Zong Qinghou

Danone and Wahaha vie for the last laugh

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


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What began as an apparent win-win partnership between France's Groupe Danone and China's Hangzhou Wahaha Group in the 1990s is unravelling in spectacular fashion, showing that a clash of cultures, egos and business goals can undermine the good intentions of a mainland joint venture.

The feud between the producer of France's signature Evian water and the mainland's largest beverage company shows that in a booming market, companies can outgrow each other, turning partnership into a bitter pill.

Businesses worldwide are watching how the saga unfolds, hoping to learn from Danone's mistakes as rising economic nationalism and an abundance of cash make mainland joint ventures less secure.

Zong Qinghou, Danone's Chinese partner and the chairman of the joint venture, resigned last week, accusing the French company of everything from shirking its duties in the partnership to harassing his family.

The resignation followed Danone's filing of a lawsuit in a United States court which accused Mr Zong of selling joint-venture products without sharing the proceeds.

The story of Danone and Wahaha - a Chinese word used to mimic the sound of a laughing child - began in 1996, when Wahaha needed cash and Danone wanted to get a foothold in the mainland market. Danone injected about US$70 million into five joint ventures, which have since grown to 39. The joint ventures gave Mr Zong a way to build a business for himself instead of working for the state.

'Mr Zong is sort of riding on the back of the joint venture and getting a benefit to his own businesses which compete with the joint venture,' said Ben Miao, a senior associate and dispute specialist at law firm Clifford Chance.

Danone was shaking hands with a self-made millionaire used to calling the shots. Mr Zong, a delegate to the National People's Congress, is known as an extremely confident man who runs his company with an iron fist, working long hours, testing new products himself and, according to one source, going as far as to carry on his person all the keys to his factory.

Mr Zong, 62, was sent to work on a state farm in Zhejiang as a teenager, eventually returning to Hangzhou to work at a school-owned factory. In 1987 he took control of an ailing business and turned it into a national leader in the drinks business.

Although from humble beginnings with little education, Mr Zong's personal wealth was estimated at US$1 billion by the Hurun Report last year, epitomising the mainland's nouveau riche who have wheeled-and-dealed their way to the head table of the nation's burgeoning capitalism.

Mr Zong and his Chinese managers ran the joint venture and although Danone, which holds a 51 per cent stake, attempted to get control on more than one occasion, they were rebuffed by Mr Zong.

'The main reason Danone bought into Wahaha in the first place was to gain access to their distribution channels but now they are screwing up the supply chain to ensure that Danone's products don't get to where they should,' said Paul French, director of Shanghai-based market research company Access Asia. 'Wahaha were probably a little bit dazzled when Danone came in, but now they don't need them.'

Things began to unravel several months ago when Mr Zong publicly rejected a plan by Danone to buy out Wahaha's stake in some of the joint ventures, with Mr Zong accusing the French of launching a hostile takeover.

Danone last week filed a complaint in a Los Angeles court against Ever Maple Trading, based in the British Virgin Islands, and Hangzhou Hongsheng Beverage. Danone is also suing Kelly Fuli Zong, an Ever Maple representative Danone says is Mr Zong's daughter, and You Zhen Shi, her mother. Hangzhou Wahaha Group, a firm owned by Mr Zong that has a share of the Danone venture, was not named in the lawsuit.

Danone is seeking at least US$100 million in damages against the companies as it sues them for illegal fruit-juice and mineral-water sales under the Wahaha brand, which Danone says costs the company US$25 million per month in lost sales. Danone has also filed a case against Wahaha in Stockholm.

Arbitration experts say that filing the case in the United States may apply pressure on Wahaha to come to an out of court settlement in order to avoid a long and costly battle, for which Danone has much deeper pockets.

However, even with a court victory, Danone could have trouble accessing its assets on the mainland, legal experts said.

'If they take this to court in China, I doubt that they would win,' said Teng Binsheng, a professor of strategic management in the Cheung Kong Graduate School of Business. 'Or at least they're not going to get what they want.'

Mr Zong's place as head of the joint venture was taken by vice-chairman Emmanuel Faber. Mr Zong, who maintained a public diatribe against Danone, wrote a heated public letter in which he accused Danone of trying to reap benefits without putting in its fair share of the work.

'Mao Zedong has a line from his poem saying: 'Even if more fierce the storm becomes, I keep up with more confidence and walk at my own pace',' Mr Zong wrote.

Wahaha sales employees issued an emotional letter condemning Danone and asking that the company remain under the control of Mr Zong.

Lawyers say non-compete clauses in the contract between the parties will prove to be central to the case, as is in all disagreements over joint ventures.

Danone has been aggressively buying stakes in mainland food companies for the past 20 years, helping to build up Wahaha's competition. It has purchased stakes in Hong Kong-listed China Huiyuan Juice Group, Shenzhen Health Food, Bright Dairy & Food, Guangdong Robust Group and Shanghai Aquarius Drinking Water. It has also formed a venture with China Mengniu Dairy, the largest producer of liquid milk on the mainland.

'Danone's strategy was to invest in a lot of companies which made it kind of hard to focus on any one of them and they're competitive with each other by nature,' Mr Teng said.