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.

In Environmental News

This doesn't surprise me. Unfortunately, I heard from a very highly placed individual that China is not serious about environmental issues. Cracking down on foreign owned enterprises gives the illusion that China is concerned but merely serves as a protectionist measure.

China will not be tied to set targets for the reduction of greenhouse gas emissions, the European parliament's climate change committee said on Wednesday, following meetings with Chinese officials. However, it was suggested that, rather than sign up to a full international pact on global warming, China might be persuaded to join other developing countries in pledging anti-climate change action. The talks came ahead of a summit in Bali in December at which representatives from 191 nations will discuss what to do once the Kyoto protocol on climate change expires in 2012, the Financial Times reported. The US has said that developing countries such as China and India must help cut emissions even though their historical and per capita contributions to global warming trail those of the West. The International Energy Agency predicts that China will surpass the US as the world's biggest producer of greenhouse gases this year.

Sub-Prime Meltdown for Dummies

Here is an excellent explanation of the sub-prime meltdown in the US from the retarted Chinese reporter's perspective:

Sub-Prime Meltdown explained

Here is a good explanation about the Sub-Prime meltdown.

After 9/11
Bush and Greenspan was afraid of economic problems
Got together and agreed to lower interest rate to stimulate economy
Fractional Reserve meant banks could lend more money than they had
Secondary market were eager to provide liquidity, so more loans were originated
After Dot Com bust, Wall Street looked for a place to park money
A flood of money and liquidity came into the Real Estate market, post Dot Com bust
A whole bunch of newbie loan sharks, er officers, er loan consultant came into the market
Leaders created Option ARM to help more folks buy a home
Effectively turning some marginal borrowers into Prime borrowers
Assumed market appreciation, since that would take care of security and LTV problem
More Sub-Prime loans written with relaxed underwriting, since lender had too much money to lend
Wall Street pushed lenders to create more loans to package and turn them into securities
Newbie loan officer, newbie underwriter, not following prudent underwriting
Disaster waiting to happen, but not surprising


THE ROAD TO SUB-PRIME MELTDOWN BEGINS

Mortgages started to reset
Marginal borrowers started to default, first the Sub-Prime and now Alt-A
Wall Street gets freaked and started pulling back liquidity
Lenders start to see more defaults and they start to freak
Lenders begin to have harder time selling their existing loan portfolio
Fannie Mae and Freddie Mac getting freaked too
Secondary market started to slow easy credit, and began tightening credit
Lenders had tougher time selling existing loans
Buyers sensed a tightening of credit
Media continued talking about Sub-prime this and that, and emotions were running high
Buyers sensed more uncertain future ahead, and began to sit on the sidelines, waiting and watching
Loan volumes of some lenders dropped off by 85% year to date
Freak conservative lenders overreact and started eliminating loan programs left and right
Buyers have a harder time finding a loan
More media bad news freaked the buyers some more
Sub-Prime problems cascade to other loan segments
Beginning to see it affect suppliers, contractors, material haulers, etc
Wall Street cutting off liquidity and easy credit
Banks over tighten underwriting, strangling off loan volume
Buyers still freaked and on the sidelines
Lenders have greater difficulty selling existing loans to secondary market


What you see is almost the mirror opposite. The first part is expansion in every way – buyers, sellers, lenders, easy credit, easy underwriting, plenty of Wall Street money, plenty of secondary market liquidity, low interest, plenty of liquidity from the Fed, and a fractional reserve system that exaggerates the expansion.

What you see in the second part, is sparked initially by mortgage resets, and defaults, as this reverses the expansion into a contraction cycle - freaked buyers, sellers, lenders, credit crunch, tight underwriting, Wall Street liquidity drying up, Secondary market liquidity slowing and tightening, some liquidity from the Fed, and the same fractional reserve system that exaggerates the contraction.

You can say we are in a market correction cycle, since the expansion cycle was exaggerated, and now the contraction cycle is exaggerated, as the market struggles to get back to a reasonably normal cycle.

It sort of reads like a haiku doesn't it?

Chinese Logic

Here's a good one. As I understand the argument, western companies use greener and more eco-friendly technologies than Chinese companies, so the government has decided to place heavier regulations on western enterprises to ensure cleaner manufacturing?

The new Catalogue for the Guidance of Foreign Investment Industries should help balance out the country's trade by reducing the number of supportive policies aimed at exporters.

More importantly, it should give a shot in the arm to efforts to save energy and protect the environment by encouraging greener use of foreign investment.

So now that the government has decided to reduce the external trade imbalance, guiding foreign investment away from export operations will help.

However, what makes the new guidelines so crucial to the country's sustainable development is their emphasis on encouraging energy-saving and eco-friendly foreign investment in this country.

In their hunger for economic growth, many local governments have tried to absorb as much foreign investment as possible, regardless of the energy and environmental costs.

But with the authorities promising to cut energy intensity by 20 percent and pollution by 10 percent between 2006 and 2010, the blind pursuit of growth is never an option.

It is believed that foreign investors, especially those from developed countries, tend to come equipped with needed technologies and the expertise to meet stricter energy and environmental requirements.

By encouraging energy-efficient and eco-friendly production, it is hoped that the new guidelines will unleash a continuous inflow of foreign investment, driving China's campaign to go green.

Try this one on for size. Instead of making things much more difficult on western operations, why don't you consider enforcing the regulations you already have in place on CHINESE companies. Maybe you can start with state-owned Chinese companies. It's pretty clear that Chinese companies are the ones with the environmental issues, so it is a pretty sure bet that if you enforce environmental laws against your own, your environment will improve.

A 20-Something Holier Than Thou's Take On China

More drivel from the same site as the prior post. This is entertaining, first because I see this stuff all the time (see the prior post on the plant watering team in my office building) and second because the guy gets so worked up about it.

Those Crazy Chinese

Man, you gotta love those crazy Chinese.

My air conditioner broke the other day.

The guy turns up to fix it.
We're on the 19th floor so he looks out the window at the unit perched outside on 2 foot wide concrete shelf that sits in mid air.

Big smile, reaches into his bag and pulls out a piece of rope and ties it around his waste.
Hmm, what to do with the other end?

Ohhh, he hooks it over the top of the flimsy bathroom window which could carry the body weight of a large rat at best.

That's it, in a second he's out their, through the small bathroom window, slings himself up 4 feet to the 2 foot wide concrete block, and he's out there working.

He is perched 19 floors up on a 2 foot wide slab and it's been raining. There is no safety at all.

How does he handle such hardship every day?

He starts singing his favourite Chinese song. He's still humming to himself now and I still feel dizzy watching him from the safety of my own window. Later I quiz him about the safety. He says he's been doing this job for 7 years and no problem with a big grin.

So, when I hear those dribbling foreigners that are spoiled and fat and condescending as they prattle about their democracy and other general bullsh&t……..
…….I often think to myself.... You %$#@# idiot, you really have no conception of what it is like to be a Chinese person living in China today

You are so spoiled and babied by your family and society that you have no idea how most of the world lives as you sprout you condescending cr@p about freedom of speech and your second rate democracy.

I say to you, get a life and leave the Chinese people to live theirs. Right now they are interested in improving there everyday life and maybe sending money back to their family in the village. Your probably trying to charge your parents to mow their lawn

Actually, I would have said "you %$#@# idiot" about the Chinese guy who was willing to climb onto the wet, 2-ft wide slab on the 19th floor with no protection, but that's just me.

We are fat and spoiled, but freedom of speech is not over-rated and my democracy is not second rate. Perhaps you'd like to visit a Chinese jail some time and talk to the political prisoners who've been rotting there for 10 years about the issue of freedom of speech. Or perhaps you'd like to have this discussion with the Chinese professionals mentioned in the post below who finally have a buck in their pocket and would like some participation in the way their government functions.

Imperialist Invaders

The China Daily Online has a little section where a journalist describes a situation and then poses a question for people to write in. Now this is in English, so it is geared for a western audience. Here is today's scenario:

China: A Role Model to All Nations

China is a role model to all developing nations around the globe.

After centuries of oppression and domination by western nations, most developing nations are trying to pull their nations up from poverty. They look at China's rapid progress as an example.

China also give aid and technical help to these nations and have formed many bilateral relations for the benefit of everyone.

However, it is not only the developing nations that benefit from China. The developed nations benefit as well.

Recently, China has helped to arbitrate between the US and North Korea. There are also many more examples too numerous to mention.

Question: Is it a good idea for China to act as a role model or should she just quietly mind her own business?

Ummm. First, that oppression and domination you experienced, China, that was from Mao. He was not western. It was not the British that sent you to the countryside for re-education. And if we are going to make comparisons, let's look at Hong Kong. Hong Kong was in British hands for quite some time, and if I were forced to make a judgment, I'd say it is way the heck ahead of you in about every category.

So enough with the smug, self-satisfied navel gazing. Keep moving forward and focus on making the lives of your people better and your air breathable.

Wrong Type of Government

Some bad news for the Chinese government:

China's "new social stratum," a term officially used to label businessmen and professionals, is increasingly showing an interest in politics, the latest issue of a Communist Party of China (CPC) magazine said.

"They want to participate in political affairs and realize their political ambitions so that their interests can be protected and voices heard," said an investigative report in the weekly Study Times sponsored by the Party School of the CPC Central Committee.