Introduction
A Multinational Corporation is an enterprise that manages goods and services production and delivery to more than one country. The MNCs have their headquarters in one country known as the home country while the other countries where it operates are known as the host countries. There are several Multinational Corporations that exist in several sectors of the economy involved in the production of different commodities. Some Multinational Corporations have huge GDPs that exceed that of most developing countries. Multinational Corporations have been very instrumental in the promotion of globalization. In this research paper we are going to consider General Motors (GM), an American multinational corporation that has its branches in almost every country across the globe. The MNC is mainly concerned with the manufacturer of motor vehicles. General Motors is commonly known as GM and has its headquarters in Detroit Michigan. It is the world’s second largest manufacturer of motor vehicles. It has more than 200,000 employees and operates in over 150 countries. It produces cars and trucks in more than 30 countries and sells these vehicles with the brand names: GMC, Opel, Holden Chevrolet, Buick and Cadillac. The company enjoys quite a variety of international markets. It has its presence in almost all the continents and its growth has been on the rise in the recent past. The company’s presence is widely felt in Asia, North America and Africa.
Foreign markets
General Motors’ presence is felt in almost every continent. The foreign markets for the company forms the biggest percentage of its market with the largest one being China. The managers at General motors have stated that international markets are the key to growth of the company. The company has put forward an initiative and has proposed that it will launch about 70 new or improved vehicles in the international markets so as to expand its business in the motor industry even further. The company is the industry leader in the combined markets of Brazil, Russia, India and China. The director of General Market for International Markets Tim Lee recently stated that General Motors is in the process of becoming the first global vehicle manufacturer to sell more than 2 million vehicles in China in 2011. The entry of GM into several international markets has helped the company boost its sales hence increased revenue. However, there are some challenges that come along with the foreign markets. Some of the risks that the company faces as a result of the foreign markets include: foreign currency exposures, High transportation costs, poor infrastructure, and unfavorable weather conditions among others. The company has been struggling with the problem of foreign currency exposures and has formulated a strategy that can help mitigate the problem.
Foreign currency risk exposure
The foreign currency exposure refers to the degree to which the future cash flows of an organization taking place as a result of the foreign and domestic denominations transactions are exposed to the disparities of the foreign currency exchange rates. In order to solve such a problem, it is necessary for the relevant organization to identify the existing potential currency relationships and carry out transactions only when it is best fit for the organization. Foreign currency exchange rates can lead to a company losing a lot of money or can at the same time help the company make some significant gains. The foreign currency risks on the other hand refer to the net possible gains or losses which can come out as a result of the changes in the exchange rates of the foreign currency. It is mainly concerned with the effects of the fluctuations in exchange rates.
General Motors is faced with both the recurring and non-recurring foreign currency risks and three types of exposures as a result of foreign currency exchange rates. The exposures facing General Motors include:
i. Translation exposure - also known as accounting or balance sheet exposure. This situation arises when there is need to make a merged report of a worldwide operation of the company using one reporting currency. Depending on the local exchange rate with the reporting currency, a company can record significant gains or losses.
ii. Transaction Exposure – also known as conversion or cash flow exposure and involves the actual cash flow which is used for setting up dealings which are denominated in a foreign currency. In most cases whenever there is a financial transaction being done involving two different currencies, there is usually a discrepancy which occurs between the time a transaction is initiated and the time the transaction is fully settled.
iii. Economic exposure - also known as the operational exposure and mainly deals with the strategic assessment of the foreign transactions and interaction. It involves the differences that may occur in terms of the price of an item or the operational costs of the company as a result of the differences in the exchange rates at any given time.
Strategies
In order to properly control such exposure and limit their effects to the overall operation of the company, there is need for the organization to carry out a proper exposure identification scheme and formulate the strategies to minimize them. The approach used by an organization is usually based on the costs benefits of the substitute strategies. Each type of exposure is controlled in a unique way therefore the identification process is very vital in the overall process of controlling the risks and exposures coming out as a result of the foreign exchange rates. The strategies that can be put forward to mitigate the risks depend on the type of risk that the organization is faced with. Nonrecurring risks can be best handled using some short-term strategies while the ongoing/recurring risks should be dealt with using long-term strategies. The risk should therefore be properly analyzed in order to determine the most appropriate method of dealing with the risk.
General motors should use a comprehensive system of risk management. Even though it has relatively high costs, this method of risk management is very useful especially in situations whereby the extent of exposure is large. Using a speculative method of risk management cannot be beneficial to the organization as things may not work out as expected thereby resulting into the company making huge losses as a result of the speculation.
The following strategies have been proposed to manage the risks:
i. Forecasting – the amount of information in existence regarding a given currency or situation in the international market is dynamic and always changes. There is a lot of information that exists showing the factors that influence the fluctuations in foreign currency. An accurate forecast should be made using the prevailing factors so as to caution the company against the risks that may come up as a result of the fluctuations in the foreign currency exchange rates.
ii. Assumptions – it is very important to take not of any assumption made during measuring and forecasting. The regulations that are put forth by different legislations should also be noted in order to determine their influence to the exchange rates.
iii. Pricing Policy – this involves predetermining the currency on which a transaction is supposed to be made and the currency that the transaction is to be settled on. If the same currency is used then the company will be saved from the losses that could occur as a result of the changes in the exchange rate from one currency to the other.
iv. Asset/liability management – this involves making equal and opposite deposits and borrowings which are produced in a specific currency so as to match the expenditure or proceeds.
v. Currency future contract – this situation gives a company a chance to purchase a given amount of a currency using a specified price for a future given date through some organized form of exchange. A company will be required to make some deposits of a given amount for the transactions to be facilitated. This has helped General Motors to deal with issues of the fluctuating currencies in the host countries interfering with the general operation of the company.
International Banking System and Financial Markets
The International Banking is very instrumental in the operation of any MNC. General Motors has been saved by the International Banking System to help protect it from risks that occur in the host countries where they operate in. there are some countries that are often faced with political instability. The International Banking acts as an insurance firm against the risks that may occur as a result of the risks and uncertainties that the MNC can be faced with while in operation in the host countries. The international financial markets perform intermediary functions through relocating the purchasing power from the lenders and investors to the groups or individuals wishing to obtain assets that they expect would yield future benefits. The international financial transactions usually involve the exchange of assets between parties of different financial institutions across national boundaries. The international financial centers serve as a pool of savings and then relocate them to their most proficient use disregarding the places where the savings are generated.
Functions of the financial markets
i. Price discovery process
ii. Ensure liquidity through the provision of a machinery for the investors to sell their financial asset
iii. Reduce the cost of transactions and information
The international markets can be divided into either money or capital markets. The money markets mainly deal with the possessions which are created or transacted with relatively short maturity period which is usually less than a year. However, the capital markets deals with the transactions on items which have a maturity period often exceeding one year or which lack a definite maturity period.
Techniques for using the markets to finance global operations for General Motors
In order for the GM to use the markets to finance global operations, the following techniques are used:
The company engages in price discovery process whereby the prices of all the materials used for the manufacturing process are established and then obtained using the best possible costs. The price discovery process also involves the establishment of all the operational costs of running the business. This helps the company to avoid losses that could occur as a result of wrong information on the price of the items they use in the manufacturing process and the price they set for their products. The company is also involved in reducing then number of middlemen involved in the transaction process. This helps the company reduce the overall cost of carrying out the transactions and the cost of obtaining information for a given product as they deal with the final consumers directly.
General Motors has formulated financial strategies that can help it thrive in the dynamic international markets. The company has hugely invested in shares and is currently the company with the largest amount of shares trading in the NYSE with over $20 billion worth of shares. This can help the company increase its profitability as a result of the shares being traded on in the NYSE.
The company is also on the track of producing over 70 new cars which are customized to fit in the different markets across the globe. This will help the company increase the number of customers and hence improve on the customers’ profitability as the sales will be boosted much further with the introduction of the new brands.
The company receives financing from the US government as the US government is one of the largest shareholders for the company. This has also helped the company to absorb some of the losses that may occur as a result of fluctuations in the international markets thus making the company to be able to remain in business.
The company also is involved in initiatives of using the locally available materials for the production of its cars. It tries to minimize imports unless it is very necessary. This has also helped the company to control the risks that are involved as a result of the foreign exchange discrepancies.
References
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