Danone Gets Clobbered by the Chinese

This political disaster illustrates how MNC's still get trampled in China. The Chinese see the French as the corrupt foreign business partner in this one. Normally when it comes to the French, I'm inclined to agree. However, in this case I'll give the French a reprive. This is a classic Chinese JV gotcha:

"It began in 2005, when executives at Groupe Danone, the French beverage and yogurt giant, say they noticed something peculiar in the financial figures coming from their joint venture in China with the Wahaha Group.

After a lengthy investigation, Danone officials concluded that their closest partner in China, Wahaha's longtime chairman, Zong Qinghou, was operating secret companies outside the joint venture - companies that were mimicking the joint venture and siphoning off millions of dollars."

This happens every day of the week. The foreign company finds a partner it thinks it can trust, cuts a fair deal making everyone wealthy and then gets taken to the cleaners.

"In late 2006, after Danone says it discovered the parallel companies, Zong agreed to sell a majority stake in those companies to Danone, which intended to fold them into the joint venture.

But after signing the agreement, Danone says, Zong pulled out of the deal and then began creating even more mirror companies, including his own separate sales division."

You CANNOT run a business in China as if you are a silent partner. You will lose every time.

Tax Law Changes

For anyone interested in other major ramifications of China's tax law changes, this is a good article.

The Money Just Grows on Trees

I was sitting around with a group of guys this evening after a meeting discussing business in China. There was a lot of frustration about the difficulties of running a business here and the general perception outside of China that money is falling out of trees. You just have to be under the right tree.

Other than real estate speculators, recent stock market junkies and communist officials, I don't know anyone who has gotten rich quickly and easily in China. There is a learning curve here and it is steep. Often companies will set up shop in China, or worse - buy someone else's, and expect to run it from the US after they have hired some "particularly talented" Chinese to manage their new China operation. Or they may have acquired a supplier with whom they've had an excellent working relationship for a number of years.

You can't run a business in China as if you are a passive investor giving Chinese management annual output and profit targets. You will get your shirt handed to you. If you are lucky. This business model generally works out as follows: new management speaks your language until about 2 days after the deal is done. Then little things start popping up. Profits aren't meeting expectations, and there is a general concern back at home that no one knows what is going on in the China operation. Several executives fly back and forth a couple of times during the first year to check on things and try to iron out some of the issues.

The second year, profits plummet. Management back in the US is unable to get any straight answers from China management, so the execs fly back over. They are shocked to find they have been locked out of their own manufacturing facility by their own general manager, and they are unable to communicate with the employees. The general manager, who happens to be the nephew of the vice mayor, tells management that he will take all the employees with him and the city will shut down the manufacturing plant for failure to do xy&z if US management doesn't pay him some exorbitant amount or give him an interest in the company or some other unsatisfactory demand.

US management is also shocked to learn that the general manager has set up a competing plant manufacturing the same widgets next door to their plant. He is allocating all expenses to the US plant while all contracts and profits are held in the name of his competing plant which the US company unwittingly paid for. And there is not one thing US management can do.

Some free advice. Read Mr. China. It is still relevant today. Assume nothing. Have at least one person (depending on the size of your operation) and an accountant from your headquarters in the US spend at least three years working in your China operation. Be prepared to hear unbelievable tales from your expat in China and support him. Know that everything you do will take three times as long and cost three times as much has you have budgeted. Be prepared to lose money for the first three years. Give foreign corrupt practices act lectures frequently. Never build your own facility unless you absolutely can't avoid it - buy someone else's mistake. It is much cheaper. Be glad you aren't in a joint venture. It would be much worse.