Who is right in the Groupe Danone beverage company battle between French and Chinese entrepreneurs?

China

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by Lao Ke

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The Chinese language is full of colorful and pithy idioms or proverbs and one of my favorites goes like this, "sleeping in the same bed but with different dreams". This well-worn phrase will immediately bring a knowing smile to the face of any veteran of joint ventures in China such as myself, and the ongoing battle between Danone and Wahaha serves to again remind how true this is for most joint ventures in China. As to the question of who is right and who is wrong, my own experience would lead me to believe that both share the blame in equal measures based on the public information available, but, in the spirit of debate, I will argue for the Chinese side, if for no other reason than the fact that Danone let this matter escalate to its current level in large measure due to its own failure to manage the business effectively.

Doing business in China, especially in the form of a joint venture, is fraught with perils to begin with, and Tim Clissold's best seller "Mr. China" is a must read for any with doubts on this statement. Perhaps the highest risk comes when the partner chosen is a fledgling entrepreneur as was the case with Wahaha, and in no less of a place than Zhejiang province, where even Chinese companies are suspicious of making joint ventures. A quick review of the circumstances behind Danone's rush to the alter with Wahaha in 1996 and most "China hands" would agree it was doomed from the start. Danone was the rich and handsome foreign husband who wanted market share and an entry into the market and Wahaha was the equally beautiful, but slightly nave, Chinese wife who need capital to expand its already growing business. Enter that crafty marriage broker Peregrine Investments and it was soon a fait accompli despite the fact that both sides probably had little idea of what they had agreed to. This is further evidenced by the fact Danone agreed that Wahaha's chairman would play a very active role in management, a recipe in and of itself for disharmony. Let's label this as wrong number 1.

It seems the birth of the current rancor can be traced to 1997 when Danone took a controlling interest in the joint venture at a time when Wahaha's Chinese partners were unable/unwilling to inject new capital in proportion to their share. At that time there was also an agreement made to fully transfer the Wahaha trademark to the joint venture and, as preposterous as it sounds, Danone left the responsibility for making sure this was properly done fully in the hands of Wahaha, with no oversight whatsoever! But perhaps Danone was not that interested to insure that the trademark Wahaha was indeed theirs as they had their sights set on bigger fish. Soon, in 2000, Danone bought 92% interest in a company in Guangdong province, which just happened to be Wahaha's largest competitor, and this was the start of a series of acquisitions in shares of companies competing with the joint venture for market share. For reasons unknown to outsiders this action must have also given the Chinese partner the opinion that a similar action on their part was acceptable as this was about the same time they began setting up their own companies to compete with the joint venture. Let's label this wrong number 2.

The rest is more or less history and the basis of the nasty public proceedings now underway. Regardless of the outcome, it is a safe bet to say that the value of Danone's investment in Wahaha will suffer as a result. Clearly there is seldom a winner in these kind of acrimonious disputes and the public opinion in China will undoubtedly lean toward the view that this is yet another case of foreigners exploiting their power against a local interest. And while certainly 2 wrongs don't make a right, it would appear that Danone could have spared itself a lot of this negative publicity by earnestly working to reach a solution outside of the courts. After all, they have far more to lose, as at the end of the day, a bottle of water is still just a bottle of water to most.

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