Bringing from overseas and borrowing from affiliates... Busy preparations for investment funds

"Putting money in dollars in overseas markets with high interest rates yields greater benefits. The fact that it must be brought back to Korea means that the cash situation for investment is not favorable." - Executive A of a large corporation

One reason large corporations are unable to significantly increase investments in the second half of the year is the ongoing difficulty in securing investment funds. According to an analysis by the Federation of Korean Industries (FKI) of the first-quarter business performance of the top 500 companies by sales (excluding financial firms), the sales growth rate was only 5.7%, and operating profit decreased by 47.4%. With profits continuing to decline in the second quarter during the interest rate hike period, companies’ ability to mobilize cash for future investments is weakening.

Container unloading operations at Busan Port's Sinsundae Pier and Gammam Pier. [Image source=Yonhap News]

The solution found by the industry is 'capital reshoring,' which has been made easier by this year’s corporate tax law revision. This refers to bringing income earned by overseas subsidiaries back to Korea for domestic investment. Recently, Hyundai Motor Group chose to utilize retained earnings of overseas subsidiaries to secure funds needed for expanding domestic electric vehicle investments. They increased dividends from overseas subsidiaries with high surplus funds to the domestic headquarters by 4.6 times compared to last year, bringing in $5.9 billion (approximately 7.8 trillion KRW) to Korea. They plan to bring 79% of this amount into Korea in the first half of the year and transfer the remaining 21% in the second half.

Samsung Electronics also reported dividend income of 8.4398 trillion KRW in its first-quarter business report this year, about 66 times the 127.5 billion KRW recorded in the first quarter of last year. Most of the dividend income came from overseas subsidiaries, understood to be cash reserves accumulated as retained earnings in overseas subsidiaries with production facilities in countries such as Vietnam and China, brought back to Korea through domestic dividends. Samsung Electronics, which held 145 trillion KRW in cash on a consolidated basis at the end of last year, has most of that?100 trillion KRW?as retained earnings held by domestic and overseas subsidiaries rather than the Korean headquarters.

The Federation of Korean Industries announced on the 15th the "Survey on Domestic Investment Plans of the Top 500 Companies for the Second Half of 2023" Investment Activity Hindering Risks. [Data=FKI]

Companies are choosing capital reshoring as a means to mobilize cash for investment because the corporate tax law revision this year significantly reduced the taxes payable when bringing money back to Korea. Previously, when surplus funds of overseas subsidiaries were paid as dividends to Korea, they were taxed both overseas and domestically, with foreign tax credits only allowed within certain limits. However, starting this year, only 5% of dividends already taxed overseas are subject to domestic taxation, and the remaining 95% are exempt.

To secure investment funds, companies also borrow from cash-rich affiliates. Earlier, Samsung Electronics borrowed 20 trillion KRW from its affiliate Samsung Display as operating funds to prepare for semiconductor investments. The loan has a 30-month term until August 16, 2025, with an annual interest rate of 4.6%. Despite facing worsening semiconductor-driven performance and even the possibility of a quarterly loss for the first time in 15 years in the second quarter, Samsung Electronics plans to maintain facility investments in semiconductors at last year’s level this year, anticipating an improvement in the market in the second half.

LG Display, which cannot stop investing in organic light-emitting diode (OLED) technology, raised 337 billion KRW through bond issuance in January this year and borrowed 1 trillion KRW from LG Electronics in March. The loan has a three-year maturity with an interest rate of 6.06% per annum. Large corporations with limited affiliate support also raise funds in financial markets. SK Hynix raised 1.6949 trillion KRW through corporate bond issuance in the first quarter and secured 2.2377 trillion KRW in April by issuing exchangeable bonds backed by treasury shares.

Choo Kwang-ho, head of the Economic and Industrial Headquarters at the Federation of Korean Industries, said, "Recently, companies are finding it difficult to actively invest due to the global economic slowdown, export decline, and inventory accumulation caused by sluggish sales," adding, "The government needs to expand support for research and development (R&D) and continue regulatory improvements and labor market reforms to play a catalytic role in corporate investment."

This content was produced with the assistance of AI translation services.