GM was the world’s largest automaker and, since 1931, the worlds sales leader. In 2001, GM had unit sales of 8.5 million vehicles and a 15.1% worldwide market share. Founded in 1908, GM had manufacturing operations in more than 30 countries, and its vehicles were sold in approximately 200 countries. In 2000, it generated earnings of $4.4 billion on sales of $184.6 billion.
Table 1:GM Consolidated Income Statement
GM’s global operations gave rise to significant currency risk and the treasury office at GM managed these risks. Among the key objectives of GM’s foreign exchange was to reduce cash flow and earnings volatility and align FX management in a manner consistent with how GM operated its automotive business. These objectives were supported by the company’s formal hedging policy.
The company however did not have a substantial competitive exposure hedging policy in place. Over the last year (2001 in case study) GM was trying to properly evaluate the risk to the substantial yen denominated assets it held. The value of the yen relative to the dollar was decreasing and GM had considerable exposure to this. In conjunction with this depreciation affecting the unit sales, GM has a significant stake in Suzuki, Isuzu and Fiji as well as a $500 million bond issue. All this accounts to considerable exposure which should be properly evaluated. GM’s competitive exposure and how it is hedged/not hedged are discussed in this report as well as a sensitivity analysis reviewing the effect on GM’s sales and market value should the yen depreciate any further.
GM’s exposure to the Japanese yen arose because of competing against Japanese automakers who had large parts of their cost structure denominated in yen. As these direct competitors derived roughly 43% of their revenue form the US market, a depreciation of the Yen could allow for greater incentives and savings to be passed onto US customers. This means that any depreciation in the yen lowered the relative cost structure of Japanese automakers in the US compared with GM. If some of GM’s competitors achieved significantly reduced costs through currency depreciations which meant that the performance of GM’s business faced currency risk. In addition to this many of the Japanese automakers were direct competitors with GM and targeting the same market i.e. family saloons, SUV’s etc. If GM were to lose this market share to its competitors due to the yen depreciation, there is no guarantee that customers would return to GM in the future, so it is of huge importance that they hedge their competitive exposure. GM also had several yen denominated assets and liabilities in net receivables ($900m), a loan, a bond ($500m) and significant equity in Japanese automakers.
Quantifying the risks to Competitive Exposure
As discussed in section 2.0 depreciation of the yen would lead to lower cost for Japanese automakers because approximately 20% to 40% of the content was sourced from Japan and imported into the US. Furthermore the case study derives that approximately 15% to 45% of the cost savings on this content would be passed on directly to customers, thus ensuring a cheaper product in comparison to GM. Sales elasticity estimated by GM indicated that a 5% price decrease would increase sales units of Japanese automakers by approximately 10%. Any market loss was to be evenly distributed by the big three in Detroit Michigan USA. To quantify these risks and potential damage to GM market share we wrote a spreadsheet which uses a range of different margins that Japanese automakers could pass onto customers and thus reduce GM’s market share. This is dependent on the rate of depreciation of the Yen relative to the dollar. Copies of the spreadsheet are available if required. Results are shown in graphical format, with calculations following.
Fig 1 – GM Loss of Profit with Yen Depreciation
Fig 1 – GM Decline in Market Value with Yen...
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