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GMs Capital Allocation Framework Case Solution

Solution Id Length Case Author Case Publisher
2053 418 Words (3 Pages) C. Fritz Foley, F. Katelynn Boland, Michael Lemm Harvard Business School : 218026
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A major challenge faced by automotive vehicles is the rising need to switch to electric vehicles and self-driving vehicles that are expected to have a positive impact on the environment in terms of reducing the level of carbon emissions and the instances of accidents that might happen. This requires extensive research and development on the part of auto manufacturers, which would add up to their total cost and reduce their margins.

Following questions are answered in this case study solution

  1. The challenges facing the automotive industry

  2. How those challenges impact the capital budgeting process

  3. The competing Demand for GM capital

  4. GM Cost of Capital

Case Analysis for GMs Capital Allocation Framework

Also, the fact that the automotive industry is a highly cyclical one should be taken into consideration. As the economy grows, the demand for cars automatically increases but in case of a recession, as happened in the case of the 2007 financial crisis, the demand would substantially decline. Also, the recent trends show a rise in shared mobility with cabs like Uber and Lyft becoming common, which would also negatively influence the total demand for cars.

2. How those challenges impact the capital budgeting process

Currently, the new capital budgeting framework calls for an ROIC of at least 20% as well as a cash balance of $20 billion to maintain liquidity. The rest of the free cash flow is expected to use to buy back shares or give out as dividends. However, considering the complex technology of self-driving cars, it would require an extensive budget for research and development to produce cars that are safe, or else they can pose a threat to the lives of the passengers.

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