Case | HBS Case Collection | July 2006 (Revised March 2008)

Changan Automobile Co., Ltd.

by Dennis Campbell and Donglin Xia

Abstract

Chairman Yin Jiaxu must communicate that the company's extraordinary reported performance in 2002 reflects Changan's unique strategy within the competitive dynamics of China's automobile industry. Changan's 2002 annual report demonstrated an extraordinary level of success for the company, with net income growth of 421% over the prior year. Chairman Yin viewed this astonishing level of growth as the reward for the company's strategic shift in sales mix toward Changan's higher margin automobiles, coupled with component price decreases and hard-fought internal cost reduction efforts. However, an anonymous article posted on the Internet attributed Changan's reported success to fraudulent financial reporting, attracting the attention of the press, analysts, and financial Web sites. At the heart of the concerns raised in the article were fluctuations in Changan's quarterly gross margins, including a large increase in gross margin in the fourth quarter, a large amount of accrued marketing expenses on its balance sheet, and high reported margins on one of its top selling models, the Star of Changan SC6350 minivan. Facing suspension of trading in Changan Automobile Co.'s shares on the Shenzen Stock Exchange amid widespread investor concern over the company's financial reporting practices, Chairman Yin must devise a communication strategy to convince investors that the company's financial reports reflect the underlying economics of the company.

Keywords: Financial Reporting; Ethics; Corporate Disclosure; Media; Business and Shareholder Relations; Auto Industry; China;

Citation:

Campbell, Dennis, and Donglin Xia. "Changan Automobile Co., Ltd." Harvard Business School Case 107-006, July 2006. (Revised March 2008.)