General Motors, Jpy-Usd Exposure

2427 Words10 Pages
Daniel Pinga
AEM 4290
General Motors, JPY-USD Exposure

Executive Summary
General Motors Corporation, the world’s largest automaker, has an extensive global outreach, which places the firm in competition with automakers worldwide, and subjects itself to significant exchange rate exposure. In particular, despite most of its revenues and production being derived from North America, depreciating yen rates pose problems for the firm indirectly through economic exposure. While GM possesses ‘passive’ hedging strategies for balance sheet and income statement exposures, management has not yet quantified or recognized solutions to possible losses from the indirect competitive exposure it now shared with Japanese automakers in the U.S import
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dollars. Having appreciating USD in their assets column, with depreciating yen in their liabilities column, this has lowered cost structure and expanded profit margins for firms such as Nissan, Honda and Toyota. Now, these automakers are able to pass on their reduced costs to consumers via sticker price reductions between 15-45% of cost savings, or through added incentives. According to Exhibit 6, as of 2000, per-vehicle incentives of GM ($1,969) far exceeds those of Toyota and Honda, at $725 and 664, respectively; this competitive advantage GM currently holds, as well as its relative market share in the U.S., are endangered if Japanese firms choose to move their incentive values closer to the industry average. Looking into the competitive threat more closely, the auto industry in the United States is rather sensitive to price, with a price elasticity of 2, or a 5% increase in price contributing to a subsequent 10% fall in demand. Thus, based upon the sticker price decreases potentially implemented by Japanese automakers, Japanese companies’ combined market share (roughly 4.1m units in 2000) stands to increase substantially, and could eat into General Motors’ overall market share. To highlight the sensitivity to the USD-JPY spot exchange rate, GM’s VP of Finance, Eric Feldstein, suggests that just a one-yen depreciation increases competitors’ operating profit by $400m. With $900m in net yen receivables, $500m in outstanding yen-denominated bonds, and more

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