Quantifying and Managing Competitive Exposure at General Motors

Group Project For International Finance

Submitted to Prof. T.S. Srinivasan
Group 11, Section B PGP27198/ Abhineet Gaurav PGP27209/Ashish Khanna PGP27210/ A
tul Kr. Singh PGP27230/ Prashant Pawar PGP27243/ Rakesh Jangili FPM13003/Prateek
Sharma PGp27006/ Aniruddh Dixit
1

Table of Contents
1. 2. Executive Summary ........................................................
....................................................................... 3 Compet
itive Currency exposure at GM (2001: Using Case Info) ..........................
................................ 4 2.1.1 2.2 2.3 2.4 3. 4. Recent Performance ..
................................................................................
........................... 5
Automobile Market in USA .......................................................
.................................................... 5 Competitive Exposure Mech
anism ..........................................................................
..................... 7 Yen Exposure Quantified.................................
.............................................................................. 7
Approaches to Manage GM's Competitive Exposure .................................
.......................................... 9 GMs competitive Yen exposure (1993 t
o 2005) ........................................................................
........ 12 4.1 4.2 4.3 4.4 GMs US Car Sales Exposure ...........................
............................................................................ 13
GMs Market Share Exposure .......................................................
.............................................. 14 GMs Net Income Exposure .......
................................................................................
................. 15 Implication of result on hedging strategy .................
.................................................................. 16
5.
New GMs Competitive Exposure ......................................................
.............................................. 18 5.1 5.2 5.3 5.4 5.5 Issues in
measuring quantifying exposure using regression.................................
...................... 19 GMs Unit Sales Exposure (Worldwide) ...................
................................................................... 20 GMs Auto R
evenue Exposure (Worldwide) ....................................................
........................... 21 Moving to a net income like exposure.............
........................................................................... 22 H
edging the resulting exposure ..................................................
................................................ 23
6. 7. 8.
Conclusion .....................................................................
...................................................................... 25 Attach
ements .........................................................................
............................................................. 26 Sources Used ..
................................................................................
..................................................... 26
2

1.
Executive Summary
In this report we have tried to quantify General Motors (GM) Competitive exposure
against various currencies. For this we have adopted a three pronged approach w
here in one part we have described the competitive exposure against Yen faced by
GM till the period described in the case (2001). In next two Sections, we have
tried to quantify the competitive exposure faced by GM till 2005 and the exposur
e faced by GM currently. The 2nd section has been kept to 2005 as years 2006, 20
07 and 2008 were years of heavy loses for GM and we wanted to keep those extra-o
rdinary data points out of analysis. To quantify GMs exposure to yen we have regr
essed its financial results with Yen Index. In third section, we have tried to q
uantify New GMs Competitive exposure. Currently GM seems to be affected by both Won
and Yen, we have tried to capture the relevant risk by regressing the financial
s with Yen and Won indices respectively. The financial data for GM has been coll
ected from the website www.sec.gov, while the Yen dollar and Won dollar index ha
ve been downloaded from the St. Louis Fed website (www.research.stlouisfed.org/f
red2). At end of every section we have suggested ways by which GM can contain th
ese exposures. However, to take hedging decisions in practical situations one wo
uld require greater information like what is the current exposure of GM in terms
of translation and transaction risks in various currencies. Then one would need
the correlation between those currencies and then one can net out the resultant
exposure from competitive exposure to get the actual exposure value which needs
to be hedged. Competitive exposure can change over time in terms of currencies
and amount so any hedging policies must be made keeping this in mind. This is vi
sible in case of GM which now seems exposed both to Korean Won and Japanese Yen,
while in beginning of the millennium it was affected only by Yen.
3

2.
Competitive Currency exposure at GM (2001: Using Case Info)
In 2001 General Motors was worlds leading automaker. At 8.5 million vehicles, GM
enjoyed a market share of 15% and an annual sales of $184.6 billion over which i
t made earnings of $4.4 billion. Besides its automotive division which was respo
nsible for manufacturing and selling SUVs, sedans etc., the company had automobi
le financing and division which had annual sales of $24 billion in 2001 and earn
ings of $1.6 billion1. The company sold its cars in 200 countries and had its ma
nufacturing operations in 30 countries. Due to its international operations (it
receives more than 25% of its sales from outside US), it had had organized its m
ain automotive division into four geographic divisions: a) GM North America b) G
M Europe c) GM Asia Pacific and d) GM Latin America/Africa/Middle East.
GM Breakdown of Sales, Auto 2001 Componen
Latin Asia America, Pacific Africa, 2% Middle East 4% Europe 15% Hughes 5% ts, O
thers 2% North America 72%
GM Breakdown of Net Property, 2000 Latin
America 4% Europe 19% North America 75% Others 2%
GMs portfolio of vehicles included popular sedans such as Opel, Saab, Buick, Chev
rolet, Cadillac etc. In United States, its major market, GM faced competition fr
om besides Ford, Chrysler and BMW and a host of Japanese automakers such as Toyo
ta, Nisan, Honda, Mazda and Mitsubishi.
1
General Motors, December 31, 2000 10-K
4

2.1.1 Recent Performance

GM Financial Performance
190000 180000 170000 160000 150000 140000 6.00% 5.00% 4.00% 3.00% Total net sale
s and revenue (in $ millions) Operating Margin 40% 30% 20% 10% 0%
GM New Registrations as a % of Total
In US In Canada and Mexico In Other countries
2.00%
1.00% 0.00%
199819992000
Due to increased competition, GMs market share was slowly declining. As the follo
wing graph shows, new registrations for GM as % of total new registrations was g
radually falling Due to its sizeable foreign operations, the company faced signi
ficant amount of currency risk. The company estimated that liability due to inst
ruments with foreign currency exposure was $13 billion in 2000. GM employed a va
riety of financial derivative products such as forward contracts, swaps and opti
ons to hedge against foreign currency related losses. For transactions denominat
ed in foreign currencies, GM hedges forecasted and firm commitments upto 1 year.
For commodities (such as aluminium and other non-ferrous metals used in automob
ile manufacturing), it hedges exposure up to 6 years. The company suffered losse
s of $100 million and $162 million in transaction and translation losses in 2000
and 1999 respectively. 2.2 AUTOMOBILE MARKET IN USA The automobile market in US
A consists was a well-developed mature market during 2001. There were around 24
companies who were competing in the US market. Major products were cars, trucks
and buses. GM, Ford, Chrysler and PACCAR were the major American companies in th
e automobile industry. They operated on a global scale and had manufacturing uni
ts outside USA also. Together they captured about 63% of market share in US. The
y faced stiff
5

competition from outside players. Their market share declined to 63% in 2001 fro
m 72.4% in 19942. This was a time when the Japanese, Korean and German companies
were capturing the lost market share of these American firms. As can be seen in
the Figure below, the market share of Japanese companies rose from 22.84% to 26
.29% during the same period (1994-2001). Even the German car makers share rose f
rom 2.15% to 5.62%. The major Japanese players were Honda, Nissan and Toyota eac
h having a market share of 6.91%, 4.03% and 9.97% in 2001. The competitions from
foreign firms were also unpredictable because of the exchange rate fluctuation
and offering competitive advantage to some. The incentives given to customer per
vehicle were on average around 1593. GM was already giving an incentive higher
than this whereas Toyota and Honda were giving around one-third of what GM was g
iving. This shows that the GM was running its business on pretty narrow margins.
The fear of yen depreciating was a critical problem for US automakers in genera
l. They also had to be wary of German and Korean car manufacturers.
Market Share of Automobile companies US Market
80
Market Share (Percentage)
70
60 50 40 30 20 10 0 American Total Germany Total Japan Total South Korea Total
1994 1995 1996 1997 1998 1999 2000 2001
2
http://wardsauto.com/keydata/historical/UsaSa28summary
6

2.3 COMPETITIVE EXPOSURE MECHANISM

Depreciation In Yen Additional Gross Margin for Japanese Manufacturers Lower Pri
ces by Japanese Manufacturers Gaining of Market Share by Japanese companies Redu
ction in GM s Unit Sales and Margins Loss in GM s Net Income (Competitive Exposu
re)
2.4 YEN EXPOSURE QUANTIFIED General Motors Yen Exposure can be categorized into
following categories:
1. Commercial Exposure: This is the exposure that arises because of sales and pu
rchase happening in foreign currency. Based on receivables and payables forecast
ed, GM was estimated to have 900 million USD in Yen exposure. 2. Affiliate Inves
tment Exposure: GM had significant investments in three Japanese companies: Fuji
, Isuzu and Suzuki. Due to this it was exposed to Yen exposure. Any depreciation
in Yen would therefore affect GMs value of investments. 3. Borrowings in Yen GM
had recently completed a Yen bond issue. It therefore had approximately $500 mil
lion worth of bonds outstanding and any depreciation in Yen would benefit GM as
it would have to pay less in dollar terms. 4. Competitive Exposure This exposure
arises due to competitive advantage that GMs competitors get due to Yen deprecia
tion. Also called economic exposure, this arises
7

when Japanese automakers achieve cost savings and are able to pass on to consume
rs which results in GM losing sales.
A B
General Motors Net Exposure in Yen (All figures in $ billion) Commercial Exposur
e 0.9 Assumptions: Based on forecasted receivables and payables Investment Expos
ure 0.8178 Affiliates Fuji Isuzu Suzuki Affiliate Exposure GM s Stake Investment
Exposure 1.5 20% 0.300 1.02 49% 0.500 0.09 20% 0.018 Total 0.818 0.5 4.78 133 3
0% 30% 20% 1.8% 2 3.60% 4.78 5.03
C D
Exposure due to Outstanding Debt Competitive Exposure GM Sales from United State
s (72% Sales come from US) Japanese Content in a Car (20-40%) Cost Saving passed
to consumer (15-45%) Depreciation in Yen Price Decline from Yen Depreciation Pr
ice Elasticity Decline in Sales (Price Elasticity * Decline in Prices) Erosion i
n GM s Value (% Decline in Sales *Sales)
E
Total Net Exposure = (A + B - C) * (Depreciation in Yen) + D Assumptions: 20% de
preciation in Yen
8

3.
APPROACHES TO MANAGE GM S COMPETITIVE EXPOSURE
As demonstrated earlier, despite of having its operations primarily based in US,
GM faces a significant competitive exposure in Yen terms. Specifically if yen d
epreciates its Japanese competitors have a significant cost advantage with a yen
based cost structure as against the GM who will be comparatively disadvantaged
with a dollar denominated cost structure squeezing its margins. There are severa
l tactical and strategic initiatives that GM can take to mitigate the risk arisi
ng from this competitive exposure to yen. These are as follows Changing its cost
structure: The primary risk of Yen depreciation is the relative cost advantage
it provides to Japanese competitors. GM can exploit the same advantage by sourci
ng its inputs from Japanese suppliers (yen based payables) rather than domestic
suppliers (USD payables). Such a move would be relatively easier to implement th
an making production facilities in Japan. But such a move is fraught with risks
as Automobile industry is based on long term relationships and building a suppli
er network may not be an easy task. Also, GM might have a contract with its supp
liers for long period. To add to it most of the suppliers in Japan would have be
en a part of some Keiretsu (Group) of GMs competitors who would not be willing to
supply to GM. Also, what happens when the currency movement happens in opposite
direction? Pricing: Another strategic move could be to index the prices based o
n Yen movements so with depreciating yen the prices of GM automobiles will also
be lowered to be competitive with their Japanese counterparts. However such a mo
ve is not recommended as it will cause a loss to GM s margins and is not sustain
able in wake of a steady and long term decline in Yen value. Yen Financing: Anot
her option with GM is to borrow in Yen so as it provides a natural hedge against
a depreciating yen. Note that since GM will have Yen liabilities , a depreciati
ng yen would benefit GM on one hand and give a relative cost advantage to its Ja
panese competitors , when properly
9

balanced these two effects can virtually nullify each other. This is an option w
hich is more flexible in terms of implementation and roll back. Also, interest r
ates in Japan had been very low in Japan in early 2000s (compared to USA). This c
ould also have kept the cost of financing to a low figure. However, taking Yen f
inancing without direct exposure may not go down well with investors. Increasing i
nvestments in Japanese automakers: GM already has investments in Japanese affili
ates (Fuji, Isuzu and Suzuki) that mitigate its Yen competitive exposures as dem
onstrated earlier. (See point 3 in the table 1 below). One way of reducing its Y
en exposure is to increase investments in Japanese Affiliates. This is a relativ
ely easy option for GM requiring little change in its existing operations strate
gy and still providing a hedge against yen depreciation. Here, important point i
s that the affiliates have more Yen denominated liabilities than assets hence, i
n a way GM benefited when Yen Index rose (Yen Depreciated), thus mitigating Comp
etitive exposure to an extent.
Affiliate Exposure ($ GM s Weighted Affiliates billions) Stake Exposure Fuji (1.
50) 20% (0.30) Isuzu (1.02) 49% (0.50) Suzuki (0.09) 20% (0.02) Total (0.82)
Table 1 : GM Yen Exposure from Affiliates in $ billions However, there may not b
e enough suitable investing targets as GM needs to acquire stakes of right targe
ts at appropriate price. Finding such combination is M&A space is difficult most
of the times and GM may end up paying too much upfront and end up with a bad in
vestment decision in quest of currency hedging.
Moving Up in Value Chain / Premium Products Although in theory looks like a good
strategy, but retreating from certain parts of market and giving up on market s
egments will further subsidize Japanese Auto makers who already are
10

enjoying benefits of cheap Yen. Also, GM will need to improve its R&D and delive
ry to cater to premium tastes. However, the issue remains that Japanese Automakers
can enter the premium segments as well, there are existing premium players such
as BMW, Mercedes and Audi and the company of the size of GM cant survive by bein
g a niche player.
Improving Operational Efficiency Another question which GM needs to ask itself i
s whether it is operating close to its maximum possible efficiency. If the cost
of production can be reined in to an extent such that it can pass on the savings
to customers / or increase its margins then the risk of depreciating yen can be
controlled to an extent. However, this would involve making hard decisions and
decision to shut down a plant or two may end up being more costly with severance
s and other costs.
Entering in Swap payments An agreement can be made with a party having opposite
exposure to a currency, say yen, for payoffs in case of currency fluctuation. Fo
r this to be successful GM needs to know about quantitative impact of unit chang
e in Yen dollar index. This has been discussed with detail in Section 4.4 and Se
ction 5.5.
11

4.
GMS COMPETITIVE YEN EXPOSURE (1993 TO 2005)
Yen Dollar index over 1993- 2005
160 140 120 100 80 60 40 20 0 Q1 1993 Q1 1994 Q1 1995 Q1 1996 Q1 1997 Q1 1998 Q1
1999 Q1 2000 Q1 2001 Q1 2002 Q1 2003 Q1 2004 Q1 2005 Yen Dollar index
Source: St. Louis Fed
General Motors Company filed for bankruptcy in 2009. Due to this, we decided to
use two sets of analysis one for the old entity which filed for bankruptcy in 20
09 and one for the new entity. For analysis of the old entity we had to rely on SE
C for the financial data points of General Motors Company (the old records are p
resent with entity name Motors Liquidation Company at the Sec website). The record
s were available as far back as the first quarter of 1993 so we decided to use r
egression on GMs numbers till fourth quarter of 2005. The numbers for 2006, 2007
and 2008 were not considered for analysis as during those period GM was on verge
of collapse and the changes in GMs numbers were mostly driven by its own uncerta
inty. Concepts of lags: If yen depreciates now, the effects of this can be seen
only after certain period on US Markets as the company will take time to decide
on passing the benefits to customers. Moreover, some inventory with dealers will
be there which has been procured at higher rate. Hence, the effects is said to la
g the change in Yen Dollar rate. Lag 1 implies the depreciation of Yen in Q1 wil
l have impact by Q2 and Lag 2 means depreciation of Yen in Q1 will have impact b
y Q3.
12

4.1 GMs US Car Sales Exposure

Data:
To measure the impact of the Yen Dollar exchange rate on GM US Sales we have col
lected the data for GM US quarterly sales, Quarterly to Dollar exchange rate, qu
arterly US GDP, quarterly US SAAR and Quarterly Dollar Index over the period of
1993 to 2005.
Analysis:
GM US Sales are affected by not just by the Yen Dollar exchange rate but many ot
her factors such as Trade Weighted Dollar Index, US SAAR auto sales impact the n
umber of units sold, hence we have regressed all the variables and found that US
GDP is a significant variable and other variables have insignificant p-values i
ncluding the Yen Dollar exchange rate. We further hypothesized that yen dollar e
xchange rate with a lag might have impact on the GM US Sales. We have regressed
that GM US Sales with US GDP and Yen Dollar exchange rate, the regression diagno
stics suggest that US GDP has significant explanatory power but the coefficient
of the US GDP is negative which is counter intuitive and not possible. Our regre
ssion with Yen Dollar with Lag 1 shows that it significantly impacts the GM US S
ales. We have further tested with Lag 2 and Lag 3 of Yen Dollar exchange rate, b
ut the regression equation has the most explanatory power at lag 2. Final Regres
sion statistics are as shown below:
Regression Statistics Multiple R R Square Adjusted R Square Standard Error Obser
vations 0.45 0.20 0.18 91.93 52
13

ANOVA Df Regression Residual Total 1 50 51 Coefficients Intercept Yen Dollar Exc

hange Rate lag 2 1,085.1 -3.5 SS 67,060 262,006 329,065 Standard Error 141.1 1.3
t Stat 7.692 -2.817 P-value 0.0000 0.0084 MS 67,060 8,452 F 7.93 Significance F
0.01
The regression equation means that with one unit increase (depreciation of Yen)
in Yen Dollar exchange rate will decrease the Quantity of GM US sales by 3,500 u
nits, which is around 0.5% of GM US Sales level. 4.2 GMs Market Share Exposure
Data:
To measure the impact of the Yen Dollar exchange rate on GM US Sales we have col
lected the data for GM US market share, quarterly yen to Dollar exchange rate, q
uarterly US GDP, quarterly US SAAR auto sales and Quarterly Dollar Index over th
e period of 1993 to 2005.
Analysis:
The GM market share in
Lag 2, while the other
market share including
hange rate is -.00085,
in Yen Dollar exchange
14

US is affected most by the Yen Dollar exchange rate with

variables are not very significantly impacting the GM US
the US GDP. The regression coefficient for Yen Dollar exc
which means that one unit increase (depreciation of Yen)
rate will decrease the Market share of GM US by 0.085%.

Regression Statistics Multiple R R Square Adjusted R Square Standard Error Obser

vations ANOVA
0.326 0.106 0.078 0.033 52
df Regression Residual Total 1 50 51
SS 0.004 0.033 0.037 Standard Error 0.050 0.000
MS 0.004 0.001
F 3.691
Significance F 6.39%
Intercept Yen Dollar Exchange Rate lag 2
Coefficients 0.398093 -0.00085
t Stat 7.967 -1.921
Pvalue 0.000 0.064
4.3 GMs Net Income Exposure
Data:
To measure the impact of the
ollected the data for GM Net
exchange rate, quarterly US
lar Index over the period of
Analysis:

Yen Dollar exchange rate on GM Net Margin we have c

Income from Automotive segment, daily yen to Dollar
GDP, quarterly US SAAR auto sales and Quarterly Dol
1993 to 2005.

The GM Net Margin from auto segment is affected most by the Yen Dollar exchange
rate with Lag 2, while the other variables are very insignificant explaining the
GM automotive Net Income. The regression coefficient for Yen Dollar exchange ra
te is -27.5, which means that one unit increase (depreciation of Yen) in Yen Dol
lar exchange rate will decrease the Net Income from Automotive Segment of GM by
$27.5 Mn. This seems like a very large number but it is a cumulative effect of d
rop in market share, volume sales and increasing cost structure. GM had a very v
olatile Net Income during the same period ranging from hefty losses of more than
$2.5 billion to profit of $1.5 billion.
15

Regression Statistics Multiple R R Square Adjusted R Square Standard Error Obser

vations ANOVA
0.40 0.16 0.14 805.46 52
df Regression Residual Total
SS 1 3,926,212 50 20,111,761 51 24,037,974 Standard Error 1235.92 11.00
MS 3,926,212 648,766
F 6.05
Significance F 0.019668
Intercept Yen Dollar Exchange Rate lag 2
Coefficients 3,569.7 -27.1
t Stat 2.888 -2.460
P-value 0.00700 0.01967
4.4 Implication of result on hedging strategy
The above analysis clearly suggests that for every unit rise in Yen dollar index
GM loses US$ 27.1 Million per quarter (in the quarter next to next quarter: lag
ged2). Besides trying to hedge this with conventional methods such as investment
s, Yen Financing, Changing Cost Structure etc. as discussed in section 3, the co
mpany can also try a Swap agreement with a party facing counter risk on Yen doll
ar rate. The counter party may be another exporter from Japan who loses when Yen
Dollar index goes down (Yen becomes costly)for example Canon. The Swap can be s
et such that for every unit rise in Yen Dollar index GM receives US$ 27.1 Millio
n per quarter from Canon and Vice Versa. The issue with this type of agreement i
s that in case one sided movement is expected (say long term depreciation of yen
) GM may not find a counter party as the Japanese exporter will not see value in
the deal. However in the period 1993-2005 the Yen Dollar exchange rate was rang
e bound (see Garph at beginning on Section4), so this type of strategy might hav
e worked. It ignores the other exposures which GM may have and which can net out
this competitive exposure. Also, the Rsquare for all analysis is quite low (the
%age of times change in value of
16

yen explains change in GMs number) implying further research might be required be
fore implementing the results.
17

5.
NEW GMS COMPETITIVE EXPOSURE
The present scenario for GM is completely different. Recently the Japanese Yen h
as settled around a relatively high mark of 80 Yen/ USD. This high benchmark has
increased the cost for the Japanese manufacturers who now are making choices to
move their factories overseas particularly to places like China and even USA to
hedge the currency exposure. Also, South Korean manufacturers have made signifi
cant dent in the US Auto markets. The figure below shows the increasing presence
of South Korean automakers in USA.
US Auto market share from 1961-2011 by Currency (of Manufacturer)
120
M a 100 r k 80 e t 60 S h a r e
WON US$ Pound JPY
40 20 0
EUR
Year
Till early 2000s GMs 70% of the Auto units were sold in North American Region. Now
, nearly 60% of Auto Sales is contributed by counties outside North America. Thi
s is displayed in the chart provided in the next page.
18

GM s reducing dependence on North American Markets

2500 2000 1500 1000 500 0
Unit Sold(in000 s)
North America
Others
5.1 Issues in measuring quantifying exposure using regression
The new GM has been in existence for only 14 quarters and even in the same period
has made profit only in 10 quarters. To identify impact of the currency movement
s on General Motors, we have included Korean Won also in the mix as the US Marke
t Share of Hyundai and Kia has increased. As was done in the previous case, we h
ave tried various combinations of dependent variables (Total World Wide Vehicles
Sold, Total Sales, and Net Income) with respect to a combination of independent
variables (Yen Dollar Index, Won Dollar index and Euro Dollar Index with and wi
thout lags, GDP Growth rate and US SAAR Auto Sales). While regressing we realise
d that there is no benefit of using a net income kind of variable due to lack of
data. Hence, we have used number of cars sold (worldwide) and Net Sales to iden
tify the dollar impact. Through these we will try to go to a Net Income model wh
ich will be discussed later on in the section.
19

5.2 GMS UNIT SALES EXPOSURE (WORLDWIDE)

As discussed earlier, currently GM is having more global exposure in terms of sa
les. Hence, we have used GMs total worldwide Unit sale as a dependent variable, w
hile trying out various combination we found out that Japanese Yen and Korean Wo
n both have significant impact (good t-stat, more than 2 for both, Rsquare close
to.80) on number of Units Sold by GM Worldwide. Here, one unit increase in Yen
Dollar rate (Yen depreciation) reduces the number of GM units sold worldwide by
roughly 18,920 Units per quarter. Also, one unit increase in Won Dollar rate by
one unit reduces number of GM units sold worldwide by 1,700 Units. Here, the Key
thing to note that both impact are lag 1 impact i.e. impact of currency fluctua
tion in one quarter will be seen in numbers of next quarter. The impact of Korea
n won might seem smaller than Japanese Yen, yet we must remember that Korean won
index is more than 1000 in value while Yen index is less than 80. Hence, we mus
t compare 1 unit change of Yen Index with 10 Unit change of Won Index. So, for G
M 10 rise in Won Index causes a fall of 17,000 Unit in worldwide sales per quart
er.
World wide Units Sold in 000 s Vs Currency Exposure Regression Statistics Multip
le R 0.9533 R Square 0.9088 Adjusted R Square 0.8922 Standard Error 88.0490 Obse
rvations 14 ANOVA df Regression Residual Total 2 11 13 SS 849658 85279 934937 MS
424829 7753 F 55 Significance F 0.00000
Coefficients Standard Error Intercept 5773.40 346.75 Japanese Yen lag 1 -18.92 5
.23 Korean Won lag 1 -1.70 0.40
t Stat 16.65 -3.62 -4.21
P-value 0.00 0.00 0.00
Lower 95% Upper 95% Lower 95.0% Upper 95.0% 5010.20 6536.60 5010.20 6536.60 -30.
44 -7.40 -30.44 -7.40 -2.59 -0.81 -2.59 -0.81
20

Over the last few years Korean Won has depreciated against dollar, thus opening
a new front of worry for GM in terms of Competitive currency exposure. The relat
ive movement of Won and Yen Index is seen clearly in the chart provided.
Won Index has been on the rise, Yen index has declined
1500 1400 1300 Won Index 1200 1100 1000 900 800 700 130 120 110 Yen Index
100
90 80 70 60
Won Index
Yen Index
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 2007 2007 2008 2008 2009 2009 2010 2010 2011
2011 2012 2012
Correlation between two indices over last five years =-.503
5.3 GMs Auto Revenue Exposure (Worldwide)
By trying out various combination independent variables on total worldwide sales
in US$ million, we found out again that Japanese Yen and Korean Won both have s
ignificant impact (good t-stat, more than / close to 2 for both, Rsquare close t
o.80). Here, one unit increase in Yen Dollar rate (Yen depreciation) reduces GMs
worldwide Auto Revenues by US$ 237 Million per quarter. Also, one unit increase
in Won Dollar rate by one unit reduces GMs worldwide revenue by US$ 37 Million. H
ere, the Key thing to note that both impact are lag 1 impact i.e. impact of curr
ency fluctuation in one quarter will be seen in numbers of next quarter. The imp
act of Korean won might seem smaller than Japanese Yen, yet we must remember tha
t Korean won index is more than 1000 in value while Yen index is less than 80. H
ence, we must compare 1 unit change of Yen Index with 10 Unit change of Won Inde
x. So,
21

for GM 10 rise in Won Index causes a fall of US$ 370 Million Per quarter. The Wo
n figure is perhaps more significant because of reasons discussed earlier.
Total Revenues in US Millions VS Currency Exposure SUMMARY OUTPUT Regression Sta
tistics Multiple R 0.923658464 R Square 0.853144958 Adjusted R Square 0.82644404
2 Standard Error 2034.340594 Observations 14 ANOVA df Regression Residual Total
2 11 13 SS MS 264468519.2 1.32E+08 45523958.16 4138542 309992477.3 t Stat 12.2 1.9 -4.0 F Significance F 31.9519 2.61751E-05
Intercept Japanese Yen lag 1 Korean Won lag 1
Coefficients Standard Error 98004.9 8011.6 -231.6 120.9 -37.3 9.3
P-value 0.000 0.082 0.002
Lower 95% Upper 95% Lower 95.0% Upper 95.0% 80371.5 115638.3 80371.5 115638.3 -4
97.7 34.5 -497.7 34.5 -57.8 -16.8 -57.8 -16.8
5.4 Moving to a net income like exposure
To hedge we need to estimate impact on a net income like figure. For that we wil
l assume that every extra unit of revenue is making a marginal contribution to t
he net income. For that we regressed last 14 quarters of revenues against net in
come and found out following regression output. That one unit of extra sales con
tribute to 0.321 units to Net Income (Significant t-stats, Rsquare and P values)
.
Sales Impact in Million USD Multiplication factor Yen Lag 1 Won Lag 1 Net income
Impact in Million USD 0.3 -237 -76.1 -37 -11.9
22

Hence, we can say 1 unit rise in Yen Index will cause reduction in GMs Net Income
by US$ 76.1 Million and one unit rise in Won will cause reduction in GMs net Inc
ome by US$ 11.9 Million per quarter. As we have discussed earlier the won exposu
re when compared with yen exposure needs to be multiplied by 10 and is probably
the major concern for GM right now.
Net Income VS Total Revenues Regression Statistics Multiple R 0.83 R Square 0.69
Adjusted R Square 0.67 Standard Error 1087.83 Observations 14 ANOVA df Regressi
on Residual Total 1 12 13 SS MS F Significance F 32006966.61 32006967 27.04726 0
.000221645 14200463.81 1183372 46207430.42
Intercept Revenues
Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper
95.0% -10047.866 2139.574 -4.696 0.001 -14709.598 -5386.135 -14709.598 -5386.13
5 0.321 0.062 5.201 0.000 0.187 0.456 0.187 0.456
5.5 Hedging the resulting exposure
Here the recent trend has been that Yen Index has been falling (Yen has Strength
ened over US Dollars) in recent past and the trend is likely to continue. Also,
Korean Won has been the currency which can provide more problems with its declin
e against dollar. So one can see that GM can probably take steps to hedge agains
t movement of Korean Won. This can be achieved by Swap agreement with a party fa
cing counter risk on Won dollar rate. The counter party may be another exporter
from Korea who loses when Won Dollar index goes down (Won becomes costly)- for e
xample Samsung. The Swap can be set such that for every unit rise in Won Dollar
index GM receives US$ 11.9 Million per quarter from Samsung and Vice Versa.
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The issue with this type of agreement is that in case one sided movement is expe
cted (say long term depreciation of Won) GM may not find a counter party as the
Korean exporter will not see value in the deal. It also ignores the other exposu
res (including correlation impacts) which GM may have and which can net out this
competitive exposure. GM can also look into basket of conventional methods such
as investments, Won Financing, Changing Cost Structure etc. as discussed in sec
tion 3. Won financing may not be as appealing as Yen financing because South Kor
ean interest rates are higher than US interest rates.
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6.
CONCLUSION
Competitive exposures are difficult to measure and hedge. Moreover, these can ev
olve and change with time. Japanese manufacturers who were terrorizing GM with c
heap Yen
advantage now have been forced to take measures including shifting production ba
se to USA to protect against rising Yen. On other hand, GM is now much more dive
rsified in terms of geography and currency exposure. However, the current GM is
less diversified in terms of number businesses. Also, the equity investment prof
ile has changed. Also, the fluctuation in currency rates have a faster impact ta
king only one quarter to manifest compared to two quarter before.
Parameter Geography Competitive Currency Equity investments Business
Old GM Mostly North America Yen In Japan, Europe Many Businesses
New GM Worldwide Yen, Won In China (JV), Brazil Mostly Auto
Managing Competitive exposure cant be a standalone process, but all kinds of expo
sures need to netted. In case of company such as GM, managing competitive exposu
re is not merely a financial decision but a strategic one. The entire production
, marketing and R&D strategy needs to be tweaked besides using appropriate hedgi
ng instruments.
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7.
ATTACHEMENTS
Excel File Containing 1. 2. 3. 4. 5. GM;s Performance pre 2008 and post 2008 US G
DP information Yen Dollar Index Won Dollar Index US Auto market share info
8.
SOURCES USED
SEC Website Exchange rate exposure and competition: evidence from the automotive
industry Rohan Williamson, McDonough School of Business, Georgetown University, W
ashington, DC 20057, USA St. Louis Fed Wards Auto
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