Malaysian manufacturing sector sees business use of artificial intelligence (AI) outpaces factory transformation, a survey conducted by the Federation of Malaysian Manufacturing (FMM) showed on Thursday.

The findings of the 29th edition of its Business Conditions Survey for the first half of 2026 showed Industry 4.0 adoption in Malaysia remains uneven, with 36 percent of respondents reporting implementation, down slightly from 38 percent in the previous survey.

Among adopters, the most widely implemented technologies are system integration at 60 percent, AI at 49 percent, Internet of Things (IoT) at 48 percent, cloud computing at 46 percent, autonomous robots at 41 percent, big data analytics at 38 percent and cybersecurity at 35 percent.

Meanwhile, AI use is more widespread in general business operations, with 62 percent of respondents using AI software or productivity tools.

Among these users, 83 percent use ChatGPT, followed by Gemini at 50 percent, Copilot at 47 percent, Claude AI at 25 percent and DeepSeek at 20 percent.

This indicates that manufacturers are adopting accessible AI applications faster than undertaking deeper digital transformation of production processes.

The survey also showed that high upfront costs continue to constrain investment in the renewable energy adoption in Malaysia.

According to the survey, renewable-energy adoption remains gradual. Net Energy Metering has the highest reported adoption at 20 percent, followed by Solar Accelerated Transition Action Program at 17 percent, Self-Consumption and Green Electricity Tariff at 9 percent each, and Corporate Renewable Energy Supply Scheme and Battery Energy Storage Systems at 3 percent each.

High upfront investment costs are the leading barrier, followed by long payback periods, budget constraints, unsuitable sites and policy uncertainty.

Manufacturers favor greater financial incentives or grants at 68 percent, simpler approvals at 40 percent, clearer policy direction at 38 percent and low-interest financing at 35 percent.

Overall, the survey results show that manufacturing conditions weakened after the stabilization recorded in the second half of 2025, as softer domestic and export demand weighed on business activity, production and capacity utilization, while production costs increased significantly.

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

It tracks actual performance in 1H2026 and expectations for 2H2026 through the FMM Business Conditions Index (FMM BCI), where a reading above the growth-neutral threshold of 100 indicates improvement and a reading below 100 indicates deterioration.

It is noted that manufacturing conditions in Malaysia weakened in the first half of 2026 following the stabilization recorded in the preceding six months.

Softer domestic and export demand weighed on business activity, production and capacity utilization, 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.

General business activity declined to 90 from 103 in the second half of 2025, while local and export sales fell to 82 and 85 from 94 and 93, respectively.

Production volume and capacity utilization each declined to 94 from 102.

In contrast, the production cost index rose sharply to 163 from 146, with 69 percent of respondents reporting higher costs.

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

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