Beifang Chuang Ye Vehicle Group

Synopsis

Beifang Chuang Ye Vehicle Group operated primarily in segments of the transportation

market in northern China. Beifang was comprised of 14 different companies that included three

taxi companies, a car rental company, an automobile association, an advertising company, a

vehicle importer, three automobile dealerships, and an automobile repair company. With recent

government mandated changes to vehicle emission control standards, Beifang had no new car

sales for January of 1999. Formerly fully owned by the Chinese central government, the

company had privatized and in 2000 the government owned only 10%; the prominent owners

being various members of Ming Zhou’s (vice director and general manager of Beifang) family.

Furthermore, all three dealerships were all 100% privately owned. The largest dealership sold

and serviced four brands of vehicles which were all manufactured in China and had four

locations. The other two dealerships sold new cars only, both imports and domestic vehicle

fleets. All dealerships were organized by function, the largest dealership had a general manager

and managers of sales, accessories, service parts, marketing and administration. The other two

dealerships had fewer departments because they were just sales companies.

Key Issues

One key issue is whether the employees of Beifang Chuang Ye Vehicle Group should be

held accountable for results that are beyond their control? If the managers of the dealerships had

some authority in making the decision to initially ignore the new law, then how should their

compensation be adjusted? Another key issues is whose best interest the company should be

looking out for? Should Beifang make decisions based on creating or maintaining shareholder

wealth in the short-term or should it try to protect its employees and bear the losses based on a

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 decision by upper management that will be costly and hurt shareholder value? Finally, if the

company decides to keep its employees on the payroll, how can compensation be updated to

reflect the new sales forecasts and still be in the best interest of the company as a whole?

Problem

The main issue for Beifang centered around whether or not they should compensate

personnel for a poor decision made by upper management or if personnel should be made to

share in company losses.

Alternative Solutions

We believe the company has three options: Keep payroll the same as if there were no

changes and prepare a revised budget plan, lower the salary rate for employees, or layoff

employees until profits can be made. If Beifang decided not to reduce payroll and prepares a

revised 10-month plan that rewards employees if the updated numbers are achieved, it would

keep the moral and loyalty of employees high. If the company lowers the salary of employees

until it is able to gain further profits it will help maintain morale and loyalty while also lessening

the total amount of losses. If employees are laid off, the company would lose loyalty and

employee moral would decrease while Beifang would still be subject to pay the Chinese

unemployment rate of 300 yuan to each employee. This solution would also cause the company

to incur greater costs in future months because they would have to rehire and train new

employees once they have new inventory to sell and repair.

Selected Solution

Mr. Zhou should keep all the employees on the payroll while preparing a revised net

profit plan and reward them if the plan is achieved. The employees can be paid their base pay for

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 the first two months of the year and rewards could be increased for the last ten months of the

year once new inventory is received. This would hopefully help to maintain the 20% growth rate

the company had seen before the new law was passed. The new profit plan would need to

encompass a 10-month year as long as Beifang was able to receive new inventory by March of

1999. This solution allows all his employees to keep their jobs and also motivates them to work

harder to meet the new profit plan as their incentives are loaded into a 10-month time frame

instead of the regular 12-month.

Expected Results

If Beifang continues to pay the base salary to its employees for the first two months of

the year and then readjusts compensation to match a 10-month sales year then the expected

results would be that all employees will be able to keep their jobs and should be highly

motivated to prove that management’s faith in them was worthwhile. In order to achieve the new

profit goals the employees would need to increase sales for the final ten months and hopefully

still be able to get close to the 20% annual growth rate seen before the government regulations

were enacted. An obvious result would be a short-term hit to the financial statements of the

dealership groups. Ownership would have to absorb this hit and possibly use it as a learning

experience for future decisions. The dealerships would at least save the costs of having to pay

unemployment rates to all of its employees and then having to rehire and retrain many new

employees in as little as one month. The losses incurred would be painful but Beifang as a whole

was a profitable company and should be able to sustain the short-term losses while planning on

their continued growth and success in the future.

Positives/Negatives

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 A positive is that employees will all remain on the payroll and get to keep their jobs

which important because Mr. Zhou has great empathy for his employees. A possible negative

would be that employee overall pay might be somewhat lower if they fail to achieve the 10-

month targets since they would only be receiving base pay for the first two months. Another

negative is obviously that the company will still have to pay full guaranteed payroll expenses for

two months, but this will be offset by the increased morale and the desire to continue the healthy

growth rates of the past.

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