Mei Mei Chu, Liz Lee, and A. Ananthalakshmi

KUALA LUMPUR, (Reuters) – Malaysian companies and the government must investigate mounting claims of abuse at work by migrant workers who are fueling its economy. Otherwise, there could be serious consequences for export-reliant growth models.

Malaysia, which has depended for many decades on the skills of migrant workers for its primary manufacturing and agricultural activities, is now an integral part in the worldwide supply chain for semiconductors, iPhone component, palm oil and other products.

However, as foreign labor has become more important, there have been increased complaints about abusive work conditions and living conditions among workers who are mostly from Indonesia, Bangladesh, and Nepal.

According to 11 analysts and corporate consultants interviewed by Reuters, the third-largest economy in Southeast Asia needs to reform and enforce its labour laws. Companies should also invest to improve conditions.

Seven Malaysian companies, including one of the largest palm oil producers and glove manufacturer in the world, have been subject to U.S. bans on imports for forced labor. High-tech home-appliance manufacturer Dyson Ltd severed ties last month with Dyson Malaysia, its largest supplier. This was due to concerns about labour conditions.

Anthony Dass of AmBank Research Kuala Lumpur stated, “It is an alarming sign.” Malaysia must not be changed, and there is a global emphasis on sustainability, governance and other practices. Businesses may move to different countries if this continues.”

Malaysia’s labor department didn’t respond to queries about changes to its labour laws. The trade ministry also did not answer questions regarding potential losses in investment.

M. Saravanan, Human Resources Minister, acknowledged that Malaysian investors were less confident about Malaysia’s product supply in the beginning of this month due to “forced labor issues”. He called on companies to safeguard workers’ rights.

Rosey Hurst from Impactt, an ethical trade consulting based in London said Malaysia “has become the poster boy” for forced labor. And that causes economic harm. It is time for real change.”

Hurst indicated that inquiries from international investors regarding Malaysia’s labour policies have increased. This includes from asset managers as well as private equity companies.

Similar labour abuse allegations are being levelled at other Asian manufacturing centers, such as Thailand and China. However, investors took an immediate interest to Malaysian labour abuses, which could have an impact on future supply and foreign direct investments, analysts claim.

INDICATORS FOR FORCED-LABOUR

Malaysian officials admit to working excessive hours and not receiving wages. They also acknowledge the lack of rest days, insufficient sleep time, unpaid wages, and unhygienic dorms. According to the International Labour Organisation, these conditions constitute forced labor.

Malaysian law is more liberal than what the majority of people accept as the maximum 60 hours per week. It also allows you to work when there are rest days.

Hurst explained that Malaysian law allows for, and often insists on, certain practices, which may be in conflict with ILO 11 indicators.

Malaysia’s National Action Plan on Forced Labour was launched last month to eradicate such labor practices by 2030.

Malaysia is the second largest palm oil exporter in the world. The chip-assembly market accounts for over a tenth global chip trade. According to the Department of Statistics, Malaysia employed approximately 2 million people from abroad in 2020. This is 10% of Malaysia’s workforce, and more than double what it had 20 years ago. According to the government estimates, there are up to 4 million undocumented migrants working in Malaysia.

Many foreign workers have a focus in services, manufacturing and agriculture.

Malaysians tend to avoid low-paid work that is labour-intensive. The country’s electronics industry and palm oil company rely heavily on foreign workers.

Malaysia had the highest number of U.S. Customs and Border Protection bannings than China. Washington placed Malaysia, which is the lowest-ranking country on its list, alongside China and North Korea in July to show that it had made limited progress towards eliminating labor trafficking.

Dyson ended its agreement with parts manufacturer ATA IMS Bhd shortly after Malaysian company posted record profits. ATA admitted some violations, has made certain improvements, and says it now complies all standards and regulations.

ATA stated to Reuters that it was stepping up its practices for equitable and sustainable growth in the face of scrutiny from Malaysia and the company.

According to ATA, “This has required us to relook at certain practices that were long a common practice, not only in Malaysia but internationally,” said the company.

‘MODERN SLAVERY’

When the United States last year banned Top Glove Corp, the world’s biggest medical glove maker agreed to pay $33 million to workers to reimburse recruitment fees they paid in their home countries – which activists say result in debt bondage.

After Top Glove had made changes, the U.S. Customs lifted the ban.

Top Glove stated to Reuters that exporters should “follow best global practices because customer expectations have changed over time,” and added it wasn’t enough for businesses just to be cost efficient.

The peers decided also to pay back the fees.

Malaysian palm oil producers, which are the second largest exporters of this widely-used product, spent millions to improve the living conditions of workers following bans similar to those in Indonesia.

Investors might not always be attracted by higher working or living costs.

Nneka Chuke-Obi director of sustainable finance, Fitch Ratings, stated that companies operating in Australia and the UK are subject to modern slavery regulations in supply chain. They may be required to pay higher prices in return for a lower supply-chain risk.

A multiplier effect could be seen in the impact of the electronics industry which is responsible for almost 40% of Malaysian exports.

Dell Inc. and Samsung Electronics (OTC -) Co Western Digital Corp (NASDAQ 🙂 has manufacturing facilities in Malaysia while Apple Inc (NASDAQ 🙂 relies on local suppliers.

Samsung (KS: ) declined to comment. Other tech companies did not reply to Reuters’ request for comment about their Malaysian operations and suppliers.

AmBank’s Dass said that “If companies start inspecting and pulling out contract” from electronics and electric companies, it “will have a knock on effect on the economic system.”

(Corrects the company name at paragraph 29 to Fitch Ratings and not Fitch Solutions.