Effects of Change in Economic Environment on General Motors Company - Case Study Example

Effects of change in global/regional economic environment on General Motors Company a) Operations, competitors, business particulars and management structure of GM, its role in the industry, and motivation to operate as a multinational company Ever since it was founded about a century, General Motors has held a substantial portion of the automobile market. According to the company’s official website, it has manufacturing plants in 32 countries that produce vehicles for sale in 192 countries worldwide. Its total revenue is estimated at $176 billion. At the helm of the company, overseeing all its management of operation is a board of directors that are responsible for selection of officers. Representing the owners’ interest the board is responsible for increasing the profit margins. It is composed of 11 members, nine of whom are not employees, while the other two are management personnel. The company’s subsidiaries have their own boards that are answerable to the overall board. The board manages the company through six special committees that include Audit, Capital Stock, Director Affairs, Executive Compensation, Investment Funds, and Public Policy. The public policy committee is charged with ensuring sustainability of operations in line with the company’s core values. The company has been able to withstand wide ranging changes in the global trade largely due to its public policy committee. The committee deals with the changing dynamics of business by bringing to the company’s attention emerging issues that are likely to affect operations and performance, as well as the company’s public image. It has the mandate of addressing environmental change, workers’ relations, government regulations, and corporate social responsibility. It also anticipates changes and prepares for them, besides developing strategies that have been able to steer it through all the challenges. Sometimes, the company takes bold decisions that are sometimes difficult. On several occasions, it has had to lay off huge numbers of workers to cut down costs. Early this year, the company announced plans to offer buyouts to its unionized employees, numbering 74,000. This was prompted by a troubled financial with colossal losses in the United States market, whose demand for the company’s vehicles has been weak. Between the 1970s and 1990s, General Motors, which had been the undisputed leaders in the automotive industry, was overtaken by Toyota, after it ignored the dangers of competition. Before then, the company had enjoyed a substantial period of growth. b) Foreign exchange exposures to GM as a result of foreign exchange rate movements and how the company hedges the exposures Foreign exchange exposure is the sensitivity of a company’s cash flow to the change in exchange rates. Studies have found out that since some firms have been able to match their revenue from foreign currency with costs hence a low net exposure. This is determined by the ability of a firm‘s market value and the present value of its expected cash flows, responds to changes in exchange rates. The absence of subsidies to General Motors, unlike its competitors in Japan, places it at a disadvantage in the highly competitive market. The Japanese currency, experts say, is very weak and with the thousands of dollars paid out as subsidy, the company has to work extra hard to counter. The company uses currency swaps and forwards, as well as foreign exchange contracts to hedge the foreign exchange fluctuations. Multinationals like General Motors shield themselves from exchange rate exposures resulting from foreign sales by creating offsets in foreign exchange currency through location of manufacturing plants abroad. This reduces exposure to manageable levels. c) GM’s motives and methods to expand in new markets General Motors has had its fair share of losses, which are largely due to insensitive bsiness practice as the company churns out car makes that are either too expensive or unpopular in the market. The losses are not just in term of revenue but also include loss of resources used up in the manufacturing process. Now, the company intends to General Motors expand its manufacturing to Malaysia to beef up its presence in Thailand. However, the details of the expaqnsion plan are yet to be revealed but it is believed that the move is motivated by the huge market in Asia. However, the company has continued to adopt new strategies that help it cut into new markets. This includes writing blogs and other social media to create rapport with the local communities. The blogs provide customer intelligence that are better than the usual methods of market research such as surveys and focus groups, besides being much cheaper. Moreover, the company’s officials are able to deal with individual customer’s experience with their products. In addition to this, the blogs provide a medium for the company to enlighten its customers about the design of the vehicle apart from justifying some of the features. And since the internet is more popular with the ypoung generation, the company increases its popularity among this market segment. General Motors’ problems would have sorted themselves out a long time ago, since experts say that when cash holdings exceed the entire valuation in the stock market, a Wall Street shark is going to swoop in, snap up the good parts, and toss the rest. The company has sales amounting to $193 billion, but its industrial might is fast fading. The company provides employment to many workers’ estimated at nearly 900,000 jobs at a cost of about $8.7 billion annually. Unfortunately, it has been on a loss making spree for sometime now besides being in huge debts from retiree health and pension benefits. It has also had declinining sales that have enabled the competition to eat into its market share. Now, the company is a money guzzler, eating up more than it can churn out of sale of its vehicles. It requires quick action by the management to save the company instead of maintaining the factories until the market share is irredeemable. Apparently, due to union agreements, the factories must operate at a minimum 80% irrespective of whether they make money out of it. Thus the company’s hands are tied since it cannot shut down or sack the employees without receiving the wrath of the union officials. Maybe, the company needs to seek a way of renegotiating the terms of work with the union. d) Capital structure of GM and how it finances (short and long term) its operations using international capital markets. Latest financial reports posted on the company website indicate that global revenues reached a record $184.6 billion, a 4.6% increase since 1999. The total sales in 2001accounted for 3.7% of the United States’ gross domestic product, about 375 billion dollars in sales. The net income has however dipped to $4.5 billion, down $1.1 billion over 1999. The earnings in 2001 were second highest in the company’s history and went for $8.58 per common share in the stock markets. This was however lower than the 1999 record $8.62, though the company insists that it was still solid, given its pressures in stock markets worldwide. Today, the company’s’ combined value of shares is estimated at $16.5 billion. About two years ago, it suffered a $10.6 billion loss, which was not the last as it has suffered even more. The stock’s positive value indicates a chance that the company is able to rise and change its fortunes, a feat that it is yet to accomplish. Meanwhile, it can afford to incur losses without compromising on its ability to service loans and meet other financial obligations. For instance, the company announced last year plans to refinance loans amounting to $5.6 billion, reasoning that it would help it gain financial flexibility. However experts say that the promised change of fortunes by the decision is not guaranteed. Since some loans require collateral, they are favoured over the company’s unsecured bonds, therefore if the company loses even more and defaults on its roes before paying up, then the bondholders suffer depreciation of value. e) How the market value of GM is affected by strategies used in exchange rate risk management, expansion to new markets and international financing of operations Among the exchange rate risks faced by General Motors are: transaction, translation and economic risks. Exposure to different currencies increases the chances of devaluation and increases financial costs, besides necessitating alternative transactions. The company however manages its exposure to such risks to reduce its vulnerability to the movements, which could adversely affect profit margins and the value of assets. Strategies that have been employed to combat these risks in the past are: tactical, strategic as well as by hedging the risks. The company’s overall strategy provides for a consistent approach to the management of foreign exchange risks. f) How GM changes its strategies in response to changes in its operating environment (i.e. global economic trends, change in major competitors’ strategies). General Motors plans a financial overhaul which experts warn, might not restore profitability, due to stiff competition. Despite accounting for about a quarter of the new vehicles in the United States, profitability is still falling. The loss making trend is worrying and could just go down to the last penny. Perhaps it would be wiser for the company to voluntarily file a bankruptcy petition. This would give it freedom from debtors, besides allowing a procedural disposal of assets to competitors or retained by the firm. This is however an unpopular way out of financial troubles in the corporate world. But most of the time it turns out not only as the right course of action in prevailing circumstances, but also a long overdue one. g) Evaluation of the performance of the GM’s financial managers General Motors is at cross roads. The firm, could rise from the ashes like the mythical phoenix, or perish forever. It all depends on the interplay of several factors. Several companies have risen long after their epitaphs were written. If General Motors is fortunate enough to go this route, then many has to be done to salvage the company. Despite being a respected multinational company, has lots of room for improvement, especially in the field of employee relations. Policies should be reviewed with an input from the workers. Strikes and other forms of industrial action by workers only serve to give the competition undue advantage. As the workers’ morale increases, their output also goes up, which boils down to increased profit margins. Unfortunately, the change of employees’ attitudes costs a lot of money. Many years ago, the company assented to a punitive agreement with its unionized staff that continues to haunt it especially with the deep financial troubles that it is embroiled in. The company should consider a drastic scaling down of its operations so that it reduces the number of brands and models, in order to cut down on operation costs. The company now has unnecessarily too many models that eat into its design versatility. This means a restructuring of the company’s employees. Meanwhile there is the ever present risk of being forced into bankruptcy by debtors. There is need for drastic measures to save the situation, as the company enjoys the cushioning from financial turbulence that it currently enjoys. The company’s management needs to wake up from its slumber in order to save a deteriorating situation. This is to avoid a situation that cannot be salvaged by management since it will now be at the mercy of global market forces. The huge burden it now carries may compromise on its ability to escape this grim eventuality. Experts suggest sale of insurance and other assets, besides canceling dividends in order to limit costs and maximize profits. Either way, the company’s owners or employees will suffer. And if the company remains in business then it has to reconsider its priorities in areas such as research and how they allocate funds for this. Many a times, the company has been criticized for focusing more on production capacity at the expense of quality. The company should focus more on building fewer quality vehicles with limited incentives and ensuring that its companies remain productive and profitable. Private investors in equity hold the belief that the enormous cost problems suffered by the company worldwide, will ultimately lead to a major bankruptcy suit. A takeover would definitely be challenging for whoever takes over the company, even on receivership capacity. References 1. http://www.gm.com/corporate/responsibility/reports/06/300_company/5_fifty/350.html 2. www.rediff.com/money/2004/aug/12guest1.htm 3. http://www.nytimes.com/2008/02/13/business/13auto.html?_r=1&ref=business&oref=slogin 4. www.academicmind.com/unpublishedpapers/business/management/2004-11-000aaa-automotive-industry-analysis.html - 78k 5. http://www.gm.com/corporate/responsibility/reports/01/economic_info/financial_performance/index.html 6. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=947372 7. www.gm.com 8. illuminea.com/new-media/gm-expands-social-media-marketing-strategyand-sees-sales-up/ - 35k 9. http://www.ad-hoc-news.de/Aktie/12718278/News/16437660/GENERAL+MOTORS.html 10. http://www.allbusiness.com/business-planning/business-structures-corporations/718414-1.html 11. http://www.businessweek.com/magazine/content/05_19/b3932001_mz001.htm 12. http://query.nytimes.com/gst/fullpage.html?res=9C0CEEDC1639F93BA35752C0A966958260&sec=&spon=&pagewanted=all 13. Read More