Companies Stocking Up on Cash

South Korean companies are rushing to fill their safes with cash amounting to the billions of won in preparation for possible emergency.

The future is full of uncertainties arising from the North Korean nuclear standoff and the US-led war on Iraq. South Korean companies have put on hold investment plans, and have rolled up their sleeves to secure liquidity.

With the domestic market plunging along with world markets, into possible long-term recession, companies see the need to stock up on their cash reserves. CEOs are planning for the worst, their well-being coming before anything else.

Major industry representatives like Samsung Electronics, Hyundai Motor and POSCO have reportedly sealed up trillions of won worth of liquid assets (e.g., cash or short-term securities deemed equivalent to cash).

Liquid assets are "leftover" from normal business operations including investment in equipment and payment on debts. Thus, they are not bound for any particular purpose. Basically, they are "contingency funds" for a rainy day.

Most companies reaped huge profits last year. In addition, they were not able to make any new investments this year. Consequently, corporate safes are filled with record amounts of cash.

As of the end of last year, Samsung built up their liquid assets to the amount of 7.4 trillion won (approximately $6.1 billion). In comparison with the previous year, the amount shot up to 4.3 trillion won. Likewise, Hyundai Motor accumulated 1.4 trillion won last year alone, in total amounting to 4.3 trillion won. Kia and POSCO reportedly retain 1 trillion won each, while SK Telecom and Hyundai Mobis each have 500 billion won stored away.

"Renowned multinational corporations like Microsoft have stashed away 20% of their sales profit in preparation for future uncertainties and potential risks," Joo Woo-sik, executive director of Samsung Electronics said.

Companies are utilizing their liquid assets in such a way as make certain cash is available at any time. Samsung, for example, retained 1.4 trillion won in cash last year, 4.27 in interest-yielding accounts and 1.75 in securities. The company mostly uses interest-bearing accounts such as checking accounts, savings accounts, money market deposit accounts (MMDA), CDs of less than one-year maturity, and money market funds (MMF).

POSCO uses similar methods, having invested 980 billion won in interest-bearing accounts and MMF, 200 billion in savings and dollar accounts, and 100 billion in bonds.

"Interest rates are too low but we have to prepare for the worst,” one Hyundai executive said. “In order to maintain operation in a stable way, we keep our funds as securely as possible. We make decisions in consideration of when and how much money will be needed at any point in time."

POSCO and Hyundai Motor plan to make debt payments in the amount of 1.2 billion and 1.27 billion won, respectively. Samsung, for instance, intends to fund its semiconductor and LCD line projects, which are scheduled for early this year, with the money it earned last year.

"Timing is vital to the success of the semiconductor product. To maintain our lead and widen the gap with competitors, we must secure a reasonable amount of cash," Joo Woo-sik, executive director at Samsung Electronics said.

Kang-Woon Lee kwoon90@donga.com