As environmental, social and governance (ESG) ratings become more important to global companies (see recent Resilinc blogs on ESG for apparel and supply chain greenhouse gas emissions), supply chain managers will be expected to exert more diligence to avoid procuring items that are tainted by forced labor, deforestation, excessive greenhouse gas (GHG) emissions, and other ESG issues.
Among the countries flagged for high ESG concerns is Malaysia, which in 2021 exported $280 billion worth of goods and commodities, according to the Malaysian trade ministry. Electrical machinery and electronics is Malaysia’s largest export category, and the nation of 33 million people is an important source of assembly, test, and packaging (ATP) for the semiconductor industry. In the wake of semiconductor shortages, Malaysia’s chip industry is growing, with a major ATP expansion by Intel and diversified investments from Nexperia, Infineon, AT&S and others, according to AsiaTimes.
Malaysian employers in semiconductors and other segments of electrical machinery and electronics have not been publicly linked to ESG problems. But the country’s fourth and fifth largest export industries—palm oil ($15.4 billion in 2021) and rubber products ($13.9 billion)—have made headlines and triggered enforcement actions.
In January, U.S. Customs and Border Protection (CBP) detained shipments of disposable gloves from Malaysia’s YTY Group and palm oil products from Sime Darby after the agency determined that the companies engaged in forced labor. And that was just the latest enforcement action by CBP against Malaysia exporters. One exporter, Top Glove, was found by CBP to be subjecting employees to “debt bondage, excessive overtime, abusive working and living conditions, as well as the retention of identity documents.” In the UK, the National Health Service faced a scandal early in the pandemic after purchasing about $500 million worth of PPE from Supermax, a Malaysian firm identified as using forced labor.
The UK, EU and U.S. have laws against importing goods made with forced labor, and these are getting tougher—with lawmakers targeting supply chain practices. “Germany’s Supply Chain Due Diligence Act will subject companies who fail in their duties to complete human rights and environmental due diligence to fines of up to eight million euros,” writes Oliver Holland with human rights law firm Leigh Day. Norway’s Transparency Act and The Netherlands’ Child Labour Due Diligence Law will impose similar penalties, according to Holland.
Malaysia is also challenged with a reputation for corruption. Transparency International reports that Malaysia has reduced petty bribe seeking by government employees, but the country still faces the “more complex challenge” of eliminating high-level “grand corruption … which can destroy whole sectors, create recessions, and end democracies.”
It was “grand corruption,” in the form of billions of dollars in payoffs over many years by the 1MDB investment fund, that led to the ouster of Prime Minister Najib Razak in 2018 and an historic election loss for his Barisan Nasional party, which had ruled for 61 years. But successor governments haven’t reformed “a system embedded in an old political culture of patronage,” according to the Brookings Institute.
Malaysia will likely hold its next general election in the second half of 2022, and the outcome is highly uncertain. “Long characterised by ‘stability’ and excessive concentration of power, Malaysia’s politics have become fluid and unpredictable,” wrote Francis Hutchinson, Malaysia coordinator for the Singapore-based geopolitics think tank ISEAS. “With elite compacts and agreements hammered out behind closed doors, the country now has public plot twists worthy of a Netflix series.”
That Netflix series could include geopolitical tensions as an exciting plot element. The U.S. wants to strengthen its relationship with Malaysia as a balance to China, and Malaysian exports to the U.S. grew by more than 30% in 2021. But China has been Malaysia’s largest trading partner for more than a decade, and the two countries are tightening trade ties through the Regional Comprehensive Economic Partnership (RCEP) that also includes Japan, Vietnam, Australia and 10 other Asian nations.
According to Reuters, Malaysia’s trade minister recently discounted the value of the Biden Administration’s proposed Indo-Pacific Economic Framework—which would focus on labor standards, carbon emissions, governance and digital trade, but not reduce tariffs or offer other benefits that RCEP does.
At the same time, Malaysian agricultural officials and palm oil companies want to take advantage of global edible oil shortages—caused by the Russian war on Ukraine—and recapture market share that was lost due to ESG concerns. They’re pushing back against what they call “adverse propaganda” and bringing discrimination cases to the World Trade Organization.
For supply chain managers seeking to balance ESG concerns with business drivers like quality, price and reliability of supply, Malaysia represents great opportunity and difficult-to-quantify perils. ESG supply chain failures can lead to delays, fines, erosion of brand reputation and loss of supplies if shipments are detained by customs officers. But losing economical sources of palm oil and rubber products could have serious impacts on revenue and margins. For Malaysia sourcing and other challenges of the modern supply chain, thorough supply chain mapping and a robust risk intelligence and management system are essential.