GM used to be an undisputable market leader in the USA, but because of the fierce competition in the American automotive industry the company had to change its business strategy and start expanding its geographical markets in the 1990s and 2000s. According to the GM Annual Report 2014, the vehicle sales were as follows – 3,413 in Northern America, 1,256 in Europe, 4,378 in other countries, and 878 in South America (GM Annual Report 35). 65% of GM vehicles were sold abroad and that means that the company was able to replace the lost market share in the USA with the new markets, but now it is exposed to the currency exchange risks especially in the countries with the emerging economies where the currency rates are very unstable. Moreover, in the developed countries such as Japan or Germany if the national currencies depreciate, GM’s competitors get the advantage.
Therefore, the company had to develop a hedging strategy that would address exposures related to selling, buying, and financing currencies. Euro, U.S. dollar, British Pound, South Korean Won and Mexican Peso are the most important currencies for GM. The company uses derivative instruments (foreign currency forwards, options, and swaps) in order to hedge the risks. The net fair value liability of the financial instruments equals to approximately $1 billion and the potential loss in the value of the instruments would be $0.2 billion if the currency rates changed by 10% (GM Annual Report 2014 60). In addition, GM has a policy to finance receivables in the same currency. GM uses foreign currency swaps in order to convert the obligations to the local currency of the receivables (GM Annual Report 2014 62). Moreover, exposure to exchange risks may be reduced by means of sourcing the production overseas. In 1999-2014, production of GM cars increased by 20% (Statista). Now only 22% of cars are produced in the USA (in 2000 the number of cars produced in the USA equaled to 52%) and the majority of the cars are produced in the countries with weak currencies – China, Brazil and Mexico (OICA). This outsourcing strategy also helps to cope with the fluctuating exchange rates.
In conclusion, GM had to rethink its overall business strategy after the economic crisis that hit the company in 2009. Nowadays the company is very active overseas and is exposed to the currency exchange risks. The company moved production to the developing countries where the currencies are usually weak and tend to depreciate which gives an advantage to the GM, because exports from such countries become more profitable. Moreover, GM uses traditional financial instruments for hedging the risks. Since the overseas markets provide more opportunities than the mature U.S. market, GM will have to pay much more attention to the various hedging strategies in order to avoid the financial losses.
Works Cited
General Motors. GM Annual Report 2014. 2015. Web. 2 March 2016
OICA. Automakers' new tendencies internationalizing their production. Quest Trend
Magazine. 19 October 2015. Web. 2 March 2016
Statista Portal. Number of passenger cars produced by General Motors worldwide from 1999
