Why Is Gm Worried About the Usd/jpy Exchange Rate?

1. Why is GM worried about the USD/JPY exchange rate? What is the chain of

events (7steps) following a depreciation of the Yen according to Eric Feldstein,

treasurer and vice-president of nance?

GM has limited exposure in terms of sales or associated transactional items in Japan or APAC (2% of sales in FY 2000). While GM’s transactional exposure to the USD/JPY exchange rate is minimal, they face substantial exposure operationally (competitive), as fluctuations in the yen significantly alter the cost structure of their competitors. GM faces competition from Japanese automakers like Toyota and Honda, whose US sales collectively comprised 43% of total revenue in 2000. GM is concerned that the Japanese automakers, for whom 20-40% of costs are sourced in Japan, could benefit from JPY/USD depreciation, reducing their JPY-denominated COGS and SG&A relative to USD-denominated sales. In the first half of 2000, the yen appreciated to 117 and dragged down Japanese profits by $4b. On the other hand, every unit of depreciation of the JPY/USD is estimated to improve Japanese carmakers’ operating profit by $400MM. In the latter scenario, GM’s foreign competitors operate at lower costs and could pass along savings to US consumers through rebates, weakening GM’s US market share and reduce the company’s profits. The competitors with operations and JPY/USD oriented earnings are significantly advantaged by a depreciation of the FX unit. Therefore, while GM’s cash flows have limited direct exposure to JPY, the indirect exposure is large and difficult to quantify. GM’s envisaged chain of events in a JPY depreciation scenario is as follows:

2. What is the FX exposure of GM? Distinguish between contractual and com-

petitive (operational) exposure and use the information provided in this case to

quantify the total FX exposure of GM. Think through the competitive interac-

tions with Japanese manufacturers to determine the contractual FX exposure

for GM's valuation. --- this one at the Micro level

GM had only implemented a passive hedging exposure, and did so at the regional level. With units around the world working through the sophisticated strategy to shield risk, the firm misstepped and was exposed to losses. With that being said, the firm’s contractual exposure was primarily derived from its’ earnings exposure. With largely unhedged positions, even those countries with small amount of sales, GM was open to being relatively disadvantaged on their financials. Contractually, the firm had hedged 50% of their FX from cash flows of their ongoing business of their receivables and