Indefinite Lockdown Disrupts Key Manufacturing Sectors Across Malaysia

Indefinite Lockdown Disrupts Key Manufacturing Sectors Across Malaysia

Executive Summary

  • To deal with a growing number of COVID-19 cases, authorities in Malaysia implemented a nationwide movement control order, known as MCO 3.0, in mid-May which was further upgraded to a nationwide “total lockdown” in early June.
  • Several areas that host key manufacturing industries in the country have been subject to even more restrictions since the beginning of July, in particular in the state of Selangor and the capital Kuala Lumpur.
  • In these regions, companies ranging from electronics to semiconductors and medical equipment have halted factory operations until at least July 16. In addition, it is also likely that companies outside Selangor and Kuala Lumpur will experience disruption due to their sub-tier suppliers located in these areas being affected.
  • A national reopening plan called National Recovery Plan has been put forward in June 2021, outlining the conditions for social and economic sectors to return to normalization; however, the country remains in Phase 1 to this date as the daily COVID-19 case count remains above 9,000 cases. 
  • As the COVID-19 pandemic continues to propagate across the country despite lockdown restrictions that have been in place for more than six weeks, a partial normalization of economic activities is only expected from September 2021, with a full reopening unlikely to occur before the end of the year. 

A growing number of COVID-19 cases starting early May 2021 threatened to overwhelm Malaysia’s national healthcare system. To deal with the crisis, authorities implemented a nationwide movement control order, known as MCO 3.0, in mid-May which was further upgraded to a nationwide “total lockdown” in early June. The lockdown measure has since shut down large parts of economic and social activities across the country. 

Several areas that host key manufacturing industries in Malaysia have been subject to even more restrictions since the beginning of July, in particular in the state of Selangor and the capital Kuala Lumpur, forcing factories to reduce or shut down operations to comply with the new measures to combat the COVID-19 pandemic. 

While the MCO 3.0 has impacted manufacturing operations across a variety of industries from semiconductors to electrical equipment and medical devices in the past two months, regional and global supply chains relying on manufacturers and suppliers located in Selangor and Kuala Lumpur are expected to face significant impacts on supply capacity and delivery times as the country struggles to contain the pandemic and the backlog of orders may not be quickly cleared in the coming months.

Selangor and Kuala Lumpur impose the most restrictive measures

As Malaysia started to face a third wave of COVID-19 infections in April 2021, authorities gradually introduced new regional restrictions before announcing a new national lockdown called MCO 3.0 on May 12 that was further upgraded to a nationwide “total lockdown” from June 1. The total lockdown was extended once before the Malaysian government decided to extend the restrictive measures indefinitely until several criteria indicating an improving situation are met, including a daily COVID-19 case count of no more than 4,000. 

Figure 1: Timeline of new lockdown restrictions in Malaysia. Source: Everstream Analytics

In addition, a sharp increase in COVID-19 cases prompted authorities in Selangor and Kuala Lumpur, both key locations for a large number of manufacturing clusters, to impose even more restrictive measures as part of a two-week Enhanced Movement Control Order (EMCO) from July 3 that includes a nightly curfew, a stay-at-home order unless for grocery shopping, and the shutdown of all manufacturing plants except for those producing food and daily essentials. 

Under the total lockdown that came into effect on June 1, a number of essential retail services as well as 18 manufacturing and manufacturing-related services have been allowed to continue to operate nationally to ensure minimal disruption to the supply of critical parts and components (see Figure 2). However, companies must receive an explicit approval letter from the Ministry of International Trade and Industry (MITI), while limits on workforce capacity have also been imposed. Thirteen of the sectors have been permitted to operate at a 60 percent workforce capacity, while the remaining five have only been allowed to operate with 10 percent of the workforce. In both cases, the rest of the workforce must adhere to a work-from-home policy. 

Figure 2: Impact of MCO 3.0 on manufacturing activities in Malaysia since June 1, 2021. Source: Ministry of International Trade and Industry (MITI) in Malaysia

Manufacturing sectors experience disruption despite operational permits

As Malaysia entered a state of total lockdown on June 1, manufacturing sectors including automotive and iron and steel that were only allowed to operate with 10 percent of their workforce capacity announced they would halt operations until at least June 14 when the initial lockdown period was expected to end. Since the indefinite extension of the MCO 3.0, these closures will likely last until restrictive measures are relaxed, i.e., when more workers are allowed to return to production lines. Japanese car makers Toyota Motor, Honda Motor, and Mazda closed their factories on June 1, while Malaysia Smelting Corporation (MSC) Bhd, the world’s third biggest refined tin maker, closed operations initially until June 14 to adhere to the lockdown measures.

However, even sectors that were allowed to operate at 60 percent of their workforce capacity have reportedly shut down operations temporarily due to local COVID-19 outbreaks, labor shortages, or other operational challenges. Malaysia’s largest styrene monomer producer Idemitsu Kasan Company Ltd. closed its plant in Pasir Gudang on June 1, while semiconductor company Infineon Technologies and electronic components makers Taiyo Yuden and Seiko Epson all shuttered operations in Malaysia to prevent further COVID-19 transmission among their workforces. 

Even factories that have continued to operate without restrictions under the new total lockdown since June 1 have experienced reduced productivity. According to the Malaysia Semiconductor Industry Association, the new lockdown measures were expected to reduce semiconductor output by between 15 to 40 percent, likely exacerbating supply issues.  

EMCO in Selangor and Kuala Lumpur to cause supply shortages and delivery delays

Figure 3: Manufacturing and supplier locations in Selangor and Kuala Lumpur. Source: Everstream Analytics

Since July 3, most districts in the states of Selangor and Kuala Lumpur have been facing a two-week Enhanced Movement Control Order (EMCO) that has forced the large majority of companies to close operations, except for those producing food and daily essentials. In particular Selangor, which has Malaysia’s highest regional GDP, hosts a large number of electronics, chemicals, and automotive companies that make use of its strategic location between the country’s capital Kuala Lumpur and Port Klang, the nation’s busiest container gateway.

According to data from Everstream Analytics, manufacturing and supplier locations in Selangor and Kuala Lumpur are almost evenly spread across a wide range of high-value manufacturing industries, including engineering & manufacturing (20 percent), automotive (19 percent), life sciences & healthcare (19 percent), chemicals (17 percent), and technology (16 percent). The severity of the imposed restrictions, coupled with the wide range of affected industries in Selangor and Kuala Lumpur, will likely start to ripple through global manufacturing supply chains as they come at a time when most companies have already been operating at reduced capacity for six weeks.

As soon as the EMCO came into force in both regions, companies ranging from electronics to semiconductors and medical equipment announced that they would halt factory operations until at least July 16. It is also likely that companies outside Selangor and Kuala Lumpur will experience disruption due to their sub-tier suppliers located in these areas being affected. An unspecified company located in Penang that produces capacitators for automotive, telecommunications, and medical device makers has reportedly declared force majeure as many of its sub-tier suppliers located in Selangor and Kuala Lumpur were forced to shut down.

CompanySectorIndustrial supplier for below industriesLocation
ESON Precision EngineeringElectronicsConsumer electronics; telecommunications; automotiveSelangor
Hartalega Holdings BhdMedical equipment Selangor
Top Glove Corp BhdMedical equipment Selangor
Mitsui Copper FoilElectronicsAutomotive; semiconductorsSelangor
UnspecifiedElectronicsAutomotive; telecommunications; medical devices; consumer electronicsPenang
Figure 4: Companies having reported operational disruptions due to the EMCO in Selangor and Kuala Lumpur; Source: Everstream Analytics

While the semiconductor industry has been exempt from restrictions under the MCO 3.0, Malaysia’s passive component market for semiconductors, that includes resistances, capacitators, and coils, could still be at a heightened risk of disruption. Disruptions at sub-tier suppliers, labor shortages, and local COVID-19 outbreaks could affect production output that would likely further reduce inventory levels at major component suppliers such as Taiyo Yuden and Epson, which respectively manufacture Multi-Layer Ceramic Capacitators (MLCCs) and crystal oscillators that are used in a wide range of electronic products. Both companies have already experienced disruption at their factories in Malaysia in recent weeks. Industry reports also highlighted a growing risk of supply shortages for MOSFET, metal–oxide–semiconductor field-effect transistors, a critical component in Integrated Circuits (ICs) that has applications in most consumer electronics devices. 

Timeline to normalization remains unclear

As a coalition of more than a hundred domestic and foreign businesses and trade groups across Malaysia warn of the negative impact of the ongoing lockdown restrictions on the country’s economy and its attractiveness for international investment, the Malaysian government continues to pursue its strategy of keeping large parts of economic and social activities under lockdown to stem the current wave of COVID-19 infections. A national reopening plan called National Recovery Plan has been put forward in June 2021, outlining the conditions for social and economic sectors to return to normalization; however, the country remains in Phase 1 to this date as the daily COVID-19 case count remains close to 9,000 cases. 

Figure 5: National Recovery Plan as of June 2021. Source: Ministry of Health of Malaysia.

Nonetheless, several states including Perlis, Pahang, and Pulau Pening were allowed to move to Phase 2 of the reopening plan on July 5 due to a lower number in COVID-19 cases, while more manufacturing sectors such as aerospace, electrical and electronics, and machinery and equipment for healthcare and food production received approval to operate in Selangor as of July 7 amid the ongoing EMCO. On the other hand, as COVID-19 cases continue to increase elsewhere, production facilities in the Senai Industrial Park in Johor state, among others, have been forced to cease operations until July 22, a decision that is likely to affect electronics companies such as ASJ Components, Panasonic System Network, and Nippon Chemi-Con, which have facilities in the area. 

Figure 6: Manufacturing sectors allowed to operate at 60 percent in Selangor using COVID-19 Intelligence Management System (CIMS) 3.0 approval letter. Source: Ministry of International Trade and Industry (MITI) in Malaysia

As the COVID-19 pandemic continues to propagate across the country despite lockdown restrictions that have been in place for more than six weeks, a partial normalization of economic activities is only expected from September 2021, with a full reopening unlikely to occur before the end of the year. 

Recommendations

  • As new developments continue to be reported on a weekly basis, customers are advised to keep abreast of the latest developments regarding lockdown restrictions in Malaysia. By regularly assessing which regions continue to experience disruption, companies can anticipate potential supply bottlenecks and activate contingency plans. 
  • Amid the current uncertainty, customers sourcing from Malaysia should also consider contacting their sub-tier suppliers to assess inventory levels and impacts on production schedules, in particular those suppliers located in areas under enhanced lockdown measures in Selangor, Kuala Lumpur, and Johor.
  • To mitigate potential delivery delays and supply shortages, organizations are encouraged to concentrate on finding alternative sources for the most critical components, i.e., those with the highest impact on revenue, from other geographic locations and/or suppliers and arrange emergency air freight if necessary to prevent stock-outs and operational downtime. 
  • In light of the ongoing COVID-19 lockdown restrictions in multiple parts of the world, organizations should also consider investing in technological solutions capable of mapping out supplier networks and providing greater end to-end visibility. This includes mapping supplier networks beyond Tier 1 that can support supply chain managers to understand new patterns and manage external risks. 

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