Feud highlights pitfalls of ill-defined joint ventures

PUBLISHED : Monday, 11 June, 2007, 12:00am
UPDATED : Monday, 11 June, 2007, 12:00am

The dispute between Groupe Danone and Hangzhou Wahaha Group is a result of a poor understanding of each other's goals and the evolving needs of both parties while they have grown and prospered in the mainland beverage market, experts said.

Local companies often enter joint venture agreements with very different goals than their international partners. For them, access to better technology and global expertise can also improve the management of operations outside the joint venture.

Foreign investors, on the other hand, are seeking a foothold in the Chinese market, which offers the potential of growth for years to come.

'The problem is the parties have fundamentally different motivations for entering into joint ventures, so we always say 'when planning the wedding, prepare for the divorce',' said John Leary, a partner at law firm White & Case.

Many joint ventures now struggling in the mainland were created in the 1990s when mainland companies needed capital to expand and meet growing domestic demand. They also looked at foreign partnerships as a means to sell products to the wider global market. In many cases the foreign partners provided money, technology and initial management advice, then left the running of the joint venture to the local company, which had better market insight and guanxi or business connections.

'We have seen many cases in which a foreign company invests in China but doesn't commit the resources to really monitor that project,' said Ben Miao, a dispute specialist at law firm Clifford Chance. 'Once the foreign party loses effective control of the joint company, it is quite difficult to enforce their rights.'

Increasing brand awareness in the mainland is also changing the ground on which many joint ventures were built, and the battle between Danone and Wahaha over the use of their joint venture's brand is a case in point.

'Chinese companies are becoming more aware of the value of their own brands, and if it comes to relinquishing that brand to a foreign party things run into a roadblock,' Mr Miao said.