Retrenchment - Malaysia vs Overseas

As some of you might know, I am a regular follower of Dali at http://malaysiafinance.blogspot.com/
His recent piece compared how Malaysian local companies did not really bother to retrench, compared to MMCs and foreign companies.

My point of view?

I am SURE that the price of labour has a lot to do with the difference in policy... for local firms, salaries a a much lower percentage. Take Tenaga, Proton, MayBank... what % of the annual revenue/profit do salaries make up? Compare that with General Motors, AIG, Goldman... where even 10% layoffs translated to pretty HUGE savings.
In the UK, an accountant get's like RM240,000 a year. In Malaysia, they get like RM 48,000 a year. So, in order to make the same amount of savings, a malaysian company needs to fire of 5 times the number of workers.
Or take General Motors. According to various reports, the cost of employing a GM factory worker, including wages and fringes, would not be in excess of $72 per hour. A FACTORY WORKER. Our local factory workers are getting RM1000 - RM3000 a month, but these guys are getting RM40,000 a month. Yes, dear dog, no wonder GM is in trouble.


One more thing. A lot of hiring that was going on was due to "optimism". Due to the length of the training cycle, companies have to prepare early for future growth, if you expect business to grow 40% in 2 years, you need to finish hiring 30% extra staff in 1 year. In fact, it wouldn't take a big fall in business for layoffs... in recent overheated job market environment, all it would have required would have been for revenue levels to stagnate for 2-3 years. That would already have been enough to have plenty of idle workers.

American Unemployment: the hidden figures.

Think 7.2% unemployment doesn't sound too bad? ... think it sounds really bad? Well, whatever, it get's WORSE. Facts and figures from:

http://www.bls.gov/news.release/empsit.nr0.htm

"In December, the number of persons who worked part time for economic reasons (some-times referred to as involuntary part-time workers) continued to increase, reaching 8.0 million. The number of such workers rose by 3.4 million over the past 12 months. This category includes persons who would like to work full time but were working part time because their hours had been cut back or because they were unable to find full-time jobs. (See table A-5.)"

In America, if you are employed part-time, you are not unemployed! BTW, 8 million is around 5%, and 3.4 million is about 2.2% of the labour force. So, from another perspective, this can be seen as a hidden 2% jump in unemployment.



"About 1.9 million persons (not seasonally adjusted) were marginally attached to thelabor force in December, 564,000 more than 12 months earlier. These individuals wanted and were available for work and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weekspreceding the survey. Among the marginally attached, there were 642,000 discouraged work-ers in December, up by 279,000 from a year earlier. Discouraged workers are persons not currently looking for work specifically because they believe no jobs are available for them. The other 1.3 million persons marginally attached to the labor force in December had not searched for work in the 4 weeks preceding the survey for reasons such as school attendance or family responsibilities. (See table A-13.)"

That's not too bad in a way: only another 0.2% unemployment jump there. On the other hand, it means that discouraged workers went from 363k +279k = 642k. That's a huge percentage change. Still, it's only to be expected...
In fact, what that means is, when Obama's stimulus comes in, you might see unemployment go UP temporarily... since a large number of these 642k people will probably try to secure some of these newly created jobs, they will on paper change from "not trying to find employment" to "unemployed" (temporarily) before becoming "employed"


"In December, average hourly earnings of production and nonsupervisory workers on private nonfarm payrolls rose by 5 cents, or 0.3 percent, seasonally adjusted. This followed gains of 8 cents in November and 6 cents in October. For all of 2008, average hourly earnings increased by 3.7 percent and average weekly earnings rose by 2.2 percent. (See table B-3.)"

This, however, is a sudden positive, a huge light in the middle of darkness. It means that the average worker's pay was still going up! It might not seem like a lot, but it's better than being stagnant, trust me.
The gap between +3.7% per hour and +2.2% per week is because The index of aggregate weekly hours of production and nonsupervisory workers on private nonfarm payrolls fell by 1.1 percent in December and 4.0 percent since peaking in December 2007.
That means people were working less but earning more. That's good! More free time, and more money!

Though of course, it's not so good for company cost:production ratio. Oh well. It's always workers vs company profits, I guess.

...


Now, let's jump to Malaysia and Singapore.

Well, in most Asian countries... we don't have unemployment benefits. However... Singapore appears to be trying to get around that, by telling companies to put workers on paid leave, and Singapore government will cover 75% of their salary. VERY interesting...

So, what does so much paid leave mean? ... IMHO, it means that you're going to get a number of people with money in their pockets and a lot of free time. ... very interesting. Personally, I think that gambling income will go up, and perhaps travelling will increase too... hmm. Hard to say how people will react. I suppose they will be happy in the short term, but start getting worried for job security in the long term.

Anyhow, paid leave is the current solution because Malaysia and Singapore are hoping for a V-shaped recovery. However, it looks like American firms are looking at an L-shaped recession, based on their hiring/firing policies.

Personally, I think that Malaysia is being overly optimistic. As usual.

BTW, to update on that Legoland Johor idea: ... I'm going to HK in March. And I noticed, after checking on Wiki: Disneyland HK has NEVER made a profit... it has eaten up government money, year after year after year. (because Disney is smart, they knew the enterprise was not a good idea, so they let HK government be the main shareholder)
HK, prosperous as it is, simply cannot sustain a theme park the size of Disneyland. It's annual visitors is far below projected levels.
Disneyland in Japan and America? They're doing GREAT.

How about Legoland in the rest of the world? ... doing BAD. All losing money.

What does that say about Legoland Malaysia? ... ... ... Er... Personally, I think that this is one of those "no way in hell will it work" sort of ideas. According to some figures we were discussing, Legoland in Johor would need over RM75million a year in revenue just to breakeven. Or about RM200k per day. Which would be... maybe they are hoping for 2k visitors a day, and charge them RM100 each?

...

Anyhow, I don't think it's going to work. Frankly, Lego DOES NOT SELL WELL in Malaysia. I don't think Lego itself generates annual sales of RM75 million in Malaysia, though I could be wrong there.

How Long Will the Recession Last?

http://www.thestreet.com/story/10450705/1/jpmorgan-to-cut-9200-wamu-jobs.html
"NEW YORK -- JPMorgan Chase said Monday it will cut a total of 9,200 jobs at Washington Mutual, which it acquired Sept. 25 after Washington Mutual became the nation's largest bank to fail amid the ongoing credit crisis.
Of the 9,200 jobs being eliminated as JPMorgan integrates Washington Mutual, 4,000 will be cut by the end of January, a JPMorgan spokesman said. The remaining 5,200 employees will remain with JPMorgan through a transition period, but will lose their positions by the end of 2009.
Those 5,200 employees who stay on as transition workers will receive double their salary retroactive to Oct. 1 until their last day on the job, and be entitled to severance packages, the spokesman said.
Washington Mutual had between 41,500 and 42,000 employees nationwide when JPMorgan took over the bank at the end of September."



So there you have it. JP Morgan is planning on cutting jobs, a LOT of them. All the way to the end of 2009.
And they are so desperate to get rid of these people, that they are willing to put them on double pay for a year on top of normal severance packages, as compensation.
I don't know about the share market, but it is looking like unemployment will continue to build until 2010... or further.

You have to realise something. Due to the nature of unions and the size of the penalty for layoffs, in the form of severance compensation, companies do NOT conduct layoffs unless they really REALLY need to.
Furthermore, this means that JP does not foresee needing to rehire any of these workers until 2012. How do I reach this conclusion?
Well, if JP had decided to leave these 5200 workers alone, they would have had to pay them salaries of 5200 x A per year.
The amount JP has to fork out to these 5200 as compensation for firing them will be around 5200 x 2A + severance package.
That means, from a financial standpoint, it would be cheaper to keep these people onboard, rather than to fire them in 2009, and rehire them (or their replacements) in 2011.
In other words, the forecast by JP is for a 3 year slump in business.

People, firms, and economists can claim whatever figure they like for how long the recession will last, but look at what the big corporations are doing. They are battening down their hatches for a multiyear downturn. And what the big corporations can often turn into a self-fulfilling prophecy.

Malaysia and Singapore's alternative to unemployment: Some Projected Effects.

Due to falling consumption, firms are cutting production capacity... it's an unnecesary cost. In other words, reducing the amount spent on labour. For UK and US, this means layoffs.

But for Singapore and Malaysia, we don't have social welfare programs. So the consequences of losing your job here is VERY bad compared to the USA. Especially if you can't find a new job in this environment.

The current "solution" to this is to reduce salary per person, instead of reducing number of people employed. This is good because unemployed people would default on debts, possibly turn to crime, etc etc... whereas spreading out the pain, ie instead of 10 unemployed people, you have 100 people who take a 10% pay cut... you instead get a much larger group of people who are still solvent and make enough to eat, who merely cut back on spending a little.

OR, possibly cut back on spending A LOT. In fact, it is possible this "solution" will cause consumer spending to drop even more than layoffs would. Why is this? It's because the average consumer is burdened with debt. Far more debt than their grandparents or great-grandparents would ever dream of saddling themselves with. And also fixed payments, like insurance and EPF contribution.

Well, I'd better just draw out how this works with an example. Let's take a company with 1000 workers. Each has RM3000 salary. They have over RM100,000 in loans ie housing, car, credit cards, for which they pay around RM1000 monthly. Their insurance, EPF and other monthly fixed expenses around RM500. They spend around RM1000 on necessities like FOOD, water, electricity, phone bills, petrol... leaving them with RM500 disposable income to be spent on things like clothes, outings, and other non-day to day essentials.
So consumer spending is around RM1500 per person=RM1.5million total.

1st scenario. 100 people are fired. 900 people remain. The effect would be: 90 people more or less maintain similiar spending habits. 10 people declare bankruptcy, or just sell everything and move to some cheaper locale and get a lower paying job... let's say they will on average end up with RM1000 incomes... enough to survive, basically. So, overall consumer spending= RM(1500x900) + (1000x100) = RM1,450,000. A drop of 50k. In other words, the fall in employment salary was borne mainly by the loan, property, insurance and EPF.

2nd scenario. 1000 people take a 10% paycut. The likely effect would be: 1000 people take a RM300 cut in disposable income. Overall consumer spending drops 300x1000 = 300k. In other words, this fall will be 100% borne by those who sell non-essentials.

...

In other words, for Malaysia and Singapore, under this "solution"... this is going to be a really terrible time to be selling luxury goods, or basically any non-essential items.
These sort of figures mean we're looking at a possible fall in sales of over 50% for all those clothes boutiques, shoe shops, computer shops, entertainment outlets...

These groups of businesses are always the hardest hit during a recession, so poor sales from them would hardly be a surprise.

However, my point is that these businesses will be utterly smashed by this technique of "spreading out the pain". Instead of losing 10% of their customers outright, they will face 100% of their customers reducing business by 50%. Pain.

Oh, BTW. This is going to be a huge blow for the auto-industry. When people take a pay cut, they definitely postphone buying a new car. You just become unable to make the monthly installments.

I think that Supermarkets like Tesco and Giant will do well in this environment, as people will be shopping for the cheapest deals. Also, more people will be choosing to cook their own meals. It's cheaper, and hey, after all, they so much more free time, due to all the shorter working hours, right?

US Bond Market is FAILING. BADLY. $2 trillion fails to deliver???

Excerpts from:
http://www.euromoney.com/Article/2054070/The-US-treasury-market-reaches-breaking-point.html?LS=EMS224393


"There is an even more pressing concern for many participants in this increasingly swollen market: the settlement system has broken down. Following the collapse of Lehman Brothers in September, fails to deliver among the 17 primary dealers in the US treasury market have rocketed to more than $2 trillion over a period of weeks and still lie above $1.3 trillion. Broker/dealers have stopped delivering bonds. Holders of US treasuries are now scared to lend into the repo market in case their bonds are not returned, and potential buyers sit on the sidelines fearful of handing over their money to a counterparty that at best might not deliver a bond on time, and at worst might go under. "

"Fails to deliver in the treasury markets are not a new phenomenon. There is data for fails for treasuries, agencies and mortgage-backed securities as far back as 1990, says Susanne Trimbath, an economist, and former employee of the Depository Trust Co, a subsidiary of Depository Trust and Clearing Corp. "

"Back then, though, there would be $50 billion of fails in a whole year, she says. That figure has grown enormously. Failures in US treasuries were 8.6% of all treasuries outstanding in the first five months of this year, compared with 1.2% in the first five months of 2007. That has ballooned further over the past three months, hitting more than $2 trillion for almost the entire month of October – more than 20% of the daily treasuries trading volume"


...

Failure of the Bonds market?

I know that most Malaysian have never touched a bond in their life. So let me just sum it up: The bond market is more integral to the world financial system than the stock market. It ranks right up there with the much talked about credit market. (not surprising since they basically deal with the same thing: financing debt. And they are both rather ridiculously huge)

Fails among 17 primary dealers in US treasury market shot to 2 trillion... That brings up a very important question: how about the OTHER dealers? How many failures among the smaller dealers? ... possibly higher? I mean, considering that these 17 primary dealers are the big guys, the ones who presumably would be in better shape than the little guys... what sort of fails to deliver are occuring amongst the smaller dealers?

What sort of fails are occuring in the non-US Treasury bonds?

The worst case scenario here is that the entire bond market seizes up. No rollovers??? Heaven forbid! ... seriously, I cannot even imagine what damage would be caused by this sort of chaos.

Why do some people think that there is any possibility that the crisis has been solved?

Credit market is still not working properly whatsoever... interbank credit might be looser, but it's still even TIGHTER at the consumer level!

Bond market is at it's worst level ever, as seen above.

Global Trade is frozen. Look at the BDI, or visit the docks one day. Goods are not moving. Part of this is due to tight credit. Part of this is due to lower demand for goods.
Those Pirates are not helping either. Who wants to ship stuff if there's a higher chance that you'll make huge losses from paying ransoms?

Property is dropping. In fact it is only beginning to drop in the less developed nations, who think they might be spared... understand guys. Events unfold slower for underdeveloped nations, but they eventually do hit you too. I'm looking at you Malaysia!

Employment and consumer spending are going into a vicious circle spiralling downwards. For Malaysia, our local consumption is nowhere near enough to sustain our production, so our factories are going to get killed by UK and US unemployment figures.

To make matters worse, terrorists have proven themselves to be smart and are acting at the worst(for us) /best(for them) possible moment. I am unsure what their real objectives are, but what they have managed to accomplish is they've caused political tension between a number of nations.

The only good news? Well, fuel prices are dropping. Housing prices are falling too. That means: this is a good time to look at relocating. Tired of your current neighbourhood? This might not be a bad time for a total change in lifestyle.

Unemployment accelerating

Citibank is dumping an additional 25,000 staff, making a total of 50,000 this year, and a total of 75,000 since the end of 2007.

http://news.my.msn.com/topstories/article.aspx?cp-documentid=1790234
http://www.nytimes.com/2008/11/18/business/18citi.html


And it's worldwide, so don't expect your country to be spared just because it's outside USA. After all, 12500 jobs came from India and 5000 from Germany.

As for the banking industry in general? Expect job cuts. LOTS of them. The banks are now starting to buy each other up in mergers and acquisitions. And we all know what that means: closing down of redundant branches, and laying off in overlapping departments.

What this also means for the rest of the world is: there's going to be a lot of experienced bankers with strong credentials, desperate for a job. Many of them will be willing to take a foreign job offer.

Also, looking in Melaka and all over Malaysia, there were some mergers back in recent years. For instance CIMB bought Southern Bank. However, times were good, so I noticed that there was any closing of any branches. EVEN branches side by side or within 10-20 meters of each other.
... Obviously, this has a good chance of changing.
So, expect some layoffs in Malaysia's banking industries as well.

Speaking of Malaysia, I noticed from our government website: http://www.mpoc.org.my/envo_150908_01.asp

that Palm Oil contributes 5-6% of our GDP and employs 1.4million workers. Palm oil exports in 2007 was Rm45billion.

Palm Oil has dropped from an average of RM3500 last year to below RM1500.

How do you think that will affect our GDP and employment? Well, I can't talk about employment figures (further complicated by foreign and illegal workers), but I can safely say that Palm Oil prices ALONE will cause us a drop in GDP of almost 3%. Our loss in export revenue will be over RM20billion.

BTW, Malaysia's largest export is Electronic goods. The market for electronic goods has really been hit hard and painfully. So expect horrific earnings drops and job cuts in this sector as well. Less efficient companies can expect to close down.

Overall, I am projecting Malaysia to go into a recession of worse than -10% in 2009. I think even -20% is quite definitely possible.

Yes, that looks rather horrifically bad, doesn't it? Don't believe it? We shall see.
But the top analysts in the world seem to agree with me. Even the most optimistic analysts who advocate buying Asian stocks for long term investments, (Morgan Stanley amongst them) all advocate dumping Malaysian shares, as they are among the worst in the region.
So who is more trustworthy? Me and the most reputable analysts in the world? Or our "trustworthy" leaders in government?
We shall just have to see, won't we?

For me though, I have advised all my friends and family to dump Malaysian stocks and not to come back in for the next few years. Keeping Malaysian stocks is a big risk, and a low possible reward at the moment. In fact, I have advised those running their own business to sell those too, as I feel that the Malaysian economy, and in fact Malaysia in general, is sliding downwards.