Analysis: Allegations of labor abuse in Malaysia pose a risk to the export growth model

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KUALA LUMPUR, December 21 (Reuters) – (The December 21 article corrects the company unit name in paragraph 29 for Fitch Ratings, not Fitch Solutions.)

Malaysian government and businesses must respond to growing allegations of workplace abuse of migrant workers who fuel the country’s economy, or face risks to its export-based growth model, experts warn.

For decades, Malaysia has relied on migrant workers to power basic manufacturing and agriculture, becoming an integral part of the global supply chain for products as diverse as semiconductors, iPhone components , medical gloves and palm oil.

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But as dependence on foreign labor has grown, complaints about the abusive working and living conditions of workers, who come mainly from Indonesia, Bangladesh and Nepal, have increased. .

Southeast Asia’s third-largest economy must reform its labor laws and improve its enforcement, while companies must invest to ensure better conditions, said 11 analysts, rating agencies, researchers, business consultants and activists polled by Reuters.

Over the past two years, seven Malaysian companies, including the world’s largest glove maker and palm oil producer, have faced US import bans over allegations of forced labor. High-tech home appliance maker Dyson Ltd last month cut ties with its biggest supplier, a Malaysian company, over working conditions.

“This is a wake-up call,” said Anthony Dass, AmBank research manager in Kuala Lumpur. “If Malaysia does not change and with the global focus on environmental, social and governance practices, companies may move to other countries.”

Malaysia’s labor department did not respond to questions about changing the country’s labor laws, and the Commerce Ministry did not respond to questions about potential investment losses.

Human Resources Minister Saravanan conceded earlier this month that “the forced labor issues” had “affected the confidence of foreign investors in Malaysia’s product offering.” He urged companies to protect the rights and well-being of workers.

“Malaysia has become the star child” of forced labor issues, said Rosey Hurst of London-based ethical trade consultancy Impactt. “And it’s starting to do economic damage. Real change has to happen.”

Hurst said demands from global investors on Malaysia’s working practices have increased, especially from asset managers and private equity firms.

Other Asian manufacturing centers, including China and Thailand, face similar charges of labor abuse. But investors were immediately interested in Malaysia’s recent review, and it could affect future foreign direct investment and supply contracts, analysts said.

FORCED LABOR INDICATORS

Malaysian authorities have acknowledged excessive overtime, unpaid wages, lack of days off and unsanitary dormitories. These conditions are among the 11 indicators of forced labor, according to the International Labor Organization (ILO).

Malaysian law allows more than the widely accepted maximum of 60 hours of work per week and allows work on what are supposed to be days of rest.

“Malaysia’s legal framework allows, and in fact sometimes insists on, practices that conflict with the 11 ILO indicators on forced labor,” said Hurst.

Malaysia last month launched a national action plan on forced labor to eliminate these practices by 2030.

The country is the world’s second largest exporter of palm oil and its chip assembly industry accounts for more than a tenth of the global chip trade. Malaysia had around 2 million foreign workers at the end of 2020, 10% of its workforce and double from 20 years ago, according to the Statistics Department. The government and labor groups estimate that up to 4 million additional undocumented migrants work in the country.

Foreign workers are concentrated in industry, agriculture, construction and services.

As Malaysians shy away from lower-paying, labor-intensive jobs, the country’s electronics and palm oil companies are particularly relying on migrants, whose treatment is increasingly scrutinized.

Malaysia has had the most customs bans and US border protection after China. In July, Washington placed Malaysia on a list with China and North Korea for limited progress in eliminating labor trafficking, its lowest ranking.

Dyson ended its contract with parts maker ATA IMS Bhd just months after the Malaysian company posted record profits. The ATA has acknowledged some violations, made improvements and said it now complies with all regulations and standards.

ATA told Reuters in a statement it was stepping up its practices for sustainable and equitable growth amid close scrutiny of the company and Malaysia.

“For ATA, this has meant reviewing some of the practices that have long been a norm, not only in Malaysia but also overseas, for example, excessive overtime and more engagement between management and grassroots employees.” , the company said.

‘MODERN SLAVERY’

When the United States banned Top Glove Corp (TPGC.KL) last year, the world’s largest manufacturer of medical gloves agreed to pay workers $ 33 million to reimburse recruiting fees they paid. in their home country – which activists say leads to debt bondage.

U.S. Customs revoked the ban after Top Glove made the changes.

Top Glove told Reuters in a statement that exporters must “follow global best practices, as customer expectations have changed over the years,” adding that it was “no longer enough for companies to simply be profitable “.

His peers also decided to reimburse recruiting fees.

Palm oil producers in Malaysia, the world’s largest exporter of the widely used product after neighboring Indonesia, have spent tens of millions of dollars to improve the living conditions of workers following similar bans.

Of course, the higher costs associated with improving working and living conditions do not necessarily scare investors away.

“Companies operating in Australia, UK, EU and some US states are subject to regulations that address modern slavery in supply chains,” said Nneka Chike-Obi, director of sustainable finance at Fitch Ratings. “So they may have to accept higher costs in exchange for lower risk to the supply chain.”

The impact on the electronics industry, which accounts for nearly 40% of Malaysia’s exports, could notably have a multiplier effect on the economy.

Dell Inc (DELL.N), Samsung Electronics Co (005930.KS), and Western Digital Corp (WDC.O) have manufacturing facilities in Malaysia, while Apple Inc (AAPL.O) uses local suppliers.

Samsung declined to comment. Other tech companies did not respond to Reuters requests for comment on their operations or suppliers in Malaysia.

“If companies start scrutinizing and withdrawing contracts” from electrical and electronics companies, “it will have a ripple effect on the economy,” AmBank said Dass.

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Reporting by Liz Lee, Mei Mei Chu and A. Ananthalakshmi; Editing by William Mallard

Our Standards: Thomson Reuters Trust Principles.


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