Professional Documents
Culture Documents
The choices implied in the above questions were related with how much GM should invest in its
European operations:
Focus in Russia recent lackluster performance weak macroeconomic conditions and
significant devaluation of the rouble dragged down performance;
To keep with new regulations and to continue manufacturing activities in Russia Spend
approximately $1 billion;
Had been spending $9 billion a year on capital investments to ensure it launched leading
products at the right cadence New framework highlighted the required returns
associated with these investments;
COMPANY BACKGROUND
History
Founded in 1908 combination of several motorcar companies in a single conglomerate;
1920 restructuration of the company into 5 main automobile divisions: Cadillac, Buick,
Pontiac, Oldsmobile and Chevrolet;
1950s/1960s world’s largest automaker in unit sales and accounted for 40% of
US automobile sales
Later part of the 20th century Increased competition (Japanese automakers)
2008: Surpassed by Toyota after being the world’s sales volume leader for 77 years;
Management:
Many of GM’s corporate officers had recently taken on their roles;
At the end of 2014, GM held a 16,9% retail vehicle market share in North America;
Outside of North America, Buick, Cadillac, Chevrolet… brands were predominant;
GM was a part of many joint ventures (largest: Shanghai general motors)
Component of retail sales: sales to fleet customers (rental car companies, commercial
fleet customers, leasing companies, and governments) 19,2% of global sales in 2014
Network of 20000 dealerships around the world; Independent from GM;
GM sold off its ownership interest (GM Acceptance Corporation) between 2006 and 2013,
continued to provide financial services through GM Financial (provided retail loans, offered lease
programs to automotive customers)
To finance these loans and leased equipment: relied on secured and unsecured credit
facilities;
Owner of Onstar subsidiary that provided security and mobility solutions;
INDUSTRY CONTEXT:
Highly cyclical industry
Increased sales and production volume following the 2008 crisis
Total US motor vehicle sales grew from 10.6M in 2009 to 16.8M in 2014
o Passenger car sales: 5.4M 7,7M (13,5%)
o Light Truck Sales: 5M 8.7M (20,6%)
o Medium and heavy truck sales: 200000 407000
*GM, US market, in 2014
Rise in global automobile demand global new passenger car registrations grew from
51.4M to 70.1M (2009 2014) (more in North America and Asia)
Main sources of projected increase on sales: outside North America and Western Europe
The demand of shared mobility, and especially autonomous shared mobility, could have a
big impact on the demand for vehicles and the profitability of original equipment
manufacturers.
Many industry experts believed that vehicle sales would fall
Morgan Stanley: worldwide growth in vehicle production would fall to 0% by 2025 and
remain there until 2030 (fraction of shared cars grew to 15%)
Barclays: US auto falls by 40% by 2040
Deutsche Bank: cars would be driven more miles need to be replaced more often
Not clear which firms would capture the value associated with these changes
(returns could go to whoever produced the software, owned the data, and provided the
coordination services)
THE CAPITAL ALLOCATION FRAMEWORK:
Efforts to enhance measures of profitability and new perspectives about leverage:
Concerns that the P&Ls of each GM entity were not precise enough because they were a
function of transfer prices negotiated within the firm
o Risk that some parts appeared to perform well because managers had been
successful in negotiating favorable terms;
STRENGTHEN FINANCE FUNCTION: GM developed point of sale reporting capabilities allowed
managers to measure profitability in a manner that fully allocated corporate costs; more clarity
about profitability at the country and product level possibility of conducting deeper analysis if
the firm was generating enough returns for the capital employed in different locations;
Capital Budgeting: product program business cases that included projected volumes, prices and
material costs over the life of the product program; Risk that projections have involved risk of
excessive optimist on volume or pricing was significant for new products
Performance of product programs was evaluated and monitored at many points in time;
Cases also carefully studied after the program was concluded regular reporting of results
among managers;
Recent efforts had enhanced GMs ability to consider product programs in a more integrated
way the Vehicle Execution Group brought together chief engineers and regional
presidents to make trade-offs and look for efficiency gains across product programs The
group rationalized product lines and optimized manufacturing plans
1. Analyze the recent evolution of GM. Do shareholders have reasons to be happy with the
recent performance?
2. What do you think about GM’s capital structure? Is it reasonable, considering the special
characteristics of the firm and the industry in which it operates?
3. Why is the firm targeting a ROIC of 20%? Is this target reasonable or too ambitious? What
does the firm try to achieve by publicly announcing it?
4. Please make a critical analysis of GM’s ROIC calculation methodology (Exhibit 8)
5. How, in the context of your previous analysis, can you explain the objective to repurchase
$8bn of common stock? And what about the stated policy of use of future cash flows?
6. In between, the company has announced the objective to retain $20bn in cash balances.
What are the objectives of such cash policy
7. What are the consequences of the new policies in terms of the approval of capital
investments on the achievement of long-term survivability of the firm? Could such policies
have negative strategic effects?
8. Explain the new management incentive compensation scheme. Is it aligned with
shareholders’ interests? What are the dangers?
9. Putting everything together, what do you believe GM is trying to achieve with this new
capital allocation framework and associated initiatives?