Great Moments in Chinese Conflict Management: The Danone Fail

Great moments in Western-Chinese conflict, from The Fragile Bridge – Conflict Management in Chinese Business:

Groupe Danone of France was a frontrunner in the race to win the China market, striking what it thought was a win-win deal with a well-known Chinese brand, Wahaha. The two companies formed the first of a series of JVs in 1996 using a fairly typical structure of those times that ultimately gave Danone fifty-one percent of the new firm – and rights to the Wahaha trademark – in exchange for an investment of $41 million. Or so the French dealmakers believed. In a move that now seems naïve, Danone maintained the partnership agreement even after Chinese regulators struck down the transfer of the trademark. Instead, the two firms made a private contractual agreement to transfer use of the Wahaha name to Danone – a deal that would later be found insufficient to protect the French group’s interests in China.

This is exactly the kind of semi-formal arrangement that many Western dealmakers find themselves gently pressured into over Moutai (a popular brand of powerful Chinese liquor) and expensive dinners. When this type of legal expedient is suggested, you can count on the Chinese side talking about the need for guanxi, relationships, and trust. One can practically hear the Wahaha founder Zong Qinghou or one of his representatives reassuring the French executives with that familiar Chinese maxim, “in China nothing is easy but everything is possible.”

And indeed, for years the venture was a spectacular success for both sides – growing into one of China’s biggest brands worth an estimated $2 billion. In 2007, however, Danone officials publicly accused Wahaha of setting up shadow competitors that were cheating the JV out of as much as $100 million in sales. The dispute blew up into an international front-page scandal in no time. For two years, the battle plumbed new depths of personal acrimony and scaled the heights of officialdom as French President Sarkozy brought up the issue to Chinese President Hu Jintao on a state visit to Beijing in 2007. Family names were dragged through the mud, the French foreigners were accused of “evil deeds” and disrespect for Chinese tradition, and each side made angry public denunciations of the other.

In the end, the French side ended up leaving China and surrendering its stake in the tremendously profitable JV – in exchange for an estimated $500 million. Danone played by Chinese rules (such as informal agreements) when there was money on the table but tried employing European methods (international courts and arbitration) when the Chinese side cheated (allegedly). Most observers consider it the loser in the dispute and it has yet to rebuild its presence or profitability in the China market. While it’s easy to take the role of “Monday morning quarterback” and give advice about what Danone should have done differently, it’s clear that the way it decided to manage the conflict was misguided. By making the dispute personal, public, and formal, the French firm insured itself a bloody nose in the short term and an uphill climb to reestablish itself as a viable competitor in the lucrative Chinese market for years to come.

The Danone-Wahaha dispute has become a classic case study for lawyers and entrepreneurs writing deals in China, and anyone considering signing a JV in China should familiarize themselves with the case.

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