The Danone-Wahaha Dispute

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44 May–June 2008 chinabusinessreview.com
COMMENTARY
Jingzhou Tao and Edward Hillier
A Tale of Two Companies
The Danone-Wahaha dispute is a story of the relationship
between two very different entities against
a backdrop of incredible change. The dispute
reveals many questions that China faces as it integrates
into the world economy, such as what to do when rule of
law leads to an unpopular result or harms a valued
Chinese company.
The players
Group Danone SA, a Paris-based multinational corporation
(MNC), is a giant in the global dairy product and
bottled water markets. The MNC employs roughly
90,000 staff across five continents.
Though it is a beverage giant in China, the Hangzhou
Wahaha Group Co., Ltd. is much smaller than Danone.
Since its founding in the late 1980s, the company has
grown from three people selling drinks to school children
to become the largest Chinese bottled-water company
today. This growth is mainly the result of the drive and
talent of founder Zong Qinghou, who expanded the company
by satisfying Chinese consumer demand and aligning
his business strategy with government policy.
Danone and Wahaha formed their first joint venture
(JV) in China in 1996. Over the years, the number of JVs
grew from 5 to 39, and annual sales rose from a few hundred
million renminbi to more than ¥14 billion ($2 billion)
in 2006. Danone held a 51 percent stake in the JVs
and appointed Zong chair of the JVs’ board.
In the 12 years since the first JV’s formation, China
has taken a leading role on the world stage. Hong Kong
and Macao returned to mainland China, China entered
the World Trade Organization (WTO), and Beijing won
its bid to host the 2008 Summer Olympics. Moreover,
continuing reform and strong economic growth have dramatically changed not only China itself, but perceptions
of the country, both at home and abroad. Finally, China’s
business environment has changed tremendously in the
last 10 years. In many ways, China in 2008 is a world
away from China in 1996.
News of the Danone-Wahaha dispute—in which
Danone accused Zong of setting up mirror companies
that illegally used the Wahaha trademark—burst into the
public arena in April 2007. Since then, Chinese and foreign
media have covered the dispute extensively. At times,
both parties in the dispute have been unusually outspoken
and vitriolic. Though many details are unclear, and much
information remains private, the dispute illustrates issues
that foreign-invested enterprises may face in China and
the direction of China’s development. The following summary of the dispute is based on media reports.
The Danone-Wahaha partnership once seemed ideal,
but the companies’ relationship has deteriorated.
What lessons can be learned from the dispute?
chinabusinessreview.com May–June 2008 45
COMMENTARY
Brief outline of the dispute
By 2005, Danone had discovered that Zong had established
“mirror” companies that were producing and selling
products almost identical to those of the Danone-Wahaha
JVs. The mirror companies allegedly rode piggy-back on
the JVs’ advertising and sales networks, in clear breach of the JV agreement.
Danone and Zong negotiated over several months to
resolve the conflict. In December 2006, the two parties
reportedly reached an agreement to integrate the mirror
companies into the JVs, in return for a payment of ¥4 billion ($566 million) by Danone. Zong, however, allegedly
reneged on this agreement, claiming that he had been
“forced” to sign. According to Zong, in 2006, the mirror companies were worth ¥5.6 billion
($792.3 million) in assets, far more than
Danone’s offer, and had annual profits of
¥1.04 billion ($147.2 million).
After negotiations failed, Danone
requested arbitration in Stockholm,
Sweden, and filed lawsuits in Los Angeles
and other cities, mainly over trademark
infringement and non-compete obligations
(see Table).
Zong and his supporters responded in
kind, requesting...
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