Cover Story: Glove makers no longer clear beneficiaries of stronger US dollar



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This article first appeared in The Edge Malaysia Weekly, on January 9 - 15, 2017.

 

OVER the years, export-oriented rubber glove manufacturers have been major beneficiaries of a stronger US dollar against ringgit. However, things are not always as good as they seem.

Over the last 12 months, the share prices of Supermax Corp Bhd and Kossan Rubber Industries Bhd have fallen 33% and 28% respectively. Top Glove Corp Bhd and Hartalega Holdings Bhd also saw their share prices fall 21% and 18% respectively.

Local glove makers are facing rising production costs and raw material prices. As if not enough, they were negatively surprised by the government’s implementation of the Employer Mandatory Commitment (EMC), a new ruling that makes employers fully responsible for foreign labour levy from Jan 1.

According to the Malaysian Rubber Glove Manufacturers Association (Margma), the rubber glove industry will need to pay up to RM90 million a year, based on the levy of RM1,850 per worker, which was previously borne by the workers themselves.

“This RM90 million could be used in pursuit of modernisation and automation of their factories in order to be less dependent on foreign workers,” Margma president Denis Low Jau Foo says in a Jan 4 statement.

“We are at a stage where production costs are increasing and competition is very strong, and the last thing we need is surprises of this nature.”

While the new ruling is generally deemed negative for the glove industry given its dependency on foreign workers, some quarters opine that it will only have a short-term impact as glove makers should be able to pass on the additional cost by raising the average selling price (ASP).

But at a time when the ringgit has fallen to a 19-year low against the greenback — almost touching the 4.5 level last week — most rubber glove firms may find it difficult to explain price increases to their customers. Worse still, some clients may even ask for discounts when the foreign exchange rates are favourable to the exporters.

Top Glove chairman and founder Tan Sri Dr Lim Wee Chai acknowledges the difficulty in pricing products as the ASP depends on not only the exchange rates but also labour and manufacturing costs.

“Yes, definitely. It’s very difficult for us to explain [price hikes] because when the ringgit weakens, customers will usually ask for lower prices. So, we have to show them the actual percentage increase, since raw material prices have already increased so much,” he tells The Edge.

Lim says that with the new ruling, there will be an additional cost (3.5% on labour cost and 0.5% on manufacturing cost, or less than 10 US cents per carton), but Top Glove will consider both the positive and negative impacts as well as the demand-and-supply situation when making a price revision.

“In order to offset the impact of the foreign worker levy, we have to continue to focus on improving efficiency and reducing our operating cost, in terms of not only workers but also heat energy and raw materials,” he adds.

Riverstone Holdings Ltd founder and CEO Wong Teek Son concurs.

“We will try to explain to our customers, but it is very difficult to fully pass on the costs to them due to competition. Furthermore, the strengthening of the US dollar is just an excuse by customers not to accept it (higher prices) as some of them are already suffering from a stronger US dollar,” he says.

He adds that the new ruling “is very challenging” for Riverstone as labour cost makes up 15% of its total cost and 40% of its employees are foreigners.

Hartalega managing director Kuan Mun Leong is of the view that ultimately, glove manufacturers “will probably” have to pass on the increase in costs to their customers, but he is also aware of the competition from other glove-producing countries.

“Competition in the glove industry is intense, not only in Malaysia but also with other countries. This new policy will result in higher production costs in Malaysia, thus reducing our competitiveness against manufacturers in other countries,” he says.

“While the stronger US dollar has helped our customers mitigate some of the impact of price increases, it has also resulted in higher costs due to our purchases in US dollars.”

Kuan also points out that there was insufficient notice given for the implementation of EMC to enable the manufacturers to plan and take appropriate measures to mitigate the cost impact.

“The new policy caught the manufacturers by surprise. We were not given the opportunity to provide feedback before its implementation,” he says.

Even with the price hike and push for automation, Kuan says Hartalega will still be impacted by the new ruling as there are jobs that cannot be automated at this juncture.

Hartalega is often seen as the industry leader in automation. When its Next Generation Glove Manufacturing Complex is completed in 2021, the group is expected to recruit about 7,500 workers.

Meanwhile, Careplus Group Bhd CEO Lim Kwee Shyan is optimistic about increasing prices and still keep customers happy. “I’m sure our customers will understand our situation. Depending on the impact of the US dollar alone is not enough. We need to pass on the costs to them not only because of the foreign worker levy but also because of higher raw material prices,” he says.

CIMB Research estimates that the Malaysian glove industry employs up to 42,000 foreign workers and the EMC will lead to an increase in cost of RM77.7 million.

The research house also points out that Top Glove’s earnings will be affected the most as the group has the highest number of foreign workers — about 7,000 — in the industry.

“However, we believe that the recent sharp appreciation of the US dollar will be sufficient to offset the impact of the foreign worker levy,” analyst Walter Aw says in a Jan 2 report.

Despite potential setbacks from the new ruling, CIMB Research remains “overweight” on the rubber glove sector as glove makers are expected to register stronger earnings going forward.

“This is on the back of improved supply-demand dynamics and a more favourable operating environment with a stronger greenback,” Aw says, adding that his picks in the sector are Top Glove and Supermax.

Calculations by The Edge show that the combined quarterly revenue of the industry’s Big Four — Top Glove, Hartalega, Supermax and Kossan — stood at RM1.84 billion as at Sept 30 last year.

Interestingly, their combined quarterly revenue was growing strongly by 15% to 30% year on year between the second quarter of 2015 and the first quarter of last year, but decelerated to single-digit growth in the second and third quarters of last year (see chart).