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Danone's Wrangle with Wahaha

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Danone’s Wrangle With Wahaha
Isabella Tennant – 300276839

Danone began in Spain as a small yoghurt stand. It was successful, becoming the first industrial manufacturer of yoghurt. The Danone business kept expanding globally, having a presence in all continents. Danone began to sell many different products early on. In 1997 the Danone group decided to focus only on three worldwide business lines. These were Fresh Dairy Products, Beverages, Biscuits and Cereal Products. This focus meant that Danone’s human and financial resources were freed up allowing for swift expansion into new markets in many continents, such as Asia.
Danone faced challenges while operating in China due to a lack of market knowledge, such as the challenges with Robust. Robust, the second largest company in the Chinese beverage industry was purchased by Danone in 2009. Once purchased, Danone decided to manage Robust directly instead of using the original management. The new management was not familiar with the Chinese Beverage Market and Robust struggled, resulting in its milk and tea products almost disappearing from the markets.
Wahaha was a company established by Zong Qinghou in 1987 that sold a nutritional drink for kids.
A joint venture was formed in 1996 between Danone Group and Wahaha Group. The structure of the joint venture (JV) consisted of three participants: Hangzhou Wahaha Food Group, Danone Group and Bai Fu Qin (Baifu). The Wahaha Group owned 49% of the shares. Whereas, the Danone Group and Baifu joint forces and formed Jin Jia Investment (Jinjia), a Singapore corporation. This corporation owned 51% of the shares.
Since 1997, Wahaha had set up many subsidiaries and the JV allowed for five new subsidiaries to be formed that attracted big investments, allowing Wahaha to use these investment funds to buy world-class advanced production lines.
The JV came across many issues that cause conflict between Danone and Wahaha. One problem of Danone Wahaha JV was the structure to begin with. It led to a misunderstanding from the start between Wahaha and Danone.
Wahaha felt that it was the majority shareholder as 51% of the shares were split between Danone and Baifu at 25.5%, giving Wahaha a larger percentage of the shares at 49%. Because Wahaha felt that it was the majority shareholder of the JV, it seemed that there was no problem with transferring its Wahaha trademark to the JV. This was until Danone bought out Baifu’s shares, becoming the full owner of Jinjia, resulting in becoming the full 51% owner of the JV. This created two problems for Wahaha, one being that Danone now had complete control over the Wahaha trademark and the other being that a foreign company now controlled the JV.
Another conflict that occurred within the JV began in 2000. The Wahaha Group created many companies that sold products that were the same as the JV products and also used the Wahaha trademark. Neither Danone nor Wahaha received benefits from the profits of the non-JV companies. When the JV was formed, Wahaha converted from a state owned enterprise into a private corporation. The conversion into a private company basically controlled by Zong was the beginning of Wahaha’s decision to take back the trademark that they had lost control of.
When Danone finally realised what the situation was in 2005 it insisted that it should be given 51% ownership interest in the non-JV companies. Zong Qinghou and the Wahaha Group refused this, which lead to a dispute.
Danone initiated a proceeding claiming that Wahaha had breached the contract by opening the non-JV companies and using the Wahaha trademark illegally. More than 30 lawsuits carried on between the two. Danone was not successful in proving its claims in court and all of the lawsuits ended up being in Wahaha’s favour.
The conflict between the two companies was finally resolved in 2009 when Danone agreed to a cash settlement to let go of claims to the name Wahaha. Danone settled with Wahaha by announcing that its 51% share in the JV would be sold to Wahaha.

Key lessons for Danone (or any foreign investor) about doing business in China: * Do not proceed with a JV that has been formed on an uncertain or weak legal basis. * When managing the JV, the foreign party needs to participate in the day-to-day management. * Just by having a 51% ownership in a JV, does not mean that a company will have effective control. * To gain control in a JV, foreign investors should not use technical legal techniques.

Interesting points: * That Wahaha created a series of companies that sold the same products as the JV and used the Wahaha trademark beginning in 2000, but Danone did not realise the situation until 2005, even when press reports said that products from the non-JV companies and the JV were sold by the same sale staff working for the same sales company. * Why were the problems between the two settled so publicly (Danone publicly confronting its partner) rather than settling with private negotiations, which are the usual in China?

Wahaha should have understood the implications of the structure of the JV when they went into it.

Danone should have been a part of the day-to-day management as the JV was basically fully managed by Zong so he was choosing what happened with the JV, which is where Danone may have lost a lot of control of the JV. Wahaha did all the work, while Danone received the rewards and it gave Wahaha space to manipulate the JV. These are reasons for the JV being unsuccessful.

A 51/49 JV is generally not used in China, as typically this is seen as no different from a 50/50 JV.

Wahaha came out better off? Danone sort of walked away with nothing and was not successful in any of the lawsuits against Wahaha.

Danone failed because it did not align its interests with Wahaha, instead it challenged and competed with Wahaha.…...

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