Gm Competitive Exposure
EXECUTIVE SUMMARY
This case shows us that apart from transaction, translation and economic exposure to currency risk, firms also have the very real strategic impact on their competitive position from competitive exposure. Apart from GM’s exposure to the yen which is reflected in their financial statements, their competitive position vis-à-vis Japanese manufacturers is affected by a potentially declining yen. This is because a declining yen reduces the Japanese manufacturers’ $ cost, enabling them to pass on some of the benefit to US customers and thus taking some of GM’s market share. This will impact GM’s top and bottom line. However, GM has a difficult decision regarding managing this risk.
GM can quite easily justify hedging its transaction exposure to yen, as well as its yen denominated assets and liabilities. However, taking measures to manage currency risks stemming from competitive exposure is tricky because of various reasons:
• Difficulty in accurately measuring exposure, leading to high estimation cost.
• Justifying any measures as non-speculative.
• Conducting transactions that take GM away from its core business.
• Attributing too much importance to short-term trend over long-term strategy.
At the same time, if it can see some quantifiable loss from the trend of yen depreciation, it will find it hard to justify doing nothing.
In the following analysis, we articulate why the yen devaluation matters to GM and try to estimate a range of potential loss in market value for the company. We also look at exposures arising out of GM’s direct exposure to yen movements. We then try to suggest alternative techniques for the difficult problem of estimating GM’s competitive exposure. Finally, we look at the ramifications of the various actions that GM can take to ‘hedge’ its competitive exposure to yen. As always, the eventual course of action will depend on the firm’s risk appetite and a more detailed cost-benefit analysis. Due to the various
This case shows us that apart from transaction, translation and economic exposure to currency risk, firms also have the very real strategic impact on their competitive position from competitive exposure. Apart from GM’s exposure to the yen which is reflected in their financial statements, their competitive position vis-à-vis Japanese manufacturers is affected by a potentially declining yen. This is because a declining yen reduces the Japanese manufacturers’ $ cost, enabling them to pass on some of the benefit to US customers and thus taking some of GM’s market share. This will impact GM’s top and bottom line. However, GM has a difficult decision regarding managing this risk.
GM can quite easily justify hedging its transaction exposure to yen, as well as its yen denominated assets and liabilities. However, taking measures to manage currency risks stemming from competitive exposure is tricky because of various reasons:
• Difficulty in accurately measuring exposure, leading to high estimation cost.
• Justifying any measures as non-speculative.
• Conducting transactions that take GM away from its core business.
• Attributing too much importance to short-term trend over long-term strategy.
At the same time, if it can see some quantifiable loss from the trend of yen depreciation, it will find it hard to justify doing nothing.
In the following analysis, we articulate why the yen devaluation matters to GM and try to estimate a range of potential loss in market value for the company. We also look at exposures arising out of GM’s direct exposure to yen movements. We then try to suggest alternative techniques for the difficult problem of estimating GM’s competitive exposure. Finally, we look at the ramifications of the various actions that GM can take to ‘hedge’ its competitive exposure to yen. As always, the eventual course of action will depend on the firm’s risk appetite and a more detailed cost-benefit analysis. Due to the various