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Introduction to GM (Jasim) Answer 1: General Motors was the worlds 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. Answer 2: General Motors (GM) is an American multinational which was founded by William Durant in 1908. It is known as one of the worlds largest auto manufacturers. GM employs 209,000 people around the world and produces vehicles such as cars and trucks in 31 countries. It services and sells its vehicles through various brands, such as Buick, GMC, and Holden. The largest markets of GM are China, the United States, Brazil, the United Kingdom, Germany, Canada and Russia. In June 2009, after years of loss and market share decline, GM filed for bankruptcy protection. In July, the U.S. government spent billions of dollars to fund GM during its recognition (Isidore 2009). After emerging out of bankruptcy, the debt for the new GM was reduced from $54.4 billion to $17 billion. In addition, only four brands have been kept in the U.S. market: Chevrolet, Cadillac, GMC and Buick. In November 2010, GM realized the biggest IPO in the U.S. history and was relisted with 27% ownership of the U.S. government and 12% ownership of the Canadian government. There are many reasons for GMs decline, both internal and external. After recovering from bankruptcy, the new GM has made some changes to its strategies and management to regain its golden past. This report will be mainly focus on analyzing firstly, the factors that contributed to GMs decline; secondly, the latest state of the new GM; thirdly, the challenges and obstacles GM had to confront and overcome when it partnered with governments; and lastly, whether it is GMs failure or its competitors success that caused its demise. GMs collapse can be concluded by two main factors, that are, the internal weaknesses such as high costs and wrong focus on customer needs, as well as external disadvantages such as powerful competitors, tight government regulations and global financial crisis.

2. The GM competition problem (YEN) Ahmed The case study indicates that GM had faced different problems such as transaction, translation and economic exposure to currency movement, however the GM also have the very actual tactical impact on their competitive position from competitive exposure. As the GMs exposure to the yen which is reflected in their financial statements, their competitive position regarding Japanese manufacturers is affected by a potentially depreciating yen. This is because a decreasing yen reduces the Japanese manufacturers dollar cost of goods sold which enable them to pass on some of the benefit to US customers and therefore taking some of GMs market share. This will affect GMs top and bottom line. However, GM has a tough decision about handling this risk.

3. Case methodology Saud


1. Why is GM worried about the level of the yen? Ahmed

Japanese automakers are GMs major competitors in the US auto car market. Portion of GMs worry about the yen is their own transaction exposure to the yen. However, more significantly, their competitive advantage could depend upon yen activities. GM is concerned about the level of the yen, because yen is currently depreciating. Japanese competitors cost structure depends heavily about 20%-40% on this FX rate. As a consequence, their costs decrease, their gross margins increase and they therefore able to reduce prices therefore gaining market share in the US in competition with GM which means its Japanese competitors could gain a cost advantage in the event of yen depreciation. As these competitors derived approximately 43% of their revenues from

the U.S. market, a depreciation of the yen could allow for larger incentives and savings to be delivered onto U.S. consumers. Already equity analysts had estimated that the yen

appreciation in the first half of 2000 from 117 yen to 107 yen reduced operating profits by $ 4 Billion; therefore this would be true for the reverse in the case where depreciation would lead to a growth in operating profits.

2. Understanding Competitive Exposure (Jasim) 3. How important is the GMs competitive exposure to the yen? -Saud 4. How big is GMs competitive exposure based on Feldsteins assumptions? Using the following approach, we estimate that GMs market value (based on discounting impact on EBIT by 20% to perpetuity) could range between $385 and $2300 million. This is a significant impact, needless to say. 5. Any alternative way to help Feldstein estimate GMs yen exposure? 6. How GM should manage its competitive exposure? Answer 1: General Motor can simply justify hedging its transaction exposure to yen, as well as its assets and liabilities. However, taking into consideration that to manage currency risks from competitive exposure is complicated because of several reasons: Difficulty in exactly measuring exposure, which may lead to high estimation cost. Mitigating any measures as non-speculative. Conducting transactions that take GM away from its core business. Focusing a lot on importance to short-term trend over long-term strategy. At the same time, if GM can see some quantifiable loss from the trend of yen depreciation, it will find it hard to justify doing nothing. The following analysis, we made it clear why the yen reduction matters to GM and try to estimate a range of potential loss in market share for the company. We also considered at exposures arising out of GMs direct exposure to yen activities. We then tried to propose different methods for the difficult problem of assessing GMs competitive exposure. Finally, we looked at the consequences of the various actions that GM can take to hedge its competitive exposure to yen. Then the decision of the ultimate course of action will depend on the firms risk desire and a more detailed cost-benefit analysis. Answer 2: There are three broad approaches that GM can take in this regard. 1. Do nothing.

GM can ignore currency effects to the extent that they tend to have a lesser impact on stock price in the long run. Also, it can argue that competitive exposure does not directly reflect in their financials and therefore it is not part of their obligation to hedge for competitive exposure. In addition, taking 20% of Yen depreciation in perpetuity is an extreme assumption, having in mind that if Yen appreciates below 120 /$, Japanese carmakers profitability is at stake. The benefits of this action are: Cost savings in terms of managerial time and effort No reason to make simplifying assumptions and extrapolations that might be flawed The costs of this action are: It goes against GMs expectations of a devaluing yen and their ability to hedge for this eventuality A devaluing yen affects GMs top and bottom lines as discussed earlier 2. Align business models with Japanese If GM fears that the currency trend could be sustained, it could also look to outsource some of its parts to other countries to the extent that they have weaker currencies. The ideal solution in this regard would be if they could outsource part of their production in Japan. However, this will increase their existing business risk profile because it would directly affect their business model. 3. Financial management GM can undertake a variety of financial measures to strategically cover their perceived weakening competitive situation. Invest more in Japanese automakers thus indirectly benefitting from yen depreciation. This would pose a difficulty if the exchange rate is still weak when GM wants to exit such investments.

Estimate their competitive exposure to yen by suitable methodology and use from a variety of hedging options (forwards, futures, money market, options) to manage this exposure. This will be probably viewed as speculative action because competitive exposure is not directly reflected in the balance sheet. Issue more yen-denominated bonds use their capital structure and transfer some of their dollar debt to yen. This could also be an interesting way to cover their exposure while at the same time aligning their business model with the Japanese to some extent. If they are correct, their cost of capital will decrease and this will have an offsetting effect on revenue losses. Accurately determining the magnitude of this hedge would be a potentially costly exercise, however. a. How would you go from the information given in the case about competitive interactions with Japanese manufacturer to a value exposure for GM? Hint: need to calculate the impact of a 20% depreciation of the US dollar/yen on the present value of GM. b. 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? c. 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? 4. Recommendations Due to the various simplifications in the estimates, we refrain from making a numerical conclusion. However, if GM views that competitive exposure is a serious enough longterm strategic issue, it will seriously need to consider establishing a division or subsidiary with a mandate to neutralize this imbalance