International finance MNC
FINC 6367 – International finance MNC descriptive analysis Page 1 University of Houston-Victoria School of Business FIN 6367 International Finance Dr. Xavier Garza-Gómez Fall 2014 MNC descriptive analysis (optional assignment) Objective: Understand how a MNC operates in the international environment. Instructions This assignment is optional and it is done individually. Students submitting it can earn up to 2.5 points. Students will describe the MNC’s market segments of sales, short-term assets and liabilities and long-term assets and liabilities and the basic hedging used by the company. Topics that must be covered: ? Type of company (profile) Main product (brand), service and type of industry. When available, state most important joint ventures, licenses or franchises arrangements throughout the world. ? How your company defines its international segments. You’ll just show the organization reported in the annual report. ? Segment data Sales, employees, assets, income, etc. ? How the company handles foreign exchange risk. Foreign exchange exposure Usage of main derivative instruments (forwards, futures, options and swaps) Net effect on earnings ? Region relative importance Based on previous data estimate the weight of each segment. Please refer to the following example so you get an idea of what type of information you need to include in your report. FINC 6367 – International finance MNC descriptive analysis Page 2 Basic description of how GM operates internationally and how it handles foreign exchange risk Company data General Motors Corporation (NYSE: GM) 300 Renaissance Center Detroit, MI 48265-3000 (Map) Phone: 313-556-5000 Fax: 248-696-7300 Source: Hoovers.com Profile General Motors is the world’s #1 maker of cars and trucks, with brands such as Buick, Cadillac, Chevrolet, GMC, Pontiac, Saab, Saturn, and Oldsmobile (which has been discontinued). GM also produces cars through its Holden, Opel, and Vauxhall units. Other operations include Allison Transmission (heavy-duty automatic transmissions), and GM Locomotive (locomotives, diesel engines). GM also has stakes in Isuzu Motors, Fuji Heavy Industries (Subaru), Suzuki Motor, Fiat (Alfa Romeo, Lancia), and GM Daewoo Auto & Technology. Subsidiary GMAC provides financing. Source: Hoovers.com International segments GM (Automotive and Other) reports operating segments for: GM North America (GMNA) GM Europe (GME) GM Latin America/Africa/Mid-East (GMLAAM) GM Asia Pacific (GMAP) The operating segments are managed separately because each operating segment represents a strategic business unit that offers different products and serves different markets. Source: 2003 annual report Net sales and revenues (in $millions) (Automotive divisions) 2003 2002 2001 GMNA 116,310 115,809 108,174 GME 27,478 23,912 23,700 GMLAAM 5,387 5,110 5,864 GMAP 5,338 4,524 4,201 Revenues are attributed to geographic areas based on the location of the assets producing the revenues. Source: 2003 annual report FINC 6367 – International finance MNC descriptive analysis Page 3 Net income by region (in $million) 2003 2002 2001 GMNA 811 2992 1348 GME (504) (1011) (765) GMLAAM (331) (181) (81) GMAP 577 188 (45) Total Net income 553 1988 445 Source: 2003 annual report Sales volume by region (in thousands) 2003 2002 2001 GMNA 5607 5721 5187 GME 1657 1645 1760 GMLAAM 561 640 666 GMAP 273 405 460 Total units 8098 8411 8073 Source: 2003 annual report Employment (in thousands) 2003 2002 2001 GMNA 190 198 207 GME 62 66 73 GMLAAM 23 24 24 GMAP 14 11 11 GMAC 32 32 29 Other 5 7 8 Total employees 326 338 352 Source: 2003 annual report Detailed data for principal geographic areas Sales and revenues 2003 Assets 2003 United States 133,897 47,594 Canada and Mexico 14,619 8,529 Total North America 148,516 56,123 France 2429 216 Germany 6361 5593 Spain 2143 1256 United Kingdom 6474 2275 Other 12350 3537 Total Europe 29,757 12,877 Brazil 2319 584 Other Latin America 1674 186 Total Latin America 3993 770 All other 3258 2824 Total 185,524 72,594 Source: 2003 annual report FINC 6367 – International finance MNC descriptive analysis Page 4 Foreign exchange risk (exposure) GM has foreign currency exposures related to buying, selling, and financing in currencies other than the local currencies in which it operates. More specifically, GM is exposed to foreign currency risk related to the uncertainty to which future earnings or asset and liability values are exposed as the result of operating cash flows and various financial instruments that are denominated in foreign currencies. At December 31, 2003, the net fair value liability of financial instruments with exposure to foreign currency risk was approximately $3.2 billion compared to a net fair value asset of $4.1 billion at December 31, 2002. The potential loss in fair value for such financial instruments from a 10% adverse change in quoted foreign currency exchange rates would be approximately $323 million and $411 million for 2003 and 2002, respectively. Source: 2003 annual report Foreign Currency Transactions and Translation (Results/effect on net income) Foreign currency exchange transaction and translation losses including the effect of derivatives, net of taxes, included consolidated net income in 2003, 2002, and 2001, pursuant No. 52, “Foreign Currency Translation,” amounted $103 million, and $129 million, respectively. Source: 2003 annual report Risk control system (general description) GM is exposed to market risk from changes in foreign currency exchange rates, interest rates, and certain commodity and equity security prices. In the normal course of business, GM enters into a variety of foreign exchange, interest rate, and commodity forward contracts, swaps, and options, with the objective of minimizing exposure arising from these risks. A risk management control system is utilized to monitor foreign exchange, interest rate, commodity and equity price risks, and related hedge positions. Source: 2003 annual report Risk control examples (detailed description)1 For transactions denominated in foreign currencies, GM typically hedges forecasted and firm commitment exposure up to one year in the future. For commodities, GM hedges exposures up to six years in the future. For the year ended December 31, 2003, hedge ineffectiveness associated with instruments designated as cash flow hedges decreased cost of sales and other expenses by $50 million. For the year ended December 31, 2002, hedge ineffectiveness associated with instruments designated as cash flow hedges increased cost of sales and other expenses by $0.1 million; changes in time value of the instruments (which are excluded from the assessment of hedge effectiveness and exclude transition adjustment) increased cost of sales and other expenses by $30 million and $19 million, respectively. Source: 2003 annual report 1 Note to students: These examples depend on each particular firm. Some firms enter into swaps, some don’t. Some companies disclose their futures and forwards operations and some don’t. FINC 6367 – International finance MNC descriptive analysis Page 5 Swap usage (Another example of risk control) To protect against foreign exchange risk, GM has entered into cross-currency swap agreements. The notional amounts of such agreements as of December 31, 2003 for Auto & Other were approximately $2.4 billion. The notional amounts of such agreements as of December 31, 2002 for Auto & Other were approximately $238 million. Amounts payable beyond one year after foreign currency swaps at December 31, 2003 included $2.3 billion in currencies other than the U.S. dollar, primarily the euro ($1.9 billion), the Brazilian real ($197 million), and the Australian dollar ($186 million). At December 31, 2003 and 2002, long-term debt and loans payable for Auto & Other included $27.4 billion and $14.8 billion, respectively, of obligations with fixed interest rates and $5.0 billion and $1.5 billion, respectively, of obligations with variable interest rates (predominantly LIBOR), after interest rate swap agreements. To achieve its desired balance between fixed and variable rate debt, GM has entered into interest rate swap and swaption agreements. The notional amount of pay variable swap agreements as of December 31, 2003 for Auto & Other was approximately $3.5 billion. There were no such swaption agreements as of December 31, 2003. The notional amount of such agreements as of December 31, 2002 for Auto & Other was approximately $745 million ($645 million pay variable swap agreements and $100 million relating to pay variable swaption agreements). Source: 2003 annual report Relative weights of each segment Sales distribution Employees units $ distribution GMNA 69% 75% 66% GME 20% 18% 21% GMLAAM 7% 3% 8% GMAP 3% 3% 5%
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