1. Why is GM worried about the level of Japanese Yen?
* The primary reason for GM to worry about the level of Yen is the fact that depreciation in Yen will give the Japanese automakers a cost reduction in manufacturing operations. From the case we know that the average Japanese car had between 20% and 40% Japanese content, A Yen depreciation, therefore, had the potential to reduce cost of goods sold substantially. This would allow Japanese automakers to pass cost reductions to end-customers in the forms of incentives or cutting price. From the case we also read that customers are quite sensitive about price change, a price decrease would increase the unit sales in the market. Thus depreciation in Yen will cause a portion of GM’s market share to be eaten by Japanese automakers, then erode the profit of GM and further decrease GM’s market value.
* Besides the reason of competitive exposure, it is also because GM has other kinds of foreign currency exposures that make GM worry about the level of Yen. The first one is that GM has a Yen commercial exposure, which includes net receivables of $900 million. Depreciation in Yen would devalue the receivables. The second one is that GM has a invest exposure, which includes short positions in equity stakes in 3 Japanese companies. The third one is that GM has a financing exposure, which includes a completion of $500 million Yen-dominated bonds issuing. The three kinds of exposures above make GM face a foreign currency risk and can influence the GM’s cash flow in the future.
2. How important is GM’s competitive exposure to the Yen? GM’s competitive exposure to the Yen is very significant because of the reasons below: As we have read from the case, we know that a one-Yen depreciation against dollar can make Japanese automakers’ collective profit grow by more than 0.4 billion. This will definitely increase the competitive pressure on GM. Japanese automakers will pass 15%-45% of cost reduction to end-customers and the case tells us that a 5% increase in price could be expected to lower unit sales by around 10%, if we think it reversely, if Japanese automakers lower the price by 5%, the unit sales of them will increase around 10%, and this is obviously from eating other competitors’ market shares, including GM. GM’s majority of sales still happen in the North America, which counts for 72% of its sales. Japanese automakers derived 56% and 43% of their revenues from the U.S market in 1999 and 2000, indicating a great competition regarding North America market between Japanese automakers and GM.
3. How would you go from the information in the case about competitive interactions with Japanese manufacturers to a value exposure for GM? * Constructing pro-forma cash flow statements for GM and conduct sensitivity analysis of Yen. *