Doing Business in China : Danone vs. Wahaha

Danone vs. Wahaha is one of the more well-known cases of "western" companies failing a Joint Venture (JV) with a local Chinese partner. This following quick analysis is based on a case-study I read for the "Doing Business in China" course at Hong Kong University of Science and Technology’s Management of Organizations titled “Danone & Wahaha – A bitter-sweet partnership” (Reference: IMD-3-1949 © 2008 ; Author(s): Hamilton, Stewart ; Zhang, Jinxuan.).

Causes of conflict

The main causes of conflict seem to derive from different attitudes towards key issues in the formation and operation of the joint venture, suggesting major differences in business culture and expectations as to how business should and is being conducted.

Ownership structure and foundations of trust

The first and main problem described in the case study revolves around the ownership structure and the control over the JV. It seems that the Chinese Wahaha expectations were that their 49% of the JV meant full control, as the other 51% were split half-half between Danone and Peregrine through the Singapore registered Jinjia. Danone later took over Peregrne’s part essentially gaining the 51% of the JV and theoretically gaining effective control of the JV. This was not received well by the Chinese partner and later by the Chinese public which interpreted the move as a takeover, resulting in a JV based on distrust and hostility between the partners. (Ownership description – page 7, change of ownership – page 9)

The two parties lacked communications expected of JV partners. It seems that both Zong and Danone knew or understood very little about their partners’ intentions or actual actions. Throughout the case, both parties were surprised to realize some of the partner’s course of action. For example, Zong seemed baffled by the Peregrne takeover, while Danone was confused about Zong and his family forming companies that compete with the JV. This turned even more hostile and emotional once the public became involved through the Xinhua article.

Legal foundation – Trademark control

A relatively minor issue, but one that shows the potential problems of addressing local trademark issues and the importance of a solid legal foundation for a JV. Wahaha, initially being a state-owned company, was refused the transfer of trademark rights to the new JV although this was initially the basis for which the JV was formed upon. To try and rectify the situation the sides resulted to legal acrobatics by trying to overcome the local legal system using what seemed like an unexplored backdoor. This later contributed to not being able to use the local legal system to resolve alleged trademark breach. (page

Seems like the constant attempt by Danone to adhere the Chinese to “western” use of legal maneuvers and ethics has only resulted in further misunderstandings and deepening the gap between the two parties.

Management structure

Another source of conflict was due to the management structure agreed upon. Effective control of daily operations was handed to Zong and Wahaha, as the local China experts, while the only involvement Danone had was through the board of directors. It seemed Danone was attempting to empower the local partner and was not fully aware of the potential implications. This led to dissatisfaction on both sides, as Danone felt it knows very little in actual JV operations while Zong was feeling that Danone has left him to do all the hard work, only expecting to rip off the benefits of his efforts with little to no contribution. (page

Suggestions for resolution of conflict

It’s not clear whether this conflict could really be resolved, so perhaps the strategy should be first aimed at reducing damage to a minimum.

Building a bridge – reducing tension

There is apparently an emotional involvement in the conflict between the two partners so any action to attempt to reduce tension between the parties and increase communication through mediators might ease the situation. The joint PR statement by the two parties quoted at the beginning of the case-study seems like a positive step forward.

Local Public Relations Management and Crisis Management Strategy

It seems that Danone is losing grounds in China not only with its Chinese partner, but also with the Chinese government and the Chinese public (which includes their China costumer base) from what seems like a series of PR failures showing inexperience with Chinese PR management. Attempting “western” PR and legal This should be part of a more comprehensive Crisis Management strategy preparing for the unknown negatives.

Avoiding future conflicts

Looking back, it’s very difficult to try and think how Danone or Wahaha could have known at the time what possible clashes they were facing and how such unknowns could have been avoided, especially due to the fact that China and the two companies were undergoing tremendous change at the time.

Following are possible recommendations to address each of the issues described before :

Doing things the China way – China experts

Many of those issues could perhaps have been avoided if the Danone would have assumed zero knowledge of how things work in China and attempted to adjust to working in China the Chinese way rather than following what they usually practice elsewhere. This includes the following areas – relationship building, local legal system, social and business etiquette, PR management , etc. The safest way to do this, IMHO, is usually through hiring specialists or China experts with vast experience and understanding of business, law and society in China.

Ownership structure and foundations of trust

Discuss and ensure all parties understand the structure and possible changes in control over the JV. Especially focus on building a sense of trust and mutual respect between the partners that go beyond the legal bond. Make sure that both sides contribute and have something to gain from the JV.

Legal foundation – Trademark control

Ensure a solid local legal foundation to the JV and try to clarify all possible misunderstandings regarding interpretation and usage of JV assets. Reach a mutual understanding between JV partners and gain support to the agreement with the local authorities.

Management structure

All parties should be involved in the JV daily operations through extensive mutual collaborations. Having a Chinese partner should not serve as an excuse for staying passive

The "Doing Business in China" course instructor, Ka Sing Cassian Cheung, adjunct professor at HKUST-MGTO and former CEO of a few big companies in China (like Walmart), added a few pointers:

• Danone totally relied on Zong. Most important is to build your own Guanxi in case of a split up. Guanxi can be achieved through the local partner by joining in on all daily operations.
• Create value for the company in the case of a split up. For example – create a co-brand : Denone-Wahaha.Show this is a sign of trust and confidence in the JV and the local partner.
• Form an exit strategy from day one, set the conditions on how to perform trademark valuation.
• From Danone’s perspective, leaving the JV at this point would mean losing the Chinese market. From Zong’s perspective Danone would have to come up with something new and unique to offer like international expansion.

Suggested readings for "Doing Business in China" and the "Danone & Wahaha" story :

• The “Danone & Wahaha – A bitter-sweet partnership” case-study.
• Danone v. Wahaha – China Economic Review
• A Tale of Two Companies – China Business Review
• Danone/Wahaha — China Business Lessons To Be Learned : China Law Blog
• New York Times And Steve Dickinson On The Danone Wahaha China Dispute And On Avoiding Your Own : China Law Blog
• Danone v. Wahaha — Which Of Us Is The Most China Rookie? : China Law Blog

Doing business in China is never as easy as it sounds. Comments welcome.