Danone Group Takes a Bath

I've been following the Danone Group/Wahaha Group Company JV debacle with great interest because it is so characteristic of joint ventures in China, and it was such a royal screw to the French. This is one time where I side 100% on the side of the French. Here are the basic facts:

Danone Group is big. It owns Dannon yogurt and other dairy products, Evian water, Activa and other goodies. In 1996, it decided to JV with 2 other companies, Wahaha Group, a recently privatized state owned industry in China, and Baifu, a Hong Kong company. Danone and Baifu formed a Singapore JV called Jin Jia Investment which JV'd with Wahaha in a 51%/49% split respectively. At some point, Danone acquired the interest of Baifu in Jin Jia, making it the 51% owner of the JV.

In China, foreign invested companies, which this JV was, are required to put in a predetermined amount of registered capital. In this case that number was $79.3 million US of which Jin Jia was responsible for $66.1 million US in cash and Wahaha was responsible for $13.2 million in the form of a trademark contribution. Naturally, Wahaha never contributed its trademark (this happens frequently and the western company doesn't find out until it is too late - we are dealing with a case of this now).

In a seemingly innocuous move, Jin Jia left the day to day management of the JV to Wahaha under the premise that Wahaha knew the market better than its partners and was in the best position to direct the affairs of the company. Bad move.

Zong Qinghou, the chairman and alter-ego of Wahaha, proceeded in typical Chinese fashion to staff key management positions with family members. But he is a sharp guy, and he built the market share of the business to 15%, the largest bottled water and beverage company in China. But that was not enough.

In 2000, Wahaha created a number of competing companies which sold the same products as the JV and used the trademark which was supposed to be contributed as registered capital to the JV. The same sales staff marketed both the JV's products and the products of the competing company. As a result of this, Zong is one of the richest men in China.

When Danone figured all this out, the law suits started flying. Zong now whines that from the outset of the partnership, he believed Wahaha had a controlling interest with 49%. Incredulously, he believes Danone misled him, and that he did not understand the implications of the share split, i.e., that Danone could acquire Baifu's interest to become the largest shareholder.

What is shocking to me about this story is not the fact that Zong so blatantly cheated his partner. This happens routinely. But if you ask any Chinese citizen, they believe that Zong was screwed over by Danone and that Danone is clearly in the wrong.

WHAT??? Under what set of facts? This explains the great cultural divide and provides a single sufficient example of why no western company should JV with a Chinese partner unless it is required to do so by the government (restricted industries like automotive require JVs).

We are currently working with a Fortunate 500 company to get out of a JV where its partner has royally cleaned its clock. I spent a portion of my day listening to my China-expert partner talk these same guys out of another JV. They are not in a restricted industry, and they are sharp guys. But we haven't even finished the share swap to remove them from the last fatal JV. Run, don't walk. These partnerships DO NOT WORK. 99.9% of the time they end badly, and it isn't the Chinese company that takes the hit. The Chinese company walks away with all the IP, all of the money, most of the facilities and many times the name.

After all of this, Danone will have to pay this guy a lot of money to make him go away.

September's China Economic Review has an excellent summary of the situation for anyone interested.