PETALING JAYA: Manufacturing conditions weakened in the first half of 2026 (1H26) following a period of stabilisation in the preceding six months, according to the Federation of Malaysian Manufacturing (FMM).

According to the 29th edition of its Business Conditions Survey for the 1H26, Softer domestic and export demand weighed on business activity, production and capacity utilisation, while significantly higher production costs added to operating pressures.

“Nevertheless, capital investment and employment remained relatively resilient, indicating that manufacturers maintained a cautious approach amid weaker demand and rising costs,” it said in a statement.

The FMM survey was conducted from July 15 to August 14, 2026 and received 670 responses nationwide, of which 72% were small and medium enterprises based on full-time employment.

It tracks actual performance in 1H26 and expectations for 2H26 through the FMM Business Conditions Index, where a reading above the growth-neutral threshold of 100 indicates improvement and a reading below 100 indicates deterioration.

FMM said general business activity declined to 90 from 103 in 2H25, while local and export sales fell to 82 and 85 from 94 and 93, respectively.

Production volume and capacity utilisation each declined to 94 from 102. In contrast, the production cost index rose sharply to 163 from 146, with 69% of respondents reporting higher costs.

“Capital investment increased to 106 from 103, while employment improved marginally to the neutral level of 100 from 98.”

Going forward, FMM said manufacturers have become more cautious about the outlook for 2H26.

“Expectations for business activity, domestic and export sales, production and capacity utilisation have been revised downwards, while cost pressures are expected to remain elevated.

“Investment and employment are nevertheless projected to remain relatively resilient, pointing to a subdued recovery constrained by weak demand and continued cost pressures.”

FMM said the expected business activity index stands at 93, with local and export sales projected at 88 and 92, respectively.

“Production volume is expected at 99 and capacity utilisation at 98, both slightly below the neutral threshold. The production cost index is projected at 156, with 63% of respondents anticipating further cost increases.

“Capital investment and employment are expected to remain in positive territory at 107 and 104, respectively.”

Moreover, FMM said revenue expectations are cautiously positive, with 45% of respondents anticipating an increase, including 15% expecting growth of 1-5% and 14% expecting growth of 6-10%.

“A further 28% expect revenue to remain unchanged, while 27% anticipate a decline, including 8% expecting revenue to fall by more than 25%.

“The results point to modest and uneven revenue growth rather than a broad-based acceleration.”

It added that profit expectations are more subdued than revenue expectations.

“While 38% expect profits to increase, 38% anticipate a decline and 24% expect no change. Most anticipated gains are modest, with 18% projecting profit growth of 1-5%, while 12% expect profits to decline by more than 25%.

“The weaker profit outlook reflects the continued difficulty of passing higher operating costs on to customers.”

FMM also said manufacturers remain more positive about their own businesses than the broader operating environment.

“Some 32% expect conditions in their own companies to improve, compared with 20% anticipating deterioration. However, 31% expect conditions in their industry to deteriorate, while 46% foresee weaker global economic conditions and 38% anticipate deterioration in Malaysia's economic conditions.

“Technology deployment remains a relative bright spot, with 35% expecting improvement, although 36% expect end-consumer spending to weaken.”

FMM said higher raw material and intermediate input costs are the leading challenge, cited by 53% of respondents.

“This is followed by the West Asia conflict, Red Sea disruptions and higher war-risk costs at 45%, weak domestic and/or export demand at 33%, increasing competition at 31%, and difficulty passing higher costs on to customers and margin compression at 29%.

“Other concerns include energy and fuel costs at 28%, United States tariff and trade-policy changes at 26%, and exchange-rate volatility and imported inflation.”