April 17, 2024

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Samsung Electronics headquarters in Seocho-gu, Seoul (Yonhap)

Samsung Electronics plans to borrow 20 trillion won ($15.78 billion) from its display unit to secure working capital as the tech giant seeks to maintain a similar level of investment as last year, despite the sharp industry downturn to continue into the year.

In a regulatory filing on Tuesday, Samsung said it will be borrowing funds from Samsung Display at an interest rate of 4.6 percent, with the loan to mature on Aug. 17, 2025.

Samsung Display, an affiliate in which Samsung Electronics holds 85 percent of the stake, reportedly has some 20 trillion won in reserve funds.

The rare move comes as the world's largest memory chip and smartphone maker has decided to keep up its investment in chips this year, despite the severe industry downturn which led its profit plunge in the fourth quarter last year.

As both the demand and price of chips plunged in the second half of 2022, the Korean chip maker witnessed its operating profit of its semiconductor business drop by 97 percent to log 270 billion won in the October-December period.

The Korean chip maker last year spent its biggest amount of 53.1 trillion won for infrastructure, and 90 percent of the money was channeled into its semiconductor business.

Despite its poor performance, in the earnings call for the fourth quarter of 2022 held last month, Samsung said, "To secure the best quality and for optimal operation of production lines, we will bolster maintenance and adjust equipment and continuously pursue smooth transition towards cutting-edge nodes for the future."

The market prospects for this year remains grim, and smaller rivals, such as Micron Technology, SK hynix and Kioxia have all announced a cut in output and spending. Difficulties are also expected for Samsung, with market watchers forecasting the company's operating for this year to be less than 20 trillion won.

Samsung, however, maintains it will not be "artificially" cutting output, and will keep up investment in its chips business.

The tech giant reportedly holds some 100 trillion won as reserve funds. But it decided to take the loan from its subsidiary to avoid complications.

"When it is said the company has 100 trillion won in reserve, it could consist of all different types of cashable assets. The funds may not be in Korea, or may be allocated to different business units. So the company would likely have calculated all the costs before making the decision," an industry official told The Korea Herald.

While it has not yet decided on this year's capital expenditure, Samsung is expected to ramp up spending for its foundry facilities and for production of next-generation chips with higher capacity to meet market demands.

Samsung is expected to start the construction of the fourth production line in the Pyeongtaek Campus in Gyeonggi Province, its largest chip manufacturing facility and where it recently kicked off the operation of the third production line.

This year, Samsung is also expected to complete the construction of its US foundry in Taylor, Texas, where it will be adding advanced equipment for chip production.

The chip maker is also expected to allocate funds for research and development. The company is set to mass produce the second generation model of the 3-nanometer process node it introduced in June 2022.

"The deteriorated business environment is not so favorable for our performance for now, but we believe it is also an opportunity where we can thoroughly prepare for the future," the company said during the Q4 earnings call.

By Jo He-rim (herim@heraldcorp.com)