French food giant Danone wanted to find a way into China's vast
market. It needed a partner that understood the local business.
Wahaha, one of the country's biggest beverage makers, needed
capital, technology and international expertise to lead the
market.
Danone took a 51-percent stake in a joint venture with Wahaha
Group in 1996 to form one of the most successful joint ventures in
China.
But cracks started appearing in the partnership several years
ago. Wahaha has been increasingly uneasy about Danone's ties with
other Chinese firms like Mengniu Dairy and Robust. And Donone
revealed it wanted to take control of Wahaha Group's other
businesses, a public dispute erupted.
According to Danone, the joint venture was operating well until
18 months ago when it discovered Wahaha had set up side ventures
marketing similar products.
Danone said it was considering legal action against Wahaha over
the right to use the brand, owned by the joint venture under the
1996 contract.
Zong Qinghou, the outspoken chairman of Wahaha, has drawn
widespread attention to the case. Zong, his distributors and even
some local government figures described Danone as a "foreign
invader" of a national brand.
Unlike other foreign ownership cases like Xugong and Carlyle,
the government has not weighed into the debate, despite all the
media attention. But it did issue a notice to Wahaha urging an end
to the public dispute.
"As China has already issued regulations on foreign mergers and
acquisitions of Chinese enterprises, the Ministry of Commerce will
adhere to these regulations so as to not only encourage foreign
investment but also to protect the rights and interests of Chinese
businesses," said ministry spokesman Wang Xinpei in answer to a
question on Danone's potential acquisition of Wahaha. That was the
only response from the government on the issue.
The government's neutral position has left enough space for the
two sides to solve the problem through discussion and agreement,
according to Qiao Xinsheng, a professor at the Zhongnan University
of Economics and Law.
And that is also a reflection that nationalism and patriotism -
be it out of real concern, a colorful excuse or market strategy in
disguise will be less persuasive in an open market economy.
Enterprises have to obey the rules of the game. And if mistakes are
made, they will have to deal with the results.
The squabbling between Danone and Wahaha is largely the result
of unclear allocation of profits and investments. Under the
contract, Wahaha gave up ownership of the brand to raise its stake
in the joint venture at the very beginning. The Chinese company
should have considered the cost of losing ownership of its brand in
exchange for technology and capital from Danone when it signed the
contract. Dumping Danone and establishing a new brand, as Zong
threatened in an interview, will not be that easy.
But it won't be easy for Danone, either. Zong's image as the
brand-builder and his social network with distributors complicates
the case beyond the legal issue. If relations between Danone and
Zong collapse, it will damage the joint venture. The venture's
annual sales are around $1.35 billion, 75 percent of Danone's sales
in China, which accounted for about 10 percent of its global
total.
For now, as Danone suggested late last month, reallocating the
benefits and repairing relations seems to be the best choice for
both parties.
(China Daily May 8, 2007)