General Motors Global Finance

1. Introduction to GM (Jasim)

Answer 1: General Motors was the world’s largest automaker and, since 1931, the world’s 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 world’s 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 GM’s 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 GM’s 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 GM’s failure or its competitor’s success that caused its demise. GM’s 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 GM’s 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 GM’s market share.

This will affect GM’s 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 GM’s major competitors in the US auto car market. Portion of GM’s 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 competitor’s 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 GM’s competitive exposure to the yen? -Saud

4. How big is GM’s competitive exposure based on Feldstein’s assumptions?

Using the following approach, we estimate that GM’s 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 GM’s yen exposure?

6. How GM should manage its competitive exposure?

Answer 1: General Motor