This was a presentation for International Financial Analysis and Markets. We dealt with financial issues surrounding financial exposure and hedging.

1. Foreign Exchange Hedging
Strategies at General Motors
Competitive Exposures
by Sacha Singh|Shemair Lewis|
Martin Massiah|Diandra Touissant

2. Case Summary
 In 2001, General Motors was the world’s
leading automaker
Market share of 15%
Annual sales of $184.6 billion
Earnings of $4.4 billion
 GM had manufacturing operations in more
than 30 countries and its vehicles were sold in
around 200 countries.

3. Case Summary
 Majority of sales to end customers were in North
America, however the importance of international
operations are growing.
This results in currency risks and competitive exposures
 Japanese automakers were of major concern for GM
The depreciation of the yen lowered their relative cost
structure compared to U.S. and European automakers
Japanese firms’ advantage of lower costs could
erode GM’s market share and market value

4. Case Summary
Key objectives of GM’s foreign exchange (FX) risk
management policy:
Reduce cash flow and earnings volatility
Minimize management time and costs dedicated to FX
management
Align FX management with how GM operated its
automotive business

5. Case Summary
These objectives were supported by GM’s formal
hedging policy
Passive hedging strategy: hedge 50% of all
significant foreign exchange exposures from cash
flows associated with ongoing business

6. Why is GM worried about
the level of the yen?

7. Why worry
 Due to GM’s international operations, the firm is
vulnerable to:
Currency Exposure: investment in a foreign
currency is subject to the changes in value of
that currency
Eg. GM’s foreign operations

8. Why worry
Investment exposure: equity stakes in Japanese
automakers
Affiliate Exposure
Long/(Short)
$ Billions
GM Ownership
Stake
Fuji (1.50) 20%
Isuzu (1.02) 49%
Suzuki (0.09) 20%

9. Why worry
Commercial Exposure:
Forecasted receivables less payables
Financing Exposure:
Yen-denominated loans
Bond issue of $500 million worth of outstanding yen-
denominated bonds
Competitive Exposure: exposure resulting from
competing against companies with different currencies
Eg. Japanese automakers and the depreciation of
the Yen

10. Impact of the Yen Depreciation
 Major Japanese automakers had large
portions of their cost structure denominated in
yen
Any depreciation lowers their cost structure
in comparison to foreign competitors (eg.
GM)
Lower prices can achieve normal
profitability levels for Japanese firms
 GM’s operations would be affected by
currency risk, eroding market share and market
value

11. Example
 Cost of Manufacturing a Car = $40,000
 Selling Price of Car = $50,000
 45% of components sourced from Japan
 Old Exchange Rate: $1= ¥100
 New Exchange Rate: $1= ¥120

12. Example
Old exchange rate
($1= ¥100)
 Components: 45% of
$40,000
 Cost ($)= $18,000
 Cost (¥)
=$18,000 x ¥100
=¥1,800,000
New exchange rate
($1= ¥120)
 Cost in Yen: 1,800,000
 Cost ($)
=¥1,800,000 ÷ ¥120
= $15,000
 Change
$18,000 - $15,000
=$3,000

13. How Important is GM’s Competitive
Exposure to the Yen?

14. How important
 Japanese automakers derived 56% and 43% of
their revenues from the U.S. Market in 1999 and
2000 respectively.
 Feldstein noted: For every one-yen
depreciation against the dollar, Japanese
competitors’ collective operating profit grew
by more than $400 million

15. How important
 GM’s exposure is a competitive one, rather
than a financial one
No projected receivable or payable and no
capital investment or loan to be repaid, yet
there was still a bottom-line impact due to
foreign exchange fluctuations
 GM’s competitive exposure to the Yen is
crucial to their profits and market share

16. Depreciation in
Yen leads to
Additional Gross
Margin for
Japanese
Automakers, who
Passed along
some of the
benefits to
consumers in
lowered prices
Therefore gaining
market share in
the U.S.
Which, ate into
unit sales at GM
Lowered Gm’s
profits
Reduced Gm’s
market Value

17. How important
 The average Japanese car had between 20% -
40% Japanese components
Suppliers, labour and plant expenses
 Japanese incentives and lower sticker prices
from the depreciated yen were between 15%
and 45% of the cost savings

18. Example
 Cost of Manufacturing a Car = $40,000
 Selling Price of Car = $50,000
 45% of components sourced from Japan
Cost of Japanese components (old
exchange rate): $18,000
New Exchange Rate: $15,000
Change in Profit Margin: $3,000

19. Example
 Additional margin passed to customers (45%)
$3,000 x 0.45= $1350
 New Selling Price: $50,000-$1350 = $48,650
 Price Decrease: 2.7% (1350/50,000x100)

20. How would you go from
the information in the
case about competitive
interaction with
Japanese manufactures
to value exposure of GM

21. Value Exposure GM faces
Eroding:
 Market share
 Profitability / Unit Sales

22. Market Share
 Examine how changes in the exchange rate
change the market share of your company
Japanese
Market Share
Yen
Depreciation

23. Market share exposure
 GM faces currency risk due to lower costs for
Japanese firms would lead to lower required
prices to achieve the normal profitability levels,
thus eroding GMs market share and market
value

24. Unit Sales
 Examine how changes in the exchange rate
change the unit sales of your company
Japanese Car Sales
Yen Depreciation

25. Unit Sales
 5% in price could be expected to lower unit sales by 10%
(sales elasticity of 2)
 Solution - In an effort to isolate the impact on GM, they
assumed that any market share losses to Japanese
automakers would be shared equally among and entirely by
3 Big automakers in Detroit.

26. Are there less information-
intensive methods that might
allow you to assess the
competitive exposures of GM,
specifically, or other firms
generally? How would you
implement such a method?

27. What is competitive exposure
 Exposure resulting from competing against
companies with different currencies

28. Less information-intensive methods
 Examine how FOREX volatility affects
Market Share
Cost Base
Debt
Revenue
Unit Sales
Profit

29. Market Share
 Examine how changes in the exchange rate
change the market share of your company
 Look at how your market share expands and
contracts in response to changes in the
exchange rate
 If you notice that you lose market share as your
currency appreciates against another
currency that your competitor uses, you can
identify an exposure

30. Cost Base
 Examine how changes in the
exchange rate change the
cost base of your company
 Identify what currencies your
costs are denominated in
 Compare the share of foreign
currency to your functional
currency and there is where
your exposure lies
57%
24%
14%
5%
US$ XCD$ ¥ £

31. Debt
 Examine how changes in
the exchange rate change
the debt of your company
 Look at the currencies that
you incur debt in
 As the exchange rates
change, your debt will also
change if you are repaying
it with another currency
 That is where your exposure
lies
$100,000 $100,000
$80,000
$20,000
$20,000
$0
$20,000
$40,000
$60,000
$80,000
$100,000
$120,000
$140,000
Base Increase Decrease
Changes in Debt

32. Revenue
 Examine how changes in the
exchange rate change the revenue of
your company
 Identify how revenue changes at
different exchange rates
 If you sell soursop ice-cream to parlors
in Europe, your revenue will decrease
as the Euro becomes weaker against
the EC dollar even if the unit sales
remain the same
 This is where you can see your exposure

33. Units Sales
 Examine how changes in the
exchange rate change the unit
sales of your company
 As exchange rates change, your
product will become more
expensive or more affordable to
your customers
 Your product may then be subject
to the laws of supply and demand.
 This is where you will see your
exposure

34. Profit
 Examine how changes in the exchange rate
change the profit of your company
Contracting
Market
Share
Drop in Car
Sales
Short Fall in
Profit

36. References
 Academia.edu,. (2015). Financial Statement Analysis. Retrieved 24 March 2015, from
http://www.academia.edu/621055/Financial_Statement_Analysis
 Elvis Picardo, C. (2005). Economic Exposure Definition | Investopedia. Investopedia.
Retrieved 24 March 2015, from
http://www.investopedia.com/terms/e/economicexposure.asp
 Managementparadise.com,. (2015). Foreign Exchange Hedging Strategies at General
Motors by Balajiv Ganesh in Finance category on ManagementParadise.com.
Retrieved 24 March 2015, from
http://www.managementparadise.com/balajiv.ganesh/documents/7309/foreign-
exchange-hedging-strategies-at-general-motors/
 Measuring and Protecting against Economic Exposure. (2014). Boundless. Retrieved
from https://www.boundless.com/users/233416/textbooks/money-banking-and-
international-finance/transaction-and-economic-exposures-19/transaction-and-
economic-exposures-40/measuring-and-protecting-against-economic-exposure-150-
15248/
 Public.kenan-flagler.unc.edu,. (2015). Assignment 3. Retrieved 24 March 2015, from
http://public.kenan-flagler.unc.edu/faculty/browngr/macroweb/assignment_3.html
 Suwanto, S. (2015). Harvard Business School Study Case: Foreign Exchange Hedging
Strategies at General Motors (2004) | Futurum Corfinan. Futurumcorfinan.com.
Retrieved 24 March 2015, from http://www.futurumcorfinan.com/2014/09/harvard-
business-school-study-case-foreign-exchange-hedging-strategies-at-general-motors-
2004/