General Motors, JPY-USD Exposure
General Motors Corporation, the world’s largest automaker, has an extensive global outreach, which places the firm in competition with automakers worldwide, and subjects itself to significant exchange rate exposure. In particular, despite most of its revenues and production being derived from North America, depreciating yen rates pose problems for the firm indirectly through economic exposure. While GM possesses ‘passive’ hedging strategies for balance sheet and income statement exposures, management has not yet quantified or recognized solutions to possible losses from the indirect competitive exposure it now shared with Japanese automakers in the U.S import market. As the yen depreciates against the dollar, Japanese automakers production cost structure reduces; this allows for lower sticker prices, added per-vehicle incentives, and the ability for Japanese firms to eat away at GM’s current revenue-generation from the United States. By using a projected 20% devaluation of the yen, and given unit sales figures and industry elasticity, the competitive exposure of GM to the real JPY-USD spot exchange rate is roughly $1.6b. This base case is established as the most likely scenario, yet sensitivity analysis of varying percentages of JPY content per-vehicle and cost-savings distribution to consumers showcase a much wider range of potential exposure values. When summing this competitive exposure with the remaining exposures (commercial, affiliate, and borrowing), I find that GM has an overall $1.2b exposure to the yen globally. Further, I suggest an alternate, less information-intensive means for calculating a similar figure, which includes regression of GM returns to market returns, then finding an exposure coefficient to JPY-USD fluctuations; this helps to show how returns of the firm are correlated specifically to their yen exposure. While direct calculations are not performed, this method would provide a good check for the first calculation, by using historical figures. Finally, I conclude that the best way to hedge away this significant exposure is through operational hedging methods, as they present a longer-term solution. The yen has consistently been a highly volatile currency, and as long as it remains floating, this trend will continue. Thus, short-term financial hedge opportunities like forwards, swaps and options are insufficient, and do not respond well to immediate directional changes in the XR. Thus, General Motors should look into more permanent means such as looking for a low-cost production center, or utilizing alternative sourcing options; this will allow for lower costs, allowing GM to respond to Japanese sticker price cuts, with their own, while also maintaining both market share and profit margins. As these alternatives are operational they succeed in hedging roughly 100% of exposure, and therefore significantly alter GM’s overall currency exposure portfolio in a very positive way.
Since 1931, General Motors Corporation has successfully maintained its place as the world’s largest automaker with 8.5 million vehicles sold in 2001 in 200 countries worldwide. However, its global presence has substantially increased the firm’s foreign currency exposure. In particular, despite North America representing the majority of revenues (72%), and geographic location of net PPE (75%), the real yen-dollar exchange rate has provided a significant degree of economic and competitive exposure for GM’s finances and operations. In regards to transaction exposures, GM senior executives have placed formal policies to mitigate the earnings and CF volatility from deviations in FX rates; however, the current ‘passive’ strategies pay no attention to possible losses due to the indirect competitive exposure it now shared with Japanese automakers in the U.S import market. The Impact of Yen Depreciation
General Motors is concerned with the...