Brief Integrative Case 2~2 Danone's Wrangle with Wahaha 245

Brief Integrative Case 2.2 health-oriented brands. Danone invests heavily in research 70 factories in China, including Danone Biscuits, Robust,
and development~€208 million in 2008. One hundred Wahaha, and Health. Danone sells primarily yogurt, bis-
percent of projects currently in the pipeline focus on cuits, and beverages in China. 17
health and nutrition. 13 Danone's Asia-Pacific division employs 23,000 people
Danone's Wrangle with Wahaha With a total of roughly 18 billion liters of bottled water in the Asia-Pacific area, which is almost 30 percent of
marketed in 2008, Danone is the world's second largest Danone's total employees. Of Danone's Asian sales, 57
producer (its global market share is approximately 11 per- percent were in China. Danone's Wahaha was China's
cent). Danone owns the world's top-selling brand of pack- largest beverage company. Two billion liters of Wahaha
In 1996, Danone Group and Wahaha Group combined Dannon became the first company to sell perishable dairy aged water, Aqua, which recorded sales of 6 billion liters. were sold in 2004, making it the market leader in China
forces in a joint venture (JV) to form the largest beverage products coast to coast in the U.S. 6 With Evian and Vol vie. Danone also owns two of the five with a 30 percent market share. 18 In Asia, in 2007, Danone
company in China. A longstanding trademark dispute In 1967, Danone merged with leading French fresh worldwide brands of bottled water. 1-1. Its revenue from Group was the market leader with a 20 percent share of
between the JV members, embedded within a broader cheese producer Gervais to become Gervais Danone. In water products amounted to €2.9 billion in 2008: Europe a 34-billion liter market. In comparison, rivals Coca-Cola
clash of national and organizational cultures, came to a 1973, Gervais Danone merged with Boussois-Souchon- accounted for 47 percent of this total, Asia 31 percent, and Nestle had a 7 percent and 2 percent share, respec-
head. Valuable lessons can be learned from this dispute Neuvesel (BSN). a company which had also acquired the and the rest of the world 22 percent. At constant structure tively. Evian, its global brand, was sold alongside of local
for investors considering joint ventures in China. 1 Alsacian bre\ver Kronenbourg and Evian mineral water. 7 In and exchange rates, the proportion of sales in emerging brands such as China's Wahaha.
The Wahaha Joint Venture was established in 1996 by 1987, Gervais Danone acquired European biscuit manufac- countries rose in 2008 to 52 percent. 1s In the past 20 years, Danone has purchased shares of
Hangzhou Wahaha Food Group Co. Ltd .. Danone Group, turer General Biscuit, owners of the LU brand, and in 1989, In the mid- l 990s, Danone did 80 percent of its business many of the top beverage companies in China: 51 percent
and Bai Fu Qin Ltd. In 1997. Danone bought the interests it bought out the European biscuit operations of Nabisco. in Western Europe. Until 1996, the company was present of shares of the companies owned by Wahaha Group, 98
of Bai Fu Qin and gained legal control of the JV with In 1994. BSN changed its name to Groupe Danone, in about a dozen markets including pasta, confectionery, percent of Robust Group, 50 percent of Shanghai Maling
51 percent of shares. While members of the JV are enti- adopting the name of the Group's best known interna- biscuits, ready-to-serve meals, and beer. The company real- Aquarius Co., Ltd., 54.2 percent of Shenzhen Yili Mineral
tled to use the JV's Wahaha trademark, in 2000, the tional brand. Under its current CEO, Franck Riboud, the ized that it is difficult to achieve simultaneous growth in Water Company, 22.18 percent of China Huiyuan Group,
Wahaha Group developed companies outside of the JV company has pursued its focus on the three product all these markets. Therefore, they decided to concentrate 50 percent of Mengniu, and 20.0 I percent of Bright dairy.
that sold products similar to those of the JV and used the groups: dairy, beverages, and cereals. 8 on the few markets that showed the most growth potential These companies, leaders in their industry, all own trade-
JV's trademark. The Danone Group objected and sought Today, Danone is a Fortune 500 company with a mis- and were consistent with Danone's focus on health. Start- marks that are well-known in China. 19
to purchase those non-JV companies. 2 sion to produce healthy, nutritious, and affordable food ing in 1997, the Group decided to focus on three business However, while expanding into the Chinese market,
In April 2007. Danone offered RMB4 billion to and beverage products for as many people as possible. lines worldwide (Fresh Dairy Products. Beverages, as well Danone faced challenges due to lack of market knowledge.
acquire 51 percent of the shares of Wahaha 's five non-JV as Biscuits and Cereal Products). and the rest of the busi- In 2000, Danone purchased Robust, the then-second-largest
companies. Wahaha Group rejected the offer. Subse- Danooe·s Global Growth ness lines were divested. This freed the company's finan- company in the Chinese beverage industry. Sales of Robust
quently. Danone filed more than 30 lawsuits against Danone. with 160 plants and around 80.000 employees, cial and human resources and allowed for quick expansion had reached RMB2 billion in 1999. Alier the purchase,
Wahaha for violating the contract and illegally using the has a presence in all five continents and over 120 coun- into new markets in Asia, Africa. Eastern Europe, and Danone dismissed the original management and managed
JV's Wahaha trademark in countries such as France, Italy, tries. In 2008, Danone recorded €15.2 billion in sales. Latin America. In less than 10 years, the contribution of Robust directly. Because its new management was not
the U.S., and China.1 Danone enjoys leading positions in healthy food: 9 emerging markets to sales rose from zero to 40 percent familiar with the Chinese beverage market, Robust strug-
while that of Western Europe went below 50 percent. 16 gled. Its tea and milk products almost disappeared from
Danone·s Raolcurovnd • No. l workhvide in fresh dairy products The 2007 year marked the end of a IO-year refocusing the market. During 2005-2006, the company lost RMB
Danone traces its routes to Europe in the early 20th century. • No. 2 worldwide in bottled water strategy period during which the Group's activities were 150 million. 20
In 1919. Isaac Carasso opened a small yogurt stand in • No. 2 worldwide in baby nutrition refocused in the area of health. That year, the Group sold
Spain. He named it "Danone:' meaning "Little Daniel,'' • No. 1 in Europe in medical nutrition nearly all of its Biscuits and Cereal Products business to
after his son. Carasso was aware of new methods of milk the Kraft Foods group, while adding Baby Nutrition and Wahaba Company
fermentation conducted at the Pasteur Institute in Paris. He Its portfolio of brands and products includes Activia, a Medical Nutrition to its portfolio by acquiring Numico. The Wahaha company was established in 1987 by a retired
decided to merge these new techniques with traditional probiotic dairy product line: Danette, a brand of cream Danone is now centered on 4 business lines: teacher, Mr. Zong Qinghou. In 1989, the enterprise opened
practices for making yogurt. The first industrial manufac- desserts; Nutricia, an infant product line; Danonino, a its first plant, Wahaha Nutritional Food Factory, to pro-
turer of yogurt was started. 4 1. Fresh Dairy Products, representing approximately
brand of yogurts; and Evian. a brand of bottled water. 10 duce "Wahaha Oral Liquid for Children," a nutritional
Following his success in Europe, Carasso immigrated 57 percent of consolidated sales for 2008
Listed on Euronext Paris, Danone is also ranked among drink for kids. The name Wahaha was meant to evoke a
to the U.S. to expand his market. He changed the Danone the main indexes of social responsibility: Dow Jones Sustain- 2. Waters, representing approximately l 9 percent of laughing child, combining the character for baby (wa)
name to Dannon Milk products, Inc., and founded the first ability Index Stoxx and World. ASP! Eurozone (Advanced consolidated sales for 2008 with the sound of laughter. 21 After its launch. Wahaha won
American yogurt company in 1942 in Nev.' York. Distribu- Sustainable Performance Indices), and Ethibel Sustainability 3. Baby Nutrition, representing approximately 18 per- a rapid public acceptance. By 1991, the company's sales
tion began on a small scale. When Dannon introduced the index. 11 Danone has ranked number 60 in top 100 interna- cent of consolidated sales for 2008 revenue grew beyond 100 million renminbi (¥). 22
·'fruit on the bottom"' line in 1947, sales soared. The fol- tional brands according to Interbrand 2009 Best Global 4. Medical Nutrition, representing approximately In 1991, with the support of the Hangzhou local dis-
lowing year, he sold his company's interest and returned Brand valuation, with the brand value of $5.96 billion. 12 6 percent of consolidated sales for 2008 trict government, Wahaha Nutritional Food Factory
to Spain to manage his family's original business. 5 In 2008, Danone recorded Jn organic growth rate of merged with Hangzhou Canning Food Factory, a state-
By 1950. Dannon had expanded to other U.S. states in 8.4 percent. With its operating margin increasing for the owned enterprise, to form the Hangzhou Wahaha Group
the Northeast. It also broadened the line by introducing 14th year running, the group further strengthened its Danone Strategy in China Corporation. After mergers with three more companies,
low-fat yogurt that targeted the health-conscious con- global standing. The group's performance is the result of Danone entered the Chinese market in the late 1980s. Wahaha became the biggest corporation of its district. 23
sumer. Sales continued to rise. Dannon expanded across a balanced strategy that builds on international expansion, Since then, it has invested heavily in China. building Since 1997, Wahaha has set up new many subsidiaries.
the country throughout the I 960s and 1970s. In 1979. a growing commitment to innovation, and strengthening factories and expanding production. Today, Danone has It was aided by state and local government since its
244
246 Part 2 The Role of Culture Brief Integrative Case 2.2 Danone'sWrangle with Wahaha 247

continuous expansion helped create new jobs and its production-distribution network. Its Wahaha R&D center and When the JV was formed, Wahaha Group was a state- companies. Wahaha Group and Zong, who by this time
increased profits led to more tax revenues. Analysis Center provide guarantees for high product quality. 27 owned enterprise owned by the Hangzhou city govern- was one of the richest men in China, refused. 36
In 1996, the Hangzhou Wahaha Group Corporation ment. After formation of the JV, it was converted into a
began a joint venture with Danone Group and formed five Danone-Wahaha Joint Venture private corporation, effectively controlled by Zong. This Details of the Dispute
new subsidiaries, which attracted a $45 million foreign Conflict set the stage for Wahaha Group's decision to take back In April 2006, Wahaha was informed by its I 0-year JV part-
investment and then added another $26.2 million invest- The Wahaha joint venture (JV) was formed in 1996 with control of the trademark it felt had been unfairly trans- ner Danone that it had breached the contract by establishing
ment. With the investment funds, Wahaha brought world- three participants: Hangzhou Wahaha Food Group fened to Danone. Zong and his employees now viewed nonjoint ventures, which had infringed upon the interests of
class advanced production lines from Germany, America, (Wahaha Group); Danone Group, a French corporation the transfened trademark as their personal property. 31 Danone. Danone proposed to purchase 51 percent of shares
Italy, Japan, and Canada into its sites. The terms of the (Danone); and Bai Fu Qin, a Hong Kong corporation When the JV was formed, Wahaha Group obtained an of Wahaha's nonjoint ventures. 37 The move was opposed by
Danone-Wahaha joint venture allowed Wahaha to retain all (Baifu). Danone and Baifu did not invest directly in the appraisal of its trademark valuing it at RMB 100 million Wahaha. In May 2007, Danone formally initiated a proceed-
managerial and operating rights as well as the brand name JV. Instead, Danone and Baifu formed Jin Jia Investment, (US$ I 3.2 million). The trademark was its sole contribu- ing, claiming that Wahaha's establishment of nonjoint
Wahaha. In the next eight years, the company established a Singapore corporation (Jinjia). Upon the formation of tion to the JV, while Jinjia contributed RMB500 million ventures as well as the illegal use of "Wahaha" trademark
40 subsidiaties in China, and in 1998 launched its own the JV, Wahaha Group owned 49 percent of the shares of (US$66.1 million) in cash. Wahaha Group also agreed not had seriously violated the noncompete clause. The two par-
brand, "Future Cola," to compete against Coke and Pepsi. 24 the JV and Jinjia owned 51 percent of the shares of the to use the trademark for any independent business activity ties carried on IO lawsuits in and out of China, and all the
In 2000, the company produced 2.24 million tons of bev- JV. This structure led to immediate misunderstandings or allow it to be used by any other entity. However, the ruled cases between Wahaha and Danone have ended in
erages with sales revenue of $5.4 billion. The production between the participants. From Wahaha Group's point of trademark transfer was rejected by China's Trademark Wahaha's favor?~
accounted for 15 percent of the Chinese output of beverages. view-with the division of ownership at 49 percent Office. It took the position that, as the well-known mark On February 3, 2009, a California court in the United
The group became the biggest company in the beverage Wahaha Group, 25.5 percent Danone, and 25.5 percent of a state-owned enterprise, the trademark belonged to the States dismissed Danone's accusation against the wife and
industry of China with total assets of $4.4 billion. 25 Baifu-it was the majority shareholder in the JV. Since state and Wahaha Group did not have the right to transfer daughter of Zong Qinghou and ruled that the dispute
In 2007, it produced 6.89 million tons of beverage with Wahaha Group felt it controlled the JV, it was relatively it to a private company. 32 between Danone and Wahaha should be settled in China.
a sales revenue of $25.8 billion. Today, Hangzhou Wahaha unconcerned when it transferred its trademark to the JV. 29 Rather than terminate the JV, the shareholders (now In addition, Danone's lawsuits against Wahaha were
Group Co., Ltd., is still the leading beverage producer in In 1998, Danone bought out the interest of Baifu in Danone and Wahaha Group) decided to work around the rejected by courts in Italy and France; and a series of law-
China and has more than lOO subsidiary companies with Jinjia, becoming 100 percent owner of Jinjia and effec- approval issue by entering into an exclusive license agree- suits brought by Danone in China against Zong Qinghou
total assets of $17.8 billion. The company product cate- tively the 51 percent owner of the JV. This gave it legal ment for the trademark in I 999. Since the license agreement and Wahaha's nonjoint ventures all ended in failure. 39
gory contains more than 100 varieties, such as milk control over the JV because of its right to elect the board was intended to be the functional equivalent of a sale of the The rationality of the existence of the nonjoint ven-
drinks, drinking water, carbonated drinks. tea drinks, of directors. For the first time, the Wahaha Group and Zong trademark. they were concerned the Trademark Office tures, the ownership of the "Wahaha" trademark, and the
canned food, and health care products?) realized two things: (I) They had given complete control would refuse to register the license. Therefore, they only noncompete clause issue were the key points of the
According to a report on the "Top 10 Beverage Compa- over their trademark to the JV; (2) A foreign company was registered an abbreviated license. This was accepted by the Danone-Wahaha dispute. 40 In 1996, Wahaha offered a list
nies" released by the China Beverage Industry Association, now in control of the JV. From a legal standpoint. this Trademark Office, which never saw the full license. As a of l O subsidiaries to Danone, which after evaluation
Wahaha contributed 55.57 percent to the Association Top result was implied by the structure of the JV from the very result, Wahaha Group never transferred ownership of the selected four. Jinja Investments Pte Ltd. (a Singapore-
lO's overall production, 65.84 percent to its revenue, and beginning. However, it is clear from public statements that Wahaha trademark to the JV, just the exclusive license. based joint venture between Danone Asia Pte Ltd. and
73.16 percent to its profit tax. According to Zong Qinghou, the Wahaha Group did not understand the implications Thus, Wahaha Group never complied with its basic obli- Hong Kong Peregrine Investment, of which Danone is the
the president of Wahaha: "As China becomes the world's when they entered into the venture. The Danone "takeover" gation for capitalization of the JV. It does not appear that controlling shareholder), Hangzhou Wahaha Group Co.,
largest food and beverage market, we' II be a major player in in 1998 therefore produced significant resentment on the any of the JV documents were revised to deal with this Ltd., and Zhejiang Wahaha Industrial Holdings Ltd. jointly
the global market." Wahaha implements a strategy of "local part of Wahaha Group. Rightly or not, Wahaha felt that changed situation. 33 invested to form five joint venture enterprises, with share-
production and local distribution" and has built an excellent Danone misled them from the very beginning. 30 Although Danone was the majority shareholder and holdings of 51 percent, 39 percent, and IO percent, respec-
maintained a majority interest on the board of directors, tively. In I 998, Hong Kong Peregrine sold its stake in
day-to-day management of the JV was delegated entirely Jinja Investments to Danone, which makes Danone the
Figure 1 Hierarchy of the Initial Wahaha Joint Venture to Zong. He filled management positions with his family sole shareholder of Jinja Investments, giving it the control
Structure of Initial members and employees of the Wahaha Group. Under of over 51 percent of the joint ventures. Wahaha and
W3haha Jo-int Venture 28 Zong's management, the JV became the largest Chinese Danone cooperated on the basis of joint venture enter-
bottled water and beverage company. 34 prises, rather than the complete acquisition of Wahaha by
Beginning in 2000. the Wahaha Group created a series Danone. As a result, Wahaha was always independent, and
of companies that sold the same products as the JV and its nonjoint ventures have existed and developed since
used the Wahaha trademark. The non-JV companies 1996. Relevant transactions ofWahaha's nonjoint ventures
appear to have been owned in part by Wahaha Group and and joint ventures were disclosed fully and frankly by the
in pati by an offshore British Virgin Islands company con- auditing reports of PricewaterhouseCoopers, an account-
trolled by Zong's daughter and wife. Neither Danone nor ing firm appointed by Danone. Meanwhile, during the
~.to/J-.•-¼.it, Ml Wahaha group receives any benefits from the profits of 11-year cooperation, Danone assigned a Finance Director
~ W A H A H A GROUP
these non-JV companies. According to press reports in to locate in the headquarters of Wahaha Group to audit
Dc,i_n_?n_e-:~_roup China. products from the non-JV companies and the JV the latter's financial information. 41
-- "'_5Q-Y~-
were sold by the same sales staff working for the same Danone and Wahaha had signed in succession three
sales company, all ultimately managed by Zong. 35 relevant agreements concerning the ownership of the
In 2005, Danone realized the situation and insisted it "Wahaha" brand name. In I 997, the two parties signed a
Source: Danone website. be given a 5 I percent ownership interest in the non-JV trademark transfer agreement, with an intention to transfer
248 Part 2 The Role of Culture Brief Integrative Case 2.2 Danone'sWrangle with Wahaha 249

the "Wahaha" trademark to the joint ventures. The move, in the joint ventures to Wahaha for RMB50 billion (finally Lessons Learned 57 2. How was the Danone and Wahaha JV formed?
however, was not approved by the State Trademark reduced to approximately RMB20 billion) was rejected by What was its structure? Why did Danone decide to
What can potential foreign investors learn from this dis-
Office. 42 For this reason, the two parties signed in 1999 Wahaha. 49 form a joint venture rather than establish a
pute'' Although JVs in China can be quite difficult, with
the trademark licensing contract. According to law, the After the negotiations were suspended, the two parties 100 percent-owned subsidiary?
proper planning and management, they can be successful.
same subject cannot be synchronously transferred and again turned to legal action. As of April 2009, all the ruled In the case of the Wahaha-Danone JV, many basic rules 3. What was the problem of Danone Wahaha joint
licensed the use to others by the same host. Therefore, the cases both in China and abroad have ruled against of JV operations in China were violated, virtually guaran- venture that triggered the conflict between the com-
signing and fulfillment of the trademark licensing contract Danone. 50 teeing the JV's destruction. According to Steve Dickinson, panies? What were the differences in Danone's and
showed that the two parties had agreed to the invalidation lawyer at Han-is Moure PLC, the primary rules violated Wahaha's understanding of their own respective
of the transfer agreement. The "Wahaha" brand should Conflict Resolution are as follows: 58 roles and responsibilities in this venture? What
belong to the Wahaha Group, while the joint ventures only In late September 2009, France's Groupe Danone SA agreed aspects of national and organizational culture
have right of use. 43 to accept a cash settlement to relinquish claims to the name
I. Don't use technical legal techniques to assert or affected this perspective?
In October 2005, the two parties signed the No. 1 Wahaha. In a joint statement issued September 30, 2009, gain control in a JV.
4. Was Danone successful in proving its claims in
amendment agreement to the trademark licensing con- Danone announced a settlement with China's Hangzhou 2. Do not expect that a 51 percent ownership interest court? How was the conflict between the two com-
tract, in which it confirmed Party A (Hangzhou Wahaha Wahaha Group Co. by saying its 51 percent share in joint in a JV will necessarily provide effective control. panies resolved? What were the key lessons for
Group Co., Ltd.) as owner of the trademark. In addition, ventures that make soft drinks and related products will 3. Do not proceed with a JV formed on a weak or Danone about doing business in China?
the second provision of the amendment agreement clearly be sold to the businesses' Chinese partners. "The comple- uncertain legal basis. 5. Did Danone follow the advice regarding JVs in
stated that the several Wahaha subsidiaries listed in the tion of this settlement will put an end to all legal proceed- 4. The foreign party must actively supervise or partici- China mentioned in the list just above? Which
fifth annex of the licensing contract as well as other ings related to the disputes between the two parties," the pate in the day-to-day management of the JV. aspects did it follow and which did it not?
Wahaha subsidiaries (referred to as "licensed Wahaha statement said. 51
enterprises") established by Party A or its affiliates fol- The feud over control of the Wahaha empire offered a
lowing the signing of the licensing contract also have glimpse into the breakup of a major Asian-foreign joint Questions for Review
Source: Thi:-, ca~e wa5 prepared by Tetyana Azarova of Villanova
right granted by one party to use the trademark. The venture. Danone's strategy to publicly confront its partner University under the supervision of Profes:-.or Jonathan Doh as the basis
"licensed Wahaha enterprises" involved in the amendment 1. When and how did Danone expand into the Chinese
and Wahaha's strategy to respond with its own accusa- for class discussion. Research assi:-,tance was provided by Kelley Bergsma
agreement refer to the nonjoint ventures ...i..i According to market? What problems did Danone Group encoun- and Benjamin Littell. Jt is not intended to illustrate either effective or
tions marked a break with prevailing business practice in
related files. Wahaha owns the ownership of the "Wahaha" ter while operating in China? ineffective managerial capability or administrative responsibility.
China, where problems have usually been settled with
trademark, while its nonjoint ventures have the right to face-saving, private negotiations. 52
use the trademark. 45 The Wahaha brand is among the most Analysts said the case served to reinforce how diffi-
famous in China. It ranked No. 16 among domestic brands cult it is to operate a partnership in China. "That's a key
and is worth $2.2 billion, according to a recent report by lesson: To build a [brand] business in China you need to
Shanghai research firm Hurun Report. Wahaha doesn't build from the ground up," said Jonathan Chajet, China
publicly disclose financial figures. 46 managing director for consultancy Interbrand. 53 Foreign
firms such as Procter & Gamble, Starbucks, and General
Motors have operated wholly or in part through joint
Ventures and Acquisitions ventures in China. But executives involved say the expec-
Several years ago, as Wahaha sought to expand its market, tations of foreign and local parties can conflict in a JV,
Wahaha suggested adding online new production lines by for instance, when an international company is striving
increasing investment, while Danone requested Wahaha for efficiencies and profits that match its global goals
outsource to product processing suppliers for its joint ven- while the local partner-sometimes an arm of the Chinese
tures. Wahaha saw the shortcomings in using product pro- government-strives to maximize employment or
cessing suppliers, so it set up nonjoint ventures to meet improve technology. At other times, partners have stolen
production needs. Wahaha believed that the existence and corporate secrets or cheated and otherwise sabotaged a
operation of the nonjoint ventures did not adversely affect venture, while legal avenues have had little effect on dis-
the interest of Danone. 47 putes over operations. 54
During the 11 years that followed 1996, Danone Danone, which reported the Wahaha business gener-
invested less than RMB 1.4 billion in Wahaha's joint ven- ated about IO percent of its global revenue in 2006 but
tures, but received a profit of RMB3.554 billion as of has since adjusted how it accounted for Wahaha, said it
2007. On the other hand, Danone acquired several strong expects no impact on its income statement from the settle-
competitors of Wahaha including Robust, Huiyuan, and ment. ln China, it will be left with a much smaller foot-
Shanghai Mating Aquariust. Wahaha saw Robust as its print and is essentially starting over. 55 Danone's CEO
biggest rival. Wahaha was disappointed that Danone failed Franck Riboud stated: "Danone has a long-standing com-
to hold up its end of the bargain of "jointly exploring mitment to China, where it has been present since 1987,
markets in and out of China" listed in the JV contract. 48 and we are keen to accelerate the success of our Chinese
Through influence of the Chinese and French govern- activities." China is Danone's fourth-largest market after
ments, Danone and Wahaha reached a peaceful settlement France, Spain, and the U.S., contributing about €lbn, or
in late 2007. However, Danone's proposal to sell its shares 8 percent, of Danone's revenues. 56