Case Study

FX Hedging Strategies at GM: Competitive Exposures

The case explores how competitive exposures arise for multinational firms, how they can be measured and managed, and how companies can address the economic consequences of competitive exposures. Given that GM hardly sells any hardly any products in Japan one might wonder how the automotive giant could possible face any exposure to the Japanese Yen $($JPY$)$ in its operations. Nevertheless, commentators have long alleged that senior management has paid insufficient atten$-$ tion to this very real exposure and is now paying the price in terms of GM$$s rapidly deteriorating competitive position.

Although GM$$s competitive exposure to the yen is a long$-$standing strategic concern among GM executives and shareholders, it had required the constant pressure of veteran investor and corporate raider Kirk Kerkorian to move the largely hypothetical discussions into the realm of corporate strategy. As a consequence, GM now attempts to develop an analytic framework for the quantification of GM$$s yen exposure. Senior management hopes that the insights gained from this analysis will allow GM to better manage the risks that arise from this competitive exposure.

In preparing this case you might want to consult Williamson, R$.(2001),$Exchange rate expo$-$ sure and competition: evidence from the automotive industry,$$ Journal of Financial Economics $59$: $441-475.$ The following questions are meant to guide your discussion and analysis.

Why is GM worried about the level of the yen?

$($a$)$What are the sources of this exposure? Who benefits and who loses if the USD$$s value rises against the JPY and why?

$($b$)$What are the exact mechanics through which JPY$-$USD FX rates affect GM$$s competi$-$ tive position?

How important is GM$$s competitive exposure to the yen?

$($a$)$How would you go from the information in the case about competitive interactions with Japanese manufacturers to a value exposure for GM$?$

$($b$)$How would the company be affected by a $25\%$ rise in the USD?

Are there less information$-$intensive methods that might allow you to assess the competitive exposures of GM$,$ specifically, or other firms generally? How would you implement such a method?

What methods are available for hedging the JPY exposure? Explain costs and benefits.

Should GM attempt to hedge its USD exposure and, if so$,$ how? Explain and make a recom$-$ mendation.

$($a$)$ Why is the hedging of the JPY exposure particularly difficult for GM$?$

$($b$)$ What are the costs and benefits of engaging in such a strategic$-$hedging program?

$6.$ What other currencies does GM face similar competitive exposures to$?$ Why? Can GM address these exposure more easily than the one to the JPY and, if so$,$ how?

Option A

As Treasurer of GM you have been asked by senior management and company$$s board to investigate financial and nonfinancial strategies for addressing GM$$s competitive exposures. You start with the JPY which poses the most pressing problems. The presentation to the board is only a week away and time is running out.

Option B

You are a senior investment banker advising Kirk Kerkorian in his dealings with GM and the firm$$s senior management. Since it appears that the company is finally getting serious about addressing the constant erosion of its competitive position you have been asked to prepare a study on GM$$s JPY exposure for Mr$.$ Kerkorian and the two board members that represent his interests.