Competitive Ecposure

Foreign Exchange Hedging Strategies at General Motors: Competitive Exposure

Why is GM worried about the Yen?

In 2001 General motor’s turned their attention to how fluctuation in the Yen affected GM’s costs. A great part of GM’s competitors, had a great part of costs origin in the Yen and this worried GM. The exposure that GM faced regarding the Yen was not only from Japanese equity investments and commercial exposure as of a receivable; GM’s equity investment in Japanese companies totaled at $817 million, the estimated receivable was $900 million. They also had an outstanding bond debt of a principal amount of $500 million.

Besides this, GM was also exposed to a competitive exposure to Japanese car manufacturer. With a decreasing Yen against the dollars, Japanese car manufacturers would see an increase in the number of Yen they receive for every dollar sale in the USA. Since Japanese Car manufacturer have a great part of cost in the Yen, this would give Japanese car manufacturer additional gross margins, a chance to lower sticker prices and by doing so gain market share in the USA. What GM had to figure out was how big this competitive exposure was.

First of all, GM has a transaction exposure to the yen which. Secondly, and more important is the competitive exposure that depends on the Yen. Japanese car manufacturers are big competitors in the USA market. In recent years 4.1 million units of Japanese cars were sold in the USA. That is a big part of the US market. As we can see from exhibit 4 the Yen is currently depreciating and since estimates shows that between 20 % and 40 % of a Japanese car has it cost structure in the Yen, this causes for potential problems.

How important is GM’s competitive exposure?

To answer the question of how important GM’s competitive exposure is, we have to quantify the exposure and put numbers on it. As mentioned earlier, a Japanese car consists of approximately 20 % to 40 % of Japanese parts. Given that these are costs in...