HBP# CU312 ID#150303 PUBLISHED ON FEBRUARY 9, 2021 Standing at the Edge of a Cliff: GM at the Onset of the 2008 Financial Crisis BY NICOLAS VINCENT* AND PIERRE YARED General Motors in the 21st Century Founded in 1908, General Motors (GM) grew to become one of the largest automobile manufacturers in the world. GM enjoyed the top position in global sales until the first quarter of 2007, when the title was claimed by Toyota. 1 In addition to being the single largest automobile producer, GM also dominated the American market for light vehicles,2 holding the greatest market share of any company for many years. However, with the entrance of foreign competitors, GM saw its domestic market share fall from a peak of over 50% in the 1960s3 to less than 25% by 2007 (see Exhibit 1). Moreover, as consumer preferences shifted toward compact and energy-efficient vehicles and away from the types of cars traditionally manufactured by GM, the companys brand image suffered.4 As globalization removed trade barriers and opened up the flow of goods between countries, GM, once a staunchly American manufacturer, became a truly global company. GM revenues from automobile sales outside the United States increased from 28% of total net income in 1993 to nearly 44.5% in 2007.5 However, globalization and the rise of developing countries proved to be a double-edged sword for GM. On the plus side, as millions across the world joined the middle class, GM enjoyed a larger potential market for its cars, and the growth in manufacturing talent in the developing world helped create a global supply chain. On the other hand, globalization made GM far more sensitive to volatility in the world economic environment. With an increased portion of total sales coming from abroad, GM was now forced to worry not only about the preferences of its American buyers, but also about those of its international customers. In addition, as GM expanded its supply chain and sourced raw materials from across the world (see Exhibit 2), the company became increasingly exposed to fluctuations in the prices of its commodity inputs because diverse global trends impacted the price of everything from steel (see Exhibit 3) to rubber (see Exhibit 4). Author affiliation Copyright information * Associate Professor, Department of Applied Economics, HEC 2014-2021 by The Trustees of Columbia University in the City Montral of New York. This version of the case replaces an earlier version Associate Professor of Business, Columbia Business School that was published on September 25, 2014. Acknowledgments This case is for teaching purposes only and does not represent an Columbia CaseWorks Student Fellow Patrick Whitehead 14 endorsement or judgment of the material included. provided writing and research support for this case. This case cannot be used or reproduced without explicit permission from Columbia CaseWorks. To obtain permission, please visit www.gsb.columbia.edu/caseworks, or e-mail ColumbiaCaseWorks@gsb.columbia.edu For the exclusive use of A. Bah, 2022. This document is authorized for use only by Abdulai Bah in Stabilization Policy taught by TRACY HENRY, CUNY - Baruch College from Sep 2022 to Oct 2022.

In the spring of 2008, GM was confronted with a dilemma, and how the company responded to it was poised to be critical in determining GMsfuture. On one hand, the company was faced with continually rising commodity prices, which increased manufacturing and delivery costs for the companys products.Ontheother hand, the economic boom of the 2000s showed signs of abating in the midst of falling house prices in the United States, which signaled the potential for reduced demand. With the global economy at a crossroads, GM was forced to make a decision: should it use its limited capital to (1) shore up its balance sheet and prepare to hunker down and weather the possible recession; (2) use either financial or real hedging strategies to insulate against further commodity price fluctuations; (3) focus on expanding its international presence; or (4) improve and streamline domestic offerings in an attempt to regain market share? After an Economic Boom, Cracks Begin to Appear As the domestic economy expanded during the first half of the 2000s, GM appeared to be on a positive trajectory, with solid worldwide auto sales compensating for a declining market share. However, with the companysfate so closely linked to that of the macroeconomic landscape, GM executives watched with apprehension as clouds appeared on the horizon in 20072008. Indeed, like many other manufacturers of high-priced durable goods, GM was largely dependent on the health of the entire economy for its success. When times were good, rising wealth and optimism about income prospects led consumers to purchase new cars in greater numbers (see Exhibit 5). This increased demand was fueled by easily accessible financing, a crucial component of GMs business model. Conversely,whenthecountry as a whole was experiencing an economic contraction, many households delayed the purchase of a new car, and those who remained in the market often found financing to be prohibitively expensive or simply nonexistent. Because theirs was a very cyclical industry, GM executives were particularly watchful of the economic developments occurring in 20072008. After recovering from the recession and stock market crash of the early 2000s, for several years the United States had enjoyed a period of sustained economic growth. By the end of 2007, the S&P 500 stock index had reached an alltime high, growing in value by more than 80% from the post-tech-bubble low (see Exhibit 6), while over the same time period, the unemployment rate fell from a high of 6.3% down to 5% (see Exhibit 7). However, although the economy as a whole appeared to be moving in a positive direction, some market participants became skittish starting in mid-2007. The first sign that something might be amiss came in June, when Bear Stearns was forced to provide an emergency loan of more than $3 billion to two internal hedge funds that were beginning to experience losses on mortgage-backed investments.6 As small signs of weakness continued to Standing at the Edge of a Cliff: GM at the Onset of the 2008 Financial Crisis | Page 2 BY NICOLAS VINCENT* AND PIERRE YARED For the exclusive use of A. Bah, 2022. This document is authorized for use only by Abdulai Bah in Stabilization Policy taught by TRACY HENRY, CUNY - Baruch College from Sep 2022 to Oct 2022.