FMM PRESS RELEASE: Weak 1H2025, Sharper Downturn Expected In 2H2025

September 16, 2025

Head Office, KL

Kuala Lumpur, September 17, 2025 – The Federation of Malaysian Manufacturing (FMM) released the results of its 27th edition of the Business Conditions Survey for the first half of 2025, painting a picture of weaker overall performance in the manufacturing sector and signalling a sharper downturn ahead in the second half of the year.

The Survey revealed that the manufacturing sector’s performance in 1H2025 weakened as business activity, sales and production indices slipped from the earlier gains of 2024, weighed down by rising costs and fragile demand. Employment levels were largely stable, while investment activity eased slightly, reflecting continuity in operations but reduced appetite for expansion.

Looking ahead, the outlook for 2H2025 turns more challenging, with all major forward-looking indices falling further. Persistent cost pressures and softer demand expectations suggest that firms are shifting from cautious consolidation to a more defensive stance, prioritising efficiency and risk management over growth.

The survey, which drew 627 respondents nationwide, was conducted from July 2, 2025 to August 15, 2025 and tracked business confidence via the FMM Business Conditions Index (FMM BCI) covering the actual performance in 1H2025 and outlook for 2H2025.

1H2025 PERFORMANCE: A SOFTENING ENVIRONMENT

The manufacturing sector entered the first half of 2025 on weaker footing, with business activity, sales, production, and capacity utilisation all declining after the gains recorded in 2024. Rising costs and global uncertainties dampened demand, leading to sharper contractions in key indices. The general business activity index dropped to 77 from 98 in 2H2024, with local and export sales indices both retreating to 69 and 77 respectively, while production and capacity utilisation eased to 83 and 80. Despite these challenges, employment remained broadly stable, with most firms retaining their workforce, while capital investment continued at a moderate pace though expansion appetite weakened.

Cost pressures persisted as the production cost index rose to 158 from 144, reflecting sustained but moderating input price increases. Around two-thirds of respondents reported higher costs, although more firms than before cited stable conditions. Overall, manufacturers in 1H2025 shifted from cautious optimism to a more defensive stance, focusing on consolidation and operational continuity while managing fragile demand and elevated costs.

OUTLOOK FOR 2H2025: PESSIMISM DEEPENS AMID COST PRESSURES

Manufacturers’ outlook for the second half of 2025 has weakened significantly, with business confidence slipping further across all major indicators. Expectations for business activity, sales, production, and capacity utilisation fell deeper below the neutral 100-point mark, pointing to rising caution and subdued demand. Local and export sales indices dropped to 83 and 84 respectively, while production and capacity utilisation also contracted, signalling a shift from expansion to efficiency and consolidation. Businesses are increasingly defensive in their stance, prioritising risk management amid global uncertainties.

Cost pressures remain the most pressing challenge, with 69% of respondents expecting higher input costs in 2H2025 despite a slight easing in the cost index. Investment and employment intentions were steady but subdued, with most companies maintaining current levels rather than pursuing growth. Overall, the survey indicates a more challenging operating environment ahead, with manufacturers bracing for tighter margins, weaker demand, and elevated uncertainty.

REVENUE OUTLOOK (2H2025 VS 1H2025) FRAGMENTED – The revenue outlook for 2H2025 remains fragile and fragmented, with manufacturers almost evenly split between expectations of gains (39%), declines (34%) and stability (27%). Growth is largely modest, with most firms projecting only incremental increases of up to 10%, while strong double-digit expansion is rare. On the downside, a notable share anticipate steep contractions exceeding 25%, reflecting ongoing vulnerabilities. Overall, the outlook underscores a cautious environment where limited recovery is offset by persistent risks, with firms prioritising resilience and efficiency over aggressive expansion.

PROFIT OUTLOOK (2H2025 VS 1H2025) TILTS NEGATIVE – Manufacturers’ profit outlook for 2H2025 tilts negative, with nearly half of respondents (47%) anticipating lower profits, including a sizeable share expecting steep contractions of more than 25%. While 32% project increases, these are largely modest, with only a small minority foreseeing strong double-digit growth. Another 21% expect profits to remain unchanged, reflecting a cautious stance centred on stability and consolidation. Overall, the outlook highlights continued profitability challenges as cost and demand pressures weigh heavily on the sector.

BUSINESS CONFIDENCE LEVEL: STABILITY AMID ECONOMIC UNCERTAINTY – Business confidence in 2H2025 reflects stability at the company level but greater caution toward industry and economic conditions. While nearly half of manufacturers expect their own operations to remain stable and 26% foresee modest improvements, confidence in both the Malaysian and global economy is far weaker, with almost half anticipating further deterioration. Technology deployment stands out as a relative bright spot, with 29% projecting moderate gains, but weak consumer demand remains a major concern, with 39% expecting spending to worsen. Overall, confidence is tempered, with firms bracing for uncertainty while seeking resilience through stability and technology adoption.

KEY BUSINESS CHALLENGES AHEAD – Manufacturers identified rising input costs, tax changes, and weak demand as the most pressing challenges ahead, with 66% citing higher input costs, 63% pointing to the expanded Sales and Service Tax (SST), and 60% concerned about global trade policy shifts. Other key issues include electricity tariff restructuring (54%), subdued demand (52%) and intensifying competition (47%), alongside risks from geopolitical instability, new customer acquisition, and heavier tax and regulatory burdens. Labour access, ESG compliance, supply chain disruptions and financing concerns were also noted, though with less urgency. Overall, cost and policy-driven pressures dominate manufacturers’ risk outlook for the near term.

OPPORTUNITIES IN A SHIFTING LANDSCAPE – Manufacturers see diversification as the clearest growth opportunity, with 56% identifying expansion of product portfolios and many also pointing to new export markets and international business prospects as key drivers. While short-term strategies focus on broadening offerings and tapping external demand, longer-term opportunities lie in digitalisation, cloud technologies, AI, and ESG initiatives such as value-chain projects and net-zero strategies. Some firms also highlighted integration, specialisation and reshoring, though at lower levels. Overall, growth ambitions remain tempered by cost pressures, with many viewing relief on input costs as the critical factor to unlock stronger expansion.

CHALLENGES IN INDUSTRY 4.0 ADOPTION, US TARIFFS AND SST EXPANSION

Manufacturers are facing intense disruption from global trade pressures, domestic tax reforms, and the slow, selective adoption of Industry 4.0 technologies. US tariffs are driving higher costs and supply chain shifts, while the expansion of the SST adds compliance and operational burdens, especially for smaller firms. Despite these challenges, the sector is showing resilience by adapting strategies and seeking new opportunities to stay competitive.

INDUSTRY 4.0 ADOPTION: SLOW BUT TARGETED – Industry 4.0 adoption among manufacturers remains limited, with only 32% reporting implementation and most still at an early stage of digital transformation. Adoption is largely focused on core efficiency tools such as system integration (66%), IoT (47%) and cloud computing (39%), alongside robotics, cybersecurity and data analytics in smaller shares. More advanced solutions like additive manufacturing (10%) and augmented reality (2%) remain niche, reflecting a cautious and targeted approach where most firms prioritise incremental improvements over widespread transformation.

US TARIFFS BITE: MANUFACTURERS DIVERSIFY AND ADAPT TO SURVIVE - US tariffs are creating uneven but significant challenges for Malaysian manufacturers, with over one-third reporting serious disruption or long-term risks and some facing profit losses exceeding 30%. While a portion of firms experienced only minor or no impact, the overall picture highlights growing financial vulnerabilities for a meaningful share of the sector.

To adapt, manufacturers are diversifying export markets, rethinking supply chains, boosting efficiency, and renegotiating costs or prices. They are also urging stronger government support, particularly through trade promotion for market diversification and financial incentives for re-shoring and local content. Calls for clearer tax incentives, digital transformation support, and broader policy measures further underscore the need for targeted interventions to help firms remain resilient and competitive in a shifting global trade landscape.

SST EXPANSION DRIVES HIGHER COSTS AND COMPLIANCE CHALLENGES - The expansion of the Sales and Services Tax (SST) has significantly affected manufacturers, with nearly half reporting substantial impacts ranging from higher operating costs to added compliance burdens and operational complexities. While only a small share faced no impact, most companies are grappling with issues such as product classification, treatment of mixed supplies, and unclaimed input exemptions, which risk eroding efficiency and competitiveness, particularly for SMEs.

Rising costs from newly taxed services, difficulties in securing exemptions, and broader compliance challenges—including system upgrades, Customs rulings, and transaction treatment—were cited as key pain points. Manufacturers are calling for targeted government action, with top priorities being expanded exemptions for essential inputs, clearer classification guidance, stronger transitional support, and advisory assistance. Many also expressed preference for GST as a more transparent and efficient system. Together, these findings highlight the urgent need for policy adjustments to ease the cost and compliance pressures facing the industry.

IMPACT OF ELECTRICITY TARIFF REVISIONS ON BUSINESS COSTS - The survey reveals that recent electricity tariff revisions have broadly pushed up business costs, with 60% of respondents reporting increases and only 23% seeing reductions. High-voltage users were the hardest hit, while medium- and low-voltage users also faced notable cost pressures. The majority of firms reported moderate cost increases in the 3–15% range, underscoring widespread but manageable upward pressure on operating expenses. Businesses with higher and steadier load factors were disproportionately affected, reflecting their greater energy utilisation levels.

In response, manufacturers are stepping up energy efficiency (EE) initiatives. Many have already implemented low-cost, high-impact measures such as energy-efficient lighting, compressed air system optimisation, and power factor correction, while a strong pipeline of planned investments points to broader uptake of advanced technologies like high-efficiency motors, combined heat and power, and waste heat recovery. Although some firms cite sectoral limitations, the findings highlight a clear trend toward improving efficiency and reducing dependency on conventional energy use.

Renewable energy (RE) adoption, while still modest, is gaining momentum. Current uptake is dominated by solar-based solutions, including Net Energy Metering and Self-Consumption schemes, but future intent to adopt RE is significantly higher, with strong interest in Large-Scale Solar, the Green Electricity Tariff, and the new Corporate Renewable Energy Supply Scheme (CRESS). These results point to an industry under pressure from rising energy costs but also increasingly committed to efficiency improvements and renewable energy investments to secure long-term competitiveness and sustainability.

ARTIFICIAL INTELLIGENCE (AI) AWARENESS, ADOPTION AND APPLICATION - The latest survey highlights that artificial intelligence (AI) adoption among manufacturers remains at an early stage, with just 26% of companies implementing AI solutions while the majority are still in the awareness or exploratory phase. Familiarity levels also remain modest, with only 12% of respondents reporting strong familiarity with AI technologies. Despite the slow pace of uptake, firms that have adopted AI are applying it across diverse functions, including customer service, inventory management, product development, production optimisation, and quality control, with niche applications such as cybersecurity, ERP integration and predictive maintenance also emerging.

Early adopters are already reaping clear benefits. The top reported gains include improved productivity (60%), faster decision-making (57%) and better resource management (46%). Additional benefits range from enhanced customer experience and quality improvements to cost reduction, highlighting AI’s potential not just for operational efficiency but also for competitiveness and innovation. While adoption is still low, the findings underscore AI’s transformative potential for the manufacturing sector, with early signs of experimentation across multiple business functions and tangible returns for companies that have taken the lead.

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Tan Sri Dato’ Soh Thian Lai

President, Federation of Malaysian Manufacturing

FMM Advocates Transparency, Integrity, Accountability and No Corruption

About FMM

The Federation of Malaysian Manufacturing (FMM) (formerly known as Federation of Malaysian Manufacturers) has been the voice of the Malaysian manufacturing sector since 1968, advocating policies and initiatives that drive industrial growth, competitiveness and workforce development. Representing over 13,100 member companies (4,100 direct and 9,000 indirect) from the manufacturing supply chain, FMM is actively engaged with government and its key agencies at Federal, State and local levels. FMM is also well-linked with international organisations, Malaysian businesses and civil society. Apart from benefitting from FMM’s advocacy, FMM members enjoy value-added services including training, business networking and trade opportunities as well as regular information updates.

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