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After reading the case, discuss the following:Identify the problem in the joint venture that triggered the conflict between the two companies and discuss the differences of each company’s understanding of their own respective roles and responsibilities in this venture.As a leader, discuss ways you would handle conflict when it arises from organizational culture or national culture?Directions:Discuss the concepts, principles, and theories from your textbook. Cite your textbook( in-text)and cite any other sources if appropriate.Your initial post should address all components of the question with a 500 word limit.Reply to at least two discussion posts with comments that further and advance the discussion topic. ( after submitting my discussion i will send you two peers discussions)
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Danone’s Wrangle with Wahaha
In 1996, Danone Group and Wahaha Group combined forces in a joint venture (JV) to form the
largest beverage company in China. A longstanding trademark dispute between the JV members,
embedded within a broader clash of national and organizational cultures, came to a head. Valuable
lessons can be learned from this dispute for investors considering joint ventures in China.
The Wahaha Joint Venture was established in 1996 by Hangzhou Wahaha Food Group Co. Ltd.,
Danone Group, and Bai Fu Qin Ltd. In 1997, Danone bought the interests of Bai Fu Qin and gained
legal control of the JV with 51 percent of the shares. While members of the JV are entitled to use
the JV’s Wahaha trademark, in 2000, the Wahaha Group developed companies outside of the JV
that sold products similar to those of the JV and used the JVs trademark. The Danone Group
objected and sought to purchase those non-JV companies.
In April 2007, Danone offered RMB4 billion to acquire 51 percent of the shares of Wahaha’s five
non-JV companies. Wahaha Group rejected the offer. Subsequently, Danone filed more than 30
lawsuits against Wahaha for violating the contract and illegally using the JV’s Wahaha trademark
in countries such as France, Italy, the U.S., and China.
Danone’s Background
Danone traces its roots to Europe in the early 20th century. In 1919, Isaac Carasso opened a small
yogurt stand in Spain. He named it “Danone,” meaning “Little Daniel,” after his son. Carasso was
aware of new methods of milk fermentation conducted at the Pasteur Institute in Paris. He decided
to merge these new techniques with traditional practices for making yogurt. The first industrial
manufacturer of yogurt was started. Following his success in Europe, Carasso immigrated to the
U.S. to expand his market. He changed the Danone name to Dannon Milk Products, Inc., and
founded the first American yogurt company in 1942 in New York. Distribution began on a small
scale. When Dannon introduced the “fruit on the bottom” line in 1947, sales soared. The following
year, he sold his company’s interest and returned to Spain to manage his family’s original business.
By 1950, Dannon had expanded to other U.S. states in the Northeast. It also broadened the line by
introducing low-fat yogurt that targeted the health-conscious consumer. Sales continued to rise.
Dannon expanded across the country throughout the 1960s and 1970s. In 1979, Dannon became
the first company to sell perishable dairy products coast to coast in the U.S.
In 1967, Danone merged with leading French fresh cheese producer Gervais to become Gervais
Danone. In 1973, Gervais Danone merged with Boussois-Souchon-Neuvesel (BSN), a company
that had also acquired the Alsacian brewer Kronenbourg and Evian mineral water.
In 1987, Gervais Danone acquired European biscuit manufacturer Général Biscuit, owners of the
LU brand, and in 1989, it bought out the European biscuit operations of Nabisco.
In 1994, BSN changed its name to Groupe Danone, adopting the name of the Group’s best-known
international brand. Under its current CEO, Franck Riboud, the company has pursued its focus on
the three product groups: dairy, beverages, and cereals.
Today, Danone’s mission is to produce healthy, nutritious, and affordable food and beverage
products for as many people as possible.
Danone’s Global Growth
Danone, with 180 production sites and over 100,000 employees, has a presence in all five
continents and over 120 countries. In 2018, Danone recorded €24.7 billion in sales, a 60 percent
increase from its €15.2 billion in sales in 2008. Danone enjoys leading positions in healthy food:
No. 1 worldwide in fresh dairy products
No. 1 worldwide in plant-based products
No. 2 worldwide in early life nutrition
No. 2 worldwide in packaged waters
No. 1 in Europe in medical nutrition
Its portfolio of brands and products includes Activia, a probiotic dairy product line; Danette, a
brand of cream desserts; Nutricia, an infant product line; Danonino, a brand of yogurts; and Evian,
a brand of bottled water. Listed on Euronext Paris, Danone is also ranked among the top companies
for social responsibility in the Dow Jones Sustainability Indices, and the company received a AAA
rating from MSCI ESG Research for its performance in the area of Environmental, Social &
Governance (ESG) Issues. Danone was ranked number 58 in top 100 international brands
according to Interbrand 2018 Best Global Brand valuation, with the brand value of $9.5 billion.
In 2018, Danone’s sales grew by 3 percent. The group’s performance is the result of a balanced
strategy that builds on international expansion, a growing commitment to innovation, and the
strengthening of health-oriented brands. As of 2018, Danone is the world’s second largest producer
of bottled water. Danone owns three of the world’s top-selling brands of packaged water (Mizone,
Aqua, and Evian). Its revenue from water products amounted to €4.5 billion in 2018: China,
Indonesia, and France accounted for the most sales. Growth is strongest in China, Indonesia, and
Argentina, with emerging markets accounting for 70 percent of all of Danone’s bottled water sales.
In the mid-1990s, Danone did 80 percent of its business in Western Europe. Until 1996, the
company was present in about a dozen markets including pasta, confectionery, biscuits, ready-to-
serve meals, and beer. The company realized that it is difficult to achieve simultaneous growth in
all these markets. Therefore, they decided to concentrate on the few markets that showed the most
growth potential and were consistent with Danone’s focus on health. Starting in 1997, the Group
decided to focus on three business lines worldwide (Fresh Dairy Products, Beverages, as well as
Biscuits and Cereal Products), and the rest of the business lines were divested. This freed the
company’s financial and human resources and allowed for quick expansion into new markets in
Asia, Africa, Eastern Europe, and Latin America. In less than 10 years, the contribution of
emerging markets to sales rose from zero to 40 percent while that of Western Europe went below
50 percent.13 By 2018, emerging markets accounted for a majority of all sales, with over 60
percent of all employees working in developing nations.
In 2007, the same year that it attempted to acquire 51 percent of the shares of Wahaha’s five nonJV companies, Danone marked the end of a 10-year refocusing strategy period during which the
Group’s activities were refocused in the area of health. That year, the Group sold nearly all of its
Biscuits and Cereal Products business to the Kraft Foods group, while adding Baby Nutrition and
Medical Nutrition to its portfolio by acquiring Numico.
Danone is now centered on 4 business lines:
1 Essential Dairy and Plant-Based Products, representing approximately 53 percent of
consolidated sales for 2018.
2 Waters, representing approximately 18 percent of consolidated sales for 2018.
3 Early Life Nutrition, representing approximately 22 percent of consolidated sales for 2018.
4Advanced Medical Nutrition, representing approximately 7 percent of consolidated sales for
2018.
Danone Strategy in China
Danone entered the Chinese market in the late 1980s. Since then, it has invested heavily in China,
building factories and expanding production.
Today, Danone has 70 factories in China, including Danone Biscuits, Robust, Wahaha, and Health.
Ten percent of Danone’s workforce is located in China. Danone sells primarily yogurt, biscuits,
and beverages in the Chinese market.
By 2018, Danone’s Asia-Pacific and Greater China regions employed 30,000 people, which was
almost 30 percent of Danone’s total employees.
In the early 2000s, Danone’s Wahaha was China’s largest beverage company. In 2008, 57 percent
of Danone’s Asian sales were in China. Two billion liters of Wahaha were sold in 2004, making it
the market leader in China with a 30 percent market share.18 In Asia, in 2007, Danone Group was
the market leader with a 20 percent share of a 34-billion-liter market. In comparison, rivals CocaCola and Nestlé had a 7 percent and 2 percent share, respectively. Evian, its global brand, was sold
alongside of local
brands such as China’s Wahaha.
In the late 1990s and early 2000s, Danone purchased shares of many of the top beverage companies
in China: 51 percent of the shares of the companies owned by Wahaha Group, 98 percent of Robust
Group, 50 percent of Shanghai Maling Aquarius Co., Ltd., 54.2 percent of Shenzhen Yili Mineral
Water Company, 22.18 percent of China Huiyuan Group, 50 percent of Mengniu, and 20.01 percent
of Bright dairy. These companies, leaders in their industry, all own trademarks that are well-known
in China.
However, while expanding into the Chinese market, Danone faced challenges due to lack of market
knowledge. In 2000, Danone purchased Robust, the then-second-largest company in the Chinese
beverage industry. Sales of Robust had reached RMB2 billion in 1999. After the purchase, Danone
dismissed the original management and managed Robust directly. Because its new management
was not familiar with the Chinese beverage market, Robust struggled. Its tea and milk products
almost disappeared from the market. During 2005–2006, the company lost RMB 150 million.
Wahaha Company
The Wahaha company was established in 1987 by a retired teacher, Mr. Zong Qinghou. In 1989,
the enterprise opened its first plant, Wahaha Nutritional Food Factory, to produce “Wahaha Oral
Liquid for Children,” a nutritional drink for kids. The name Wahaha was meant to evoke a laughing
child, combining the character for baby (wa) with the sound of laughter. After its launch, Wahaha
won a rapid public acceptance. By 1991, the company’s sales revenue grew beyond 100 million
renminbi (¥).
In 1991, with the support of the Hangzhou local district government, Wahaha Nutritional Food
Factory merged with Hangzhou Canning Food Factory, a state-owned enterprise, to form the
Hangzhou Wahaha Group Corporation. After mergers with three more companies, Wahaha became
the biggest corporation of its district.
Since 1997, Wahaha has set up many new subsidiaries. It was aided by state and local government
because its continuous expansion helped create new jobs and its increased profits led to more tax
revenues.
In 1996, the Hangzhou Wahaha Group Corporation began a joint venture with Danone Group and
formed five new subsidiaries, which attracted a $45 million foreign investment and then added
another $26.2 million investment. With the investment funds, Wahaha brought world-class
advanced production lines from Germany, America, Italy, Japan, and Canada into its sites. The
terms of the Danone-Wahaha joint venture allowed Wahaha to retain all managerial and operating
rights as well as the brand name Wahaha. In the next eight years, the company established 40
subsidiaries in China, and in 1998 launched its own brand, “Future Cola,” to compete against Coke
and Pepsi.
In 2000, the company produced 2.24 million tons of beverages with sales revenue of $5.4 billion.
The production accounted for 15 percent of the Chinese output of beverages. The group became
the biggest company in the beverage industry of China with total assets of $4.4 billion.
Back in 2007, it produced 6.89 million tons of beverage with a sales revenue of $25.8 billion.
Today, Hangzhou Wahaha Group Co., Ltd., is still a leading beverage producer in China with over
60,000 employees and 150 subsidiaries, though sales have dropped nearly in half since 2013 due
to the shrinking carbonated beverage market. The company product category contains more than
100 varieties, such as milk drinks, drinking water, carbonated drinks, tea drinks, canned food, and
health care products.
According to a 2018 report on the “Top 100 Food & Beverage Companies of China” released by
the Food and Beverage Innovation Forum (FBIF), Wahaha is the fifth largest food and beverage
retailer in China.
According to Zong Qinghou, the president of Wahaha: “As China becomes the world’s largest food
and beverage market, we’ll be a major player in the global market.” Wahaha implements a strategy
of “local production and local distribution” and has built an excellent production-distribution
network. Its Wahaha R&D center and Analysis Center provide guarantees for high product quality.
Danone-Wahaha Joint Venture Conflict
The Wahaha joint venture (JV) was formed in 1996 with three participants:
Hangzhou Wahaha Food Group (Wahaha Group); Danone Group, a French corporation (Danone);
and Bai Fu Qin, a Hong Kong corporation (Baifu). Danone and Baifu did not invest directly in the
JV. Instead, Danone and Baifu formed Jin Jia Investment, a Singapore corporation (Jinjia). Upon
the formation of the JV, Wahaha Group owned 49 percent of the shares of the JV and Jinjia owned
51 percent of the shares of the JV. This structure led to immediate misunderstandings between the
participants. From Wahaha Group’s point of view—with the division of ownership at 49 percent
Wahaha Group, 25.5 percent Danone, and 25.5 percent Baifu—it was the majority shareholder in
the JV. Figure 1 shows the initial structure of the JV. Since Wahaha Group felt it controlled the JV,
it was relatively unconcerned when it transferred its trademark to the JV.
In 1998, Danone bought out the interest of Baifu in Jinjia, becoming 100 percent owner of Jinjia
and effectively the 51 percent owner of the JV. This gave it legal control over the JV because of
its right to elect the board of directors. For the first time, the Wahaha Group and Zong realized two
things:
(1) They had given complete control over their trademark to the JV and (2) a foreign company was
now in control of the JV. From a legal standpoint, this result was implied by the structure of the
JV from the very beginning.
However, it is clear from public statements that the Wahaha Group did not understand the
implications when they entered into the venture. The Danone “takeover” in 1998 therefore
produced significant resentment on the part of Wahaha Group. Rightly or not, Wahaha felt that
Danone misled them from the very beginning.
When the JV was formed, Wahaha Group was a state-owned enterprise owned by the Hangzhou
city government. After formation of the JV, it was converted into a private corporation, effectively
controlled by Zong. This set the stage for Wahaha Group’s decision to take back control of the
trademark it felt had been unfairly transferred to Danone. Zong and his employees now viewed the
transferred trademark as their personal property.
When the JV was formed, Wahaha Group obtained an appraisal of its trademark valuing it at
RMB100 million (US$13.2 million). The trademark was its sole contribution to the JV, while Jinjia
contributed RMB500 million (US$66.1 million) in cash. Wahaha Group also agreed not to use the
trademark for any independent business activity or allow it to be used by any other entity. However,
the trademark transfer was rejected by China’s Trademark Office. It took the position that, as the
well-known mark of a state-owned enterprise, the trademark belonged to the state and Wahaha
Group did not have the right to transfer it to a private company.
Rather than terminate the JV, the shareholders (now Danone and Wahaha Group) decided to work
around the approval issue by entering into an exclusive license agreement for the trademark in
1999. Because the
license agreement was intended to be the functional equivalent of a sale of the trademark, they
were concerned the Trademark Office would refuse to register the license. Therefore, they only
registered an abbreviated license.
This was accepted by the Trademark Office, which never saw the full license. As a result, Wahaha
Group never transferred ownership of the Wahaha trademark to the JV, just the exclusive license.
Thus, Wahaha Group never complied with its basic obligation for capitalization of the JV. It does
not appear that any of the JV documents were revised to deal with this changed situation.
Although Danone was the majority shareholder and maintained a majority interest on the board of
directors, day-to-day management of the JV was delegated entirely to Zong. He filled management
positions with his family members and employees of the Wahaha Group. Under Zong’s
management, the JV became the largest Chinese bottled water and beverage company.
Beginning in 2000, the Wahaha Group created a series of companies that sold the same products
as the JV and used the Wahaha trademark. The non-JV companies appear to have been owned in
part by Wahaha Group and in part by an offshore British Virgin Islands company controlled by
Zong’s daughter and wife. Neither Danone nor Wahaha Group receives any benefits from the
profits of these non-JV companies. According to press reports in China, products from the non-JV
companies and the JV were sold by the same sales staff working for the same sales company, all
ultimately managed by Zong
In 2005, Danone realized the situation and insisted it be given a 51 percent ownership interest in
the non-JV companies. Wahaha Group and Zong, who by this time was one of the richest men in
China, refused.
Details of the Dispute
In April 2006, Wahaha was informed by its 10-year JV partner Danone that it had breached the
contract by establishing nonjoint ventures that had infringed upon the interests of Danone. Danone
proposed to purchase 51 percent of the shares of Wahaha’s nonjoint ventures. The move was
opposed by Wahaha. In May 2007, Danone formally initiated a proceeding, claiming that Wahaha’s
establishment of non-joint ventures as well as the illegal use of the “Wahaha” trademark had
seriously violated the noncompete clause. The two parties carried on 10 lawsuits in and out of
China, and all the ruled cases between Wahaha and Danone have ended in Wahaha’s favor.
On February 3, 2009, a California court in the United States dismissed Danone’s accusation against
the wife and daughter of Zong Qinghou and ruled that the dispute between Danone and Wahaha
should be settled in China. In addition, Danone’s lawsuits against Wahaha were rejected by courts
in Italy and France; and a series of lawsuits brought by Danone in China against Zong Qinghou
and Wahaha’s nonjoint ventures all ended in failure.
The rationality of the existence of the nonjoint ventures, the ownership of the “Wahaha” trademark,
and the noncompete clause issue were the key points of the Danone-Wahaha dispute.39 In 1996,
Wahaha offered a list of 10 subsidiaries to Danone, which, after evaluation, selected four. Jinja
Investments Pte Ltd. (a Singapore-based joint venture between Danone Asia Pte Ltd. and Hong
Kong Peregrine Investment, of which Danone is the controlling shareholder); Hangzhou Wahaha
Group Co., Ltd.; and Zhejiang Wahaha Industrial Holdings Ltd. jointly invested to form five joint
venture enterprises, with shareholdings of 51 percent, 39 percent, and 10 percent, respectively. In
1998, Hong Kong Peregrine sold its stake in Jinja Investments to Danone, which makes Danone
the sole shareholder of Jinja Investments, giving it the control of over 51 percent of the joint
ventures. Wahaha and Danone cooperated on the basis of joint venture enterprises, rather than the
complete acquisition of Wahaha by Danone. As a result, Wahaha was always independent, and its
nonjoint ventures have existed and developed since 1996. Relevant transactions of Wahaha’s
nonjoint ventures and joint ventures were disclosed fully and frankly by the auditing reports of
Pricewaterhouse-Coopers, an accounting firm appointed by Danone.
Meanwhile, during the 11-year cooperation, Danone assigned a finance director to locate in the
headquarters of Wahaha Group to audit the latter’s financial information.
Danone and Wahaha had signed in succession three relevant agreements concerning the ownership
of the “Wahaha” brand name. In 1997, the two parties signed a trademark transfer agreement, with
an intention to transfer the “Wahaha” trademark to the joint ventures. The move, however, was not
approved by the State Trademark Office. For this reason, the two parties signed in 1999 the
trademark licensing contract. According to law, the same subject cannot be synchronously
transferred and licensed for use to others by the same host. Therefore, the signing and fulfillment
of the trademark licensing contract showed that the two parties had agreed to the invalidation of
the transfer agreement. The “Wahaha” brand should belong to the Wahaha Group, while the joint
ventures only have the right of use.
In October 2005, the two parties signed the No. 1 amendment agreement to the trademark licensing
contract, in which it confirmed Party A (Hangzhou Wahaha Group Co., Ltd.) as owner of the
trademark. In addition, the second provision of the amendment agreement clearly stated that the
several Wahaha subsidiaries listed in the fifth annex of the licensing contract as well as other
Wahaha subsidiaries (referred to as “licensed Wahaha enterprises”) established by Party A or its
affiliates following the signing of the licensing contract also have the right granted by one party to
use the trademark. The “licensed Wahaha enterprises” involved in the amendment agreement refer
to the nonjoint ventures. According to related files, Wahaha maintains the ownership of the
“Wahaha” trademark, while its nonjoint ventures have the right to use the trademark. The Wahaha
brand is among the most famous in China. It ranked No. 16 among domestic brands and is worth
US$2.2 billion, according to a recent report by Shanghai research firm Hurun Report. Wahaha
doesn’t publicly disclose financial figures.
Ventures and Acquisitions
Several years ago, as Wahaha sought to expand its market, Wahaha suggested adding online new
production lines by increasing investment,while Danone requested Wahaha outsource to product
processing suppliers for its joint ventures. Wahaha saw the shortcomings in using product
processing suppliers, so it set up nonjoint ventures to meet production needs. Wahaha believed that
the existence and operation of the nonjoint ventures did not adversely affect the interest of Danone.
During the 11 years that followed 1996, Danone invested less than RMB1.4 billion in Wahaha’s
joint ventures but received a profit of RMB3.554 billion as of 2007. On the other hand, Danone
acquired several strong competitors of Wahaha including Robust, Huiyuan, and Shanghai Maling
Aquariust. Wahaha saw Robust as its biggest rival. Wahaha was disappointed that Danone failed
to hold up its end of the bargain of “jointly exploring markets in and out of China” listed in the JV
contract. Through the influence of the Chinese and French governments, Danone and Wahaha
reached a peaceful settlement in late 2007. However, Danone’s proposal to sell its shares in the
joint ventures to Wahaha for RMB50 billion (finally reduced to approximately RMB20 billion)
was rejected by Wahaha. After the negotiations were suspended, the two parties again turned to
legal action. All the ruled cases, both in China and abroad, have ruled against Danone.
Conflict Resolution
In late September 2009, France’s Groupe Danone SA agreed to accept a cash settlement to
relinquish claims to the name Wahaha. In a joint statement issued September 30, 2009, Danone
announced a settlement with China’s Hangzhou Wahaha Group Co. by saying its 51 percent share
in joint ventures that make soft drinks and related products will be sold to the businesses’ Chinese
partners. “The completion of this settlement will put an end to all legal proceedings related to the
disputes between the two parties,” the statement said. The feud over control of the Wahaha empire
offered a glimpse into the breakup of a major Asian–foreign joint venture. Danone’s strategy to
publicly confront its partner and Wahaha’s strategy to respond with its own accusations marked a
break with prevailing business practice in China, where problems have usually been settled with
face-saving, private negotiations. Analysts said the case served to reinforce how difficult it is to
operate a partnership in China. “That’s a key lesson: To build a [brand] business in China you need
to build from the ground up,” said Jonathan Chajet, China managing director for consultancy
Interbrand. Foreign firms such as Procter & Gamble, Starbucks, and General Motors have operated
wholly or in part through joint ventures in China. But executives involved say the expectations of
foreign and local parties can conflict in a JV; for instance, when an international company is
striving for efficiencies and profits that match its global goals while the local partner—sometimes
an arm of the Chinese government—strives to maximize employment or improve technology. At
other times, partners have stolen corporate secrets or cheated and otherwise sabotaged a venture,
while legal avenues have had little effect on disputes over operations. Danone, which reported the
Wahaha business generated about 10 percent of its global revenue in 2006 but has since adjusted
how it accounted for Wahaha, said it expects no impact on its income statement from the
settlement. In China, it will be left with a much smaller footprint and is essentially starting over.
Danone’s CEO Franck Riboud stated: “Danone
has a long-standing commitment to China, where it has been present since 1987, and we are keen
to accelerate the success of our Chinese activities.” China is Danone’s fourth-largest market after
France, Spain, and the U.S., contributing about €1bn, or 8 percent, of Danone’s revenues.
Lessons Learned
What can potential foreign investors learn from this dispute? Although JVs in China can be quite
difficult, with proper planning and management, they can be successful. In the case of the Wahaha–
Danone JV, many basic rules of JV operations in China were violated, virtually guaranteeing the
JVs destruction. According to Steve Dickinson, lawyer at Harris Moure PLC, the primary rules
violated are as follows:
1. Don’t use technical legal techniques to assert or gain control in a JV.
2. Do not expect that a 51 percent ownership interest in a JV will necessarily provide effective
control.
3. Do not proceed with a JV formed on a weak or uncertain legal basis.
4. The foreign party must actively supervise or participate in the day-to-day management of
the JV.
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