RN,%"k,A1&2W6

9-205-096

MIHIR A- DESAI MARK F . VESLEN

!r and ~ i(o president of finance for Genei -,A %lotors, attention to a lonWsUndhip sushyl wncern : the economic conwqwqY,, of Japanese yen. The yen fi8LUVd heap iV- h-t the cost structures of sonti-, at G\Vs and Feldstein had to anticipate ho} ,, c\di . -inge rate movements might finp~kct those GM it~,Af . his Aq lren,urv team were responsible far managing ttw H4 , i- ,,ociated with foi,~i ,, , n hdns,ktillm and rnovements . 1 For the most part, CUricn,% ri4 , arising from CAI's 1\101 ldw i(L' ojwl'ltkv11' in a- ; , rd,mio with the companyi orin,if hedging policy . ~41111t,111ti,'11 t , \ po~urt , to the did not arise ftom ~p,,, 'ilic foreign exchan tk , n- it nonothJ , ~s real risk, to the cam r. Feldstein Lid to understand GNI's yen exposure, and to determine how best to manage those
I i

Goicna'Alo0v CkmmA Aw q, Y jv the ",M Ltr~ ,,o,t i wornak-crand, since 11)11, the world'~ ,i 1, ~,i, lo r, CAI li,id unit N N5 million \ MIA, and A III ~ ." vwW" ido market char . krunde, C"'f 11,1,1 in nwr ,, tn,in '20 -'Llntrw~ '11 -1d its '.%u[c -'O(X), i!ii,itek -'.011 c)untries, In it generawd vwmn" Q A 4 We m -I- q Q K ; ; 7

tI

I t' S' "I " c-

I C) I I to

I I I I I) CI

203-096

Ftihalyu ffc<tc ;in slr,lte

a (,eneral Motors ; colllpetitivc

(0 --silt_-, to cnd ;(1~tom,'l, 111,1 thL' I,lr ;~~' ..t iancentrlti,~n of net property, pl,mt, :m,l equipirwrlt stewing as ,l i-'r'rcc'nt F'xhIt,II~2 and 3), Llut tlli' importance- ,_,f GM's intern,Itional operation, ell,_' o .oral

1=Yhll'lt I tol" ( ,,1 - "'111- .',ti,l,ltvd.In,-omc -t<ltcflli'Ilti . North America still

managed

GNI's

l operatit,ti ,~
tllt~-~'

 .l\ I?

C;t'nr.ll \Iotor, IlI tls,r~j -I4 tlo\\

,lLltt~nlc\ti~e hLl~iney~ .

nl~ll'I<l :~er1)e'17t ; and

c'dllcc' ~,lsll fow,lfld t' .lrlllfl" ti \ Ul,lIiIit\ ;

all=;11

rigks.

T1ic h,'\ - Oh",

rig,' t,1 : I ;,InitI,,)IIt t Llrn1), V ri,ks, and the Trt',I~urer'

Or

C>tIice

(At'l
IniIIiIIII/"

Thc'-'

1'A Ill~ln,l~',c'illt'tlt in l m,mrcr t-orisititellt %,, Ith. hour GM oper,a<'d its Ltpp,)rted by the fc,nnal lu'rl in :, policy. rtr~ln,~lt 1 ion , " ,I)(-ure,j onI,, uld i ;tinoled klhnt' sh,-et e\itu5ures
~I

thc' f11~111 .)L,c'i11C'nt If II),`

(FX) risk rn<ln~~ t'nlt?nt 1 oliov

111(1

iU'~tti clc'dlc~ltc't1

(trall~l .ltinn ~~h,, .rlre~j . Thc' curllp,ln\- tc~llu\\r'd

IIl

I,'Spllrt-c'ti

If MO 1hel1t ill) I'\ fll,lll If~l'fll?'llt, :l CtlnseijLI 'tI, l' l-11 ,l,-tlI' .\
III,III,l~'

p,ls " i\e he'd

III

.111

b~-'lichmarhs. The t,>rl't~ratt' Ilcd .i n~ ,, puIic\ 'r th .ill

"\III1&,\

001111t Il .lt-1 hilt

the umlerlyingbusine,-~ . ;

ith'I ha~i, ,) that financial m,m,l 1 'mt'nt \\<l ; cc3lr;i~tc'nt '.\ itll the

l l,<1 required h-,reign e\a-lhln~'t-'\p),,uic~ to I,tr nl,m .l-,cd

1"e~ultc'd

111turrl :lI Stud \ IIwt il"tc'I'lllllled

in

,"v tl),It limited nlan .l~sentent

III,)

~iL,IIIIICallt IILIti't'1'1C'1"f11,111Ci'

111\

C`titlllollt of
Of l1'e

exchange exposures al i ,,ing from the cash flows associated with clrlgoing bus ayables. rmine the riskin,- ; of the exp, -,L~ure and the amrlant to hedt.;t, on a rolling =chine ; policy ak,l dctined the in~trunlent; used ,lri>in to ht-dge c'~l,c\~ur~' arising within ~i ,, n),-,mils, a \~ (thin --,on to t\\ ~ I\ c' months. All dc, \ iation~ from these Su,- h conlrnt, rcial expel>ures were foreca,t en
r1

The passive hedging policy adopted by G'\ I was generally to h,'e-1

rt';,;ion,I l bisi

elve-month kl~,is .

(Ill 1\ ~I` used . r\\ <lrd

les

conh,u :t~ \\ t're u,cd t'\l,L,-,urr

ledge

1hpr\''\ cd b% ~r'nicar r~t'ttlti\ ~'~, nrlt.l Feld~,tt2in scrutinized su,-h rcc~ut'~t~, closely. FE'1,-1~tr'irt Mild his team also monitor(', forci~lt exchange expo,,ores

Recc nt1\ , I'1'le,tein 1-I,)d paid increasin:; ~Itt,-nt ioii to the strength of the dollar aga and

comp,m\ ; heik illt? policy but coal, nc''n<lthw1t , ~ have a direct

r indirect mpac

III, , tluc,tic,n li to m,lrLi~ .re (,M , \,'r\ ,ubst,111ti,11 rt-'n exposure . `ctlml~ctiti\ - <'' 1'\1Ik11Lll'ti c%'('rt' di~cu,>c'd lit uristic,Ilh t)ut tllcr <ll-t;c'nc~r of analytica ,lu,lntih, - the','.' c\h'c-un'> limit-d the ubilit~ to itllhl~~mc't7t -flee itic

otrtpef tive

Exposures

if'

-t ,,,I;il-',1111,-

. ; Ith ditt, r,'rIt

~It.mkc iimlc;in,:; Str .ue

autKid 1irge portions of their, ost structure clenomin .3ted in imion III ti ,' '. - cl) Iv\C,'I','d their relat7\'c ~i),t structure as C{ , 7111`Lli"c'll \\ - ith .ieid Furopean 1utIl munu( .i, ttar-'r1 . If of GM's ct~m!aetitr~r> _1chieved significantly through currenc} dt'I,i, ci,lti  n-, tlii- rrtc,int that tire p," rf, -, rm,~net of n~ y risk: lower costs for ]zi p . m',c t i r m, ;\ ~ -,u ld lead to L, ",\ ," r re,,1 u i r,'d prices to ac itabilitvlevels, thus erodin h,iic---andm- .IrL't\ - .iltee' . ear,'\ cli ," cchange rate had fluctuated i\ i,lel\ over the l, .i-t t\\ o ,IE,-,id~,~ and now pre~i,itin~ r-~ , c E\liihit -i) . J<Ihanese automakers derived -,iind -t,' . of their revenues U .'~ . m .irk,'t in l'Aci ,nd 2'00n, :ant \ "'I r' tli, \ ~ cIld 4.1 million units in lively. In c' United tit,j tt- . Fq~e[i~ i nmk-t, lied :--t[ruated that t ipicc!~ition trcuu 117 to 1117 Burin first hAf of '000 had reclu,t'd h[, ,m,,,c _i itomakers' glot,a l , i l,," r, l ring profits by $=1 bi cin r~~\ er "~d th,it tit .iti-;tic in lie, mind : t rrt CIEprc " ci,Aion against the onil, ,'tltt~r,' c,,llccti\ : ~~L-,~ratirt~~ I , r,rfit -~r< \\ b\" more th,m ~1!?tl million. Rou ;' 1'~,tinrites .h rch iepoothat the Japane-,'fii nis ~%-ere unprofitable '.hen the y cn \\,i , -tronger the clolhr :ind profit,ibleat 12(1 or more \,'l3 to the doe _1 Jc " r~ trr itl, : Comta " tifive Fxvol-o
t>

l, .i

Fei~1, t,'in of tlii~, ~~, \posure as iected recei .I\ JbI,A and no capital investment or loan to be repz impact that ,temmed from fluctuations in exchange rates . Because of the explicit transaction, Feldstein realmcd hC ~.\tiff outside the usual territory of GM's hedgi pith res 'n lm~cd t , n this Ferceived competitive exposure would new prcsee --s omethin tein felt lw had to consider very carefully . At the very lt?~lst, he needed an tight story justi ding the ni,iL'nitude of the exposure and how be 41ecti hedged . Feldstein felt that a compell depreciation in along some of this benefit to consumers the Jap,m,'se automatic I', gain (6) fns\ ~'rrtl GM's profit=, \ ",-hick thetie ~ - .Iri,ibics and,'ti,'cts . , terse, Fel&t,'in mould also nee ,_roll " rein :~\p-Lire . of ~- 1 ?00 LIl,Ari, ;, . O fl)[ .ink- , . ,-,'Ml" " ,11 !I,),I r ;~nipl,'tod a h iti followi
.i 1('~ult of lov, ~ I - 1, ricas ich (5) arc- int,.i unit ales at GM, %,hich Tlicih. ; " \ nurnericallvestimati

,'-ti ni,it,'d

c, ~nipcti titi- e exposure' in the cuntr\t of r " teltin~; lri,nt c,luit\ in tl?rliugh :I ten-den  min,it,rd ;sot? niilli : ,n worth of , )lit-ttimding

.II

1I1\''-tnI1'" nt ?sh --u r .

rrvnil-L,rt, .;l

tit,ur,',l that th, i~ .ir~, ilr-is ;lit- int . , ,\ h :it

tel .ite Liter . \tt, r itli 1lW f , u~ln ,j : " \, It , l'nik t?t [C,1111,lie 11 .?, ind 41.i" iri,-lud,.\,-1! a-, h! -'  r ,in,! !chest ~",p,r[<,' ili,rerr :,l in 1,11,111 . l \ t!,_ I"'t,'nti .al t,, r,au"l t - I'I rl rf _o~t ~,I\ !ei ;_< riii llt tiltinl,ll, l\ l,r 11 :1--,, .a on t  c11,1 ku\rr-, I eld~t,,in

WSW

C,e1101Jj NlOtOtS.' C0111110ihv0

." 4 kAl 711a nhv,- , r h A\ t jap I s 1), AJUIM NLV ExhiNt Uk , wci ahn%-t idle'-thiid ot per-v-

vVa ll On Orth" ( 1e ri OIt",

n.]-,"it,and45,,n of tl-iec, ,-t a ,, Tn2000, k httl,' m iii,entives compared with A, rest of be iJ Vii,, ~ it away more than the induct

most ,'Ajriiak? were the consuni~ , i ela~tj,i(% and the cross GM Ra eiii cot-indied vvith ont- oi'the lor dealci networks and 1% 1 , wul that .l 5~ p ewc -11d I- tkpected to 11"0, "I'Lillit b\ 11 - OL111d It)' , . . . . Lite thr ch ~1, F,1d,tei umed that any- rnarkut shav hows hi japm"e auto= Detroit hai, ,,1 t ,qiaallyaulC)Hgand eni n .
dwlicit\ to

111"

1,% - 0

jlivd that a rotj : ,,h -11,1_111,ltion around a 20% %LM devaluation wmdd capture an upper L4) o4pmm' . Tht , aiintial11]5p t e,n GM's income statement coulc .1, be vaMed as a perpctiaitv at a A) , 'fi-oWlt: 1Jto---C1,'J1'k a ~ ,14, Ili' t-i'll to d,, I ,, c decj , i'r [i)(, , 1h ,2 numbers.

Feldstein iinking to do . While many auto execu of t hktein "\,)11i"d to move past the standard rhetoric on exchaivge uites and c dun tjlr ', ildi an he concluded, had to underpin anv ivAvrnmenda c-,n 11)r)Ilagilw, (-M'~ ii,k, '-petially since the corporate he dgiii ,_ poli,y 'J ,ic l f) , ,1,-'ili~,,, iichC,Ifllr)r titi\Cexposures.

tiv,e I I odging Strategies at General Motors : ( oiti po tit icc F yoski ic-

Exhibit

December 31

2000

1999

1998

nsos Selling, general, and adrvirislrafi ,,

184,632 22,252 9 .552 7,164 2,393 (319) 4,452 (110)

140,708

Interest a) Earnings before taxes and minority interests mWaNy interests ad Opt re

19,053 7,750 9,047 3,118 (353) 426 6,002 (80) 5,922

15,915 6,629 1,636

2,956 (63)

Source:

Cruz Woi - . T- - , mber3l,2000 10-K (Detroit General Motors, 2(01?,

205-096

Foreign Exchange Hedging Strategies at General Motors: Competitive Exposures

Exhibit 2

GM Segment Breakdown of Sales to End Customers, 2000

GM Latin America, GM Africa, Middle Eest-\ d% Auto, Comn, GM Asia Pacific Other 2% 2%

Source : General Motors, 2001 Annual Report (Detroit : General Motors, 2002).

Exhibit 3

GM Geographic Breakdown of Net Property, 2000

Source : General Motors, 2001 Annual Report (Detroit : General Motors, 2002).

1'0 IN

gn Em I a I qv up J"j I I g Stla I o'~ws at General Motw, ; ( om I , otitku Lyomei

205-0%

LC

hibit 4

TI : a]

1,

p,

i ric- , Yen

(sec-8{l

Dec-$2

Dec-84

Dec-86

Dec-88

Dec-90

Dec-92

Dec-94

Dec-96

Dec-98

Dec-00

Source: TI-iomson Datastream .

(challgo I lodgill'g'rt

I .) t'y;Ie'

('enela IN Io[ m' .

( o

III po I

ihc" L\Posures

Fkhibit 4

GenoW Wm , In tvnwiit, in

\ut-fn,il ;ers

Allfloto EW4,4ure
Aftihatw 5 hwOv) SUke

Fuji lsuu Suzuki

(110) (1 .02) (009)

20%/O 49% ONTO

_. : .h, 'will'it" ,

-i

t,

['~

$1 -,

I', v11-Morn, ;:

(toll, rs)

,n,,,

Saab j
IS UZU

Land-Rover Jaguar h~lifsubisf~i DaimlerChrvsler Volvo 1,969 Industry Average san Daewoo aru Kia 6 h1'v"d Audi j i Su uki Hyundai Toyota Eionda Volkswagen -Benz zda I 1