Must Read Editorial on Danone vs. Wahaha

Wednesday, June 13, 2007 5:34

Rarely do I put up a post that will be as simple as this one, but given all the recent action surrounding the Danone saga, I found an editorial in the Shanghai Daily to be very interesting… and work the recommendation

Written by Mei Xinyu, a Senior Researcher with the Ministry of Commerce, Live by the rules but perish by them too, presents a surprisingly blunt and honest assessment of the situation.

He writes (my thoughts in italics):

I am not siding with Danone. To be frank, from what it has done so far, one cannot say that Danone has been a constructive partner of the Wahaha Group. Danone is more of a wealth grabber than a wealth builder. The 1996 contract tilted extremely favorably to the French side.

However, it’s clear that the 1996 contract was and is a legal one. Wahaha accepted the unfavorable terms and agreed that any future dispute would be subject to arbitration in Sweden (I think he means U.S.).

I would be interested in seeing how Danone has failed to be a constructive partner. After all, not only was Wahaha the number 1 water bottle company, they were also China’s #1 brand according to a 10 year survey conducted by Gallup

I suspect that where this comment originates is that Danone stifled Wahaha’s future, and I think it would be fairly easy to prove this theory given Danone’s interests in Nong Fu (Wahaha’s #1 competitor) and their own operations.

Each interest may not have directly competed, but Zong’s plans to be more than a water bottler may not have been well received by Danone

As to Zong’s pleading with the government for help

It’s ridiculous for Zong to plead with the Chinese government to cancel all or parts of the contract.

Yes, Zong is a capable business man and Wahaha a great national brand.

But neither of these factors is strong enough to justify government intervention. China cannot distort its own law.

If the Chinese government canceled the valid 1996 contract, it would deal a heavy blow to the meaning of honesty. So, there’s no point in the government stepping in at this moment. Let the court or the chamber of commerce decide.

Excellent analysis of the situation, and Siwei Zhong also did an excellent job of highlighting these issues in his post Danone Gives Wahaha A Hard Trademark Lesson

and, with this in mind, there are two lessons to be learned:

First, a Chinese company should learn to better protect its own stake. If it doesn’t want a foreign partner to take the controlling stake, it should never make a contract that unduly favors the foreign side.

Second, while helping a domestic company better protect itself against possible (hostile) foreign takeover, Chinese regulators should pay more attention to the possible moral hazards on the Chinese side

The author wraps up strong in his lessons for the readers. There is defiantly a measure of shared blame and realization that needs to occur, but all that aside.. Wahaha needed to either play by the rules set per the agreement or take the buyout as laid out per the agreement.

Hind sight is 20/20.. but that doesn’t mean that you can re-write or circumnavigate 15 year old agreements. One must take responsibility for their actions.

One thing that I find humerus about this is that had both sides been happy with their partnership, trusted each other, and worked together they would have made a lot more money in the long term. Zong may have made a 100 M for himself in this, but he would have made a lot more… and same goes for Danone.

But in the end, it appears that neither party fully respected the other until it was too late… and their collective greed may cost both parties dearly

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4 Responses to “Must Read Editorial on Danone vs. Wahaha”

  1. Chinese says:

    June 13th, 2007 at 9:47 am

    Zong just did not ask help for his government, he also try to launch a press campaign against the foreing company, with a mix of nationalism (he compares Danone with the 8 countries coalition) and difamation.

    His main fault is probably to think that China was different, and that international laws (or agreement) would not count there.

  2. Romain Guerel (French working in Beijing) says:

    June 13th, 2007 at 6:42 pm

    The arbitration is indeed in Sweden Stockholm but there is also a litigation pending in the US because Zong Qing Hou set-up companies in BVI with establishment in the US controlled by his wife and daughter.

    Personally, the problem in this case is a face problem as always in China. In the past years, Zong was loosing more and more control of the management. Danone wants to integrate more Wahaha in the group since it has other partnership in China with groups like Mengniu. Zong is certainly aware of the illegality of what he has done but for him face is above law. The fact that a Chinese entrepreneur and also member of parliament has lost face against a Big Foreign company cannot be acceptable. I think they will not any clear winner or looser in this matter because there is too much at stake and at the end.

  3. rbrubaker says:

    June 14th, 2007 at 12:04 am

    Romain,

    Thank you for explaining the Sweden arbitration. I had missed that somewhere.

    The face issue is very interesting, and the more I learn about this I would agree. This negotiation has obviously been going on a while, and what we are seeing today is not about Zong going around Danone.. but about Danone and Zong’s deteriorating relationship and common vision.

  4. rbrubaker says:

    June 14th, 2007 at 12:07 am

    Chinese,

    Zong appealed for Chinese people and the Chinese government to support his position from day one. He has been very nationalistic in his approach and asked the Chinese government to block any attempt of Danone to purchase the remaining 49%

    Can you explain your second comment a little more.

    I think that Zong believed that Danone would fear Chinese nationalism… and I think he was right. Obviously Zong’s PR campaign has been very effective.