Danone/Wahaha: Everybody Loses (Part 5)
When a joint venture goes sour in China, and the partners begin battling, everybody loses. This is certainly the case with Danone/Wahaha. Given the size and breadth of the cooperation between the two companies, the damage to all parties is that much greater.
The Victims: The JVs and Their Employees
If there are victims in all of this, it’s the 39 Danone/Wahaha joint ventures and their employees. Management has left, or is threatening to leave; the employees and remaining managers are refusing to accept the Danone appointees; distributors are choosing sides; and the distribution staff are refusing to sell the products of the French company. With so much management turmoil and instability, no one is focusing on the job at hand, and this is already taking its toll on sales. The longer the dispute goes on, the more likely it is that the very viability of the joint ventures themselves will be at risk.
Danone and its China Strategy
Groupe Danone is a Fortune 500 company and one of the most famous food and beverage groups in the world. It operates in 120 countries and has built strong brands such as Danone for fresh dairy products and Evian for mineral water. Danone has 70 factories in China and a major presence in the country. Whatever the outcome of the dispute, Danone’s China strategy is sure to suffer.
The Chinese Partner and Zong Qinghou
Mr. Zong established a very successful and profitable company in China, and in combination with Danone, built the joint cooperation into one of China’s most successful. Even though he and the Chinese partner have established parallel companies, the damage to the joint ventures with Danone is a heavy price to pay. Beyond the financial damage caused by the dispute, Mr. Zong’s reputation as one of China’s leading businessmen has surely been damaged.
The City of Hangzhou
Hangzhou is a very historic and famous city, and it is located in one of the most prosperous areas in China. The city has gained both financially and in terms of reputation from its involvement with Wahaha and the joint ventures with Danone. The city is a shareholder in the Danone/ Wahaha joint venture, and the value of this stake has already diminished. In addition, the potential loss of tax revenues and jobs should the financial condition of the joint ventures deteriorate will be an added cost–to say nothing of its loss in reputation as a good place to do business in China.
China as a Country
With a rising trade surplus, repeated calls for it to revalue its currency, headlines about defective goods from China, and increased pressures due to the environmental impact of the country’s rapid industrialization, China doesn’t need a high profile controversy regarding a substantial foreign investor. Whether deserved or not, the Danone/Wahaha dispute raises yet again issues such as the lack of a rule of law and the difficulty of doing business in the country.
Because China itself has much at stake, it is not surprising that the central government has entered the dispute. The Ministry of Commerce has reportedly asked both parties to submit materials supporting their respective claims. For the sake of everyone involved, it is important that the two parties come to some reconciliation as quickly as possible.
Note: This is the fifth in a series of posts over the past month that have dealt with various aspects of the Danone/Wahaha dispute. Future posts will cover new developments as they occur.
