Gm Competitive Exposure
Questions: Foreign Exchange Hedging Strategies at GM − Competitive Exposures
1. Why is GM worried about the yen?
GM’s concern about fluctuations in the Yen is due not only to the impact on GM’s costs, but the fact that Japanese competitors face reduced costs when the Yen is depreciating. Also, with increasing profit margins, end-price to consumer can be lowered and lead to gain in market share for Japanese competitors. Research had shown that a 10 Yen appreciation to the dollar reduces operating profit by $4 billion
2. How important is GM’s competitive exposure?
3. How would you go from the information in the case about competitive interactions with Japanese manufacturers to a value exposure for GM? Assume the yen depreciates 20% against the U.S. dollar and trace the effects of that move all the way to GM’s market value.
4. What other methods might allow you to assess the competitive exposures of GM, specifically, or other firms generally? How would you implement such a method?
Price elasticity - 5 % change in price results in 10 % decline in sales.
Financial exposure nets to 900 million and the risk of the yen is 1 % * 9Million loss
Investment exposure 20%*1500+49%*1020+20%*90) = $817.8M where 1 % depreciation results in 1% * 817.8 Millions=8.2 million loss
Outstanding ebt of 500 Million, 1 % depreciation results in 1% *500 = 5 million gain.
The total net exposure of these three factors is therefore:
(900+817.8-500)*20% = 1217.8M*20% =$243.56 (under the assumption of 20% Yen depreciation).
Competitive exposure is 72 % (US market) of total sales $184.6 bilion=132.9 billion $
Total import value is 40 % 132.9 billions
Cross price elasticity 0.5 – 2
Competitive exposure to Japanese yen = percent change quantity x US Sales $
= %ΔQGM x US Sales
1. Why is GM worried about the yen?
GM’s concern about fluctuations in the Yen is due not only to the impact on GM’s costs, but the fact that Japanese competitors face reduced costs when the Yen is depreciating. Also, with increasing profit margins, end-price to consumer can be lowered and lead to gain in market share for Japanese competitors. Research had shown that a 10 Yen appreciation to the dollar reduces operating profit by $4 billion
2. How important is GM’s competitive exposure?
3. How would you go from the information in the case about competitive interactions with Japanese manufacturers to a value exposure for GM? Assume the yen depreciates 20% against the U.S. dollar and trace the effects of that move all the way to GM’s market value.
4. What other methods might allow you to assess the competitive exposures of GM, specifically, or other firms generally? How would you implement such a method?
Price elasticity - 5 % change in price results in 10 % decline in sales.
Financial exposure nets to 900 million and the risk of the yen is 1 % * 9Million loss
Investment exposure 20%*1500+49%*1020+20%*90) = $817.8M where 1 % depreciation results in 1% * 817.8 Millions=8.2 million loss
Outstanding ebt of 500 Million, 1 % depreciation results in 1% *500 = 5 million gain.
The total net exposure of these three factors is therefore:
(900+817.8-500)*20% = 1217.8M*20% =$243.56 (under the assumption of 20% Yen depreciation).
Competitive exposure is 72 % (US market) of total sales $184.6 bilion=132.9 billion $
Total import value is 40 % 132.9 billions
Cross price elasticity 0.5 – 2
Competitive exposure to Japanese yen = percent change quantity x US Sales $
= %ΔQGM x US Sales