Having been involved in several scrapes with a Chinese partner in my more than 13 years in China, I can tell you that the current dispute between Groupe Danone and Zong Qinghou, the head of the Chinese partner in its Wahaha joint venture, is anything but simple. Believe me, it is very complicated; not all is as it appears; and both sides believe they are right.

Moreover, when disputes arise between the partners in a visible company like Wahaha, battle lines form and everyone takes a side. In what quickly becomes an emotionally charged environment, understanding what has really happened becomes difficult, if not impossible.

As a result, learning from such a complicated dispute is a multi-step process, the first of which is to remove emotion and agree on a basic set of facts. Here they are as we know them:

1. Wahaha was founded over 20 years ago by Zong Qinghou, a legend inChina business. There is little doubt that his leadership and vision has enabled Wahaha to gain a 23 percent share of the bottled water market in China, surpassing Coca-Cola.
2. Groupe Danone is a highly successful French company which has built global brands such as Danone and Evian. In addition to its 39 joint ventures with Wahaha, Danone has several more beverage joint ventures in China, including a 49 percent interest in China Mengniu Dairy Co.,China’s biggest milk producer , which it acquired at the end of 2006.
3. In 1996, Danone established five joint ventures with Wahaha, in which it gained a 41 percent interest. During the Asian financial crisis, Danone increased its stake to 51 percent by acquiring the shares of a Hong Kong company which also had ownership in Wahaha.
4. At the time of the joint venture formation, Wahaha sales were US$120 million. Today, sales are over US$1.5 billion.
5. Over the last several years, Zong has established a parallel set of companies, which he controls through offshore entities, and which are selling products in competition with Wahaha. When Danone noticed a slowdown in sales at Wahaha, it confronted Zong, claiming that the establishment of this parallel network violates the joint venture contract. To resolve the matter, it offered to buy 51 percent of Zong’s companies for a reported four billion yuan (US$525 million).
6. When Zong refused Danone’s offer, Danone took two of Zong’s companies to court in the U.S.; Zong initiated arbitration proceedings in Hangzhou, the city in which Wahaha is headquartered, and resigned from Wahaha. The management and employees of Wahaha rose up in arms against Danone. In short, a highly successful joint venture, at least from a financial point of view, is now embroiled in a complicated legal and management morass, and has become the latest and one of the most visible disputes between partners in a
   China joint venture.

Reaction from Both Sides

Who is right? It’s not as clear cut as either side would have you believe.

Zong’s critics argue that the parallel network of companies which he established are illegal and in violation of the joint venture contract. They also argue that the use of the Wahaha brand name by his companies is also a violation. On a broader level, it is argued that this is a case where a Chinese partner no longer needs the foreigner’s capital, and therefore, a contract which was signed at an earlier time when he did is set aside, illustrating once again the difficulty of doing joint ventures in China and the absence of the “rule of law” in the country.

The other side argues that Danone’s acquisition of the additional 10 percent of Wahaha through the Hong Kong company was done without the approval of the joint venture’s board of directors, and that the transfer of the Wahaha brand to the joint venture never received proper approval. As a result, Danone cannot claim exclusive use of the name.

This latter claim has triggered widespread discussion in the Chinese media about foreign companies gaining control of famous Chinese brands and companies. “Economic nationalism” has become more prevalent over the last several years in China. It has lead to the killing of several high profile deals, the most notable of which was Carlyle Group’s proposed acquisition of a majority interest inChina’s largest construction equipment company. This is a chilling set of events for companies hoping to expand in China through acquisition.

What can we learn?

As painful as this dispute is for both sides, to say nothing of the business disruption at the joint venture itself, there are a myriad of lessons to be learned. These include how to manage joint ventures in China and integrate them into a company’s global operations; the importance of establishing trust with a joint venture partner; the different approaches to resolving disputes when trouble occurs; and the high cost, both direct and indirect, of such disputes, and all the more reason for both sides to work extra hard to avoid them at all cost.

While it is tempting to cite this as yet another example of why joint ventures don’t work in China, it is not that simple. Many companies already have joint ventures and must learn to live with them, and in many industries, a wholly-owned foreign enterprise is still not an option.

These issues are important and deserve a more complete discussion than can be had in one go. With a common understanding of the facts, following posts will discuss more fully some of the important lessons. Stay tuned.