Indonesia's wage hike will hurt Malaysian planters

By Star Online: Business
27th Nov 2012

" Indonesia's rapid increase in minimum wages will continue to erode Malaysia's attractiveness as an employment destination for foreign workers. "

Indonesia's wage hike will hurt Malaysian planters too, over time, especially those in Sabah.

Indonesia's minimum wage increase has averaged between 10% to 15% per annum, over the last few years but the hikes for 2013 announced last week are phenomenal for some provinces (29% to 49% higher), especially east Kalimantan.

Plantation companies with significant exposure to east Kalimantan include QL, BW Plant, IJM Plant, and TSH. KL Kepong, London Sumatra and Salim Invomas have smaller exposures.

Last week, the Ministry of Manpower announced a minimum wage hike for 15 (out of 33) provinces in Indonesia, ranging from a low of 8% to a high of 49%.

We understand the other provinces will also announce their new minimum wages in due course.

Of the 15 provinces, four have announced exceptional increases in minimum wages, namely East Kalimantan (+49% y-o-y), Jakarta (+44%), Riau Islands (+34%), and Bengkulu (+29%).

Our recent channel check with the Indonesian-listed palm oil companies reveals that the current average labour cost per worker is around 2 million-2.5 million rupiah per month, already above the new minimum wage requirement.

Nevertheless, the new level of minimum wages could spark worker demands for salary adjustments going forward, especially in east Kalimantan.

Note that we have already incorporated annual salary adjustments of 11% to 15% for companies under our coverage.

Moreover, plantation estates will typically improve labour productivity and efficiency to mitigate this wage increase.

In the case of estates in east Kalimantan, we may expect relatively more margin erosion given the huge jump in wage costs.

Labour costs typically account for 30% to 40% of estate costs in Indonesia.

On a worst-case scenario, a 49% wage increase could potentially raise overall estate costs by 15% to 20%, which will erode profit margins.

However, the extent of the impact on overall profitability and financials depends largely on each firm's overall exposure to east Kalimantan.

Pending clearer guidance from management of QL and TSH, we leave our earnings forecasts unchanged.

This is a long-term structural issue for Malaysian plantation estates in that Indonesia's rapid increase in minimum wages will continue to erode Malaysia's attractiveness as an employment destination for foreign workers.

It is an open secret that plantation estates in Malaysia are facing labour shortages, and the industry is heavily reliant on foreign labour.

Plantation estates in Malaysia will now find it even more difficult to retain and recruit Indonesian workers, especially estates in Sabah (as it borders east Kalimantan).

This in turn will lead to an even higher wage bill for estates in Sabah over time.

[Source]