A joint venture is a contractual agreement that brings together two or more businesses to share profit, loss, and control in a specific enterprise. Despite its resemblance to a partnership, there is a significant difference. In a partnership, members collaborate to run a “business in common,” while in a joint venture, members unite for a specific purpose or project (Ward 1).
The mentioned joint venture involves Hangzhou Wahaha and Danone. These two companies formed this venture to gain a competitive edge in the food and beverage industry. Hangzhou Wahaha Group, the leading beverage manufacturer in China at the time, is the Chinese company involved in this partnership. The implementation of China’s Open Door Policy brought about economic reform, leading to economic growth and increased consumer expenditure. Consequently, Zong Qinghou, who later established Hangzhou Wahaha Group, capitalized on these opportunities for success.
French company Group Danone, specializing in food and beverage products, formed a joint venture partnership with Hangzhou Wahaha Group in 1996. The dispute arose from this contractual agreement. Hangzhou Wahaha Group was founded by Zong Qinghou in 1991, demonstrating his previous ambition as he worked at a school-run enterprise before starting his own venture.
He started his own business at school, initially selling soft drinks, stationery, and popsicles. Eventually, his business transformed into Hangzhou Wahaha Nutrition Food Factory, focusing on selling a nutritional supplement for children. By 1991, his business approach had proven to be highly successful. Consequently, Hangzhou Wahaha Nutrition Food Factory invested in shares of Hangzhou Canned Food Factory, leading to the formation of Hangzhou Wahaha Group as a collectively-owned enterprise. By 1994, the Group had diversified their range of products to encompass various beverages.
They became China’s top beverage company by offering milk, yogurt drinks, juices, colas, and bottled water. This success can be attributed to the establishment of over fifty subsidiaries in China. Group Danone, founded in 1966 in Paris, France, was originally involved in the glass and packaging manufacturing industry, as well as the food and beverage industry. In addition to fresh dairy products, Danone globally produced cereals, biscuits, bottled water, and baby food.
Due to their limited resources compared to larger companies, Danone formed partnerships with local companies in their host countries as a way to enter new markets. This strategy enabled Danone to achieve success and expand its presence in over 120 countries globally. Danone’s interest in the growing Chinese economy led them to establish factories in China and continue their joint venture approach by collaborating with local companies such as Hangzhou Wahaha Group.
A joint venture partnership was established in 1996 between Danone Group and Hangzhou Wahaha Group. Peregrine Investments Holdings, an investment bank based in Hong Kong, facilitated the agreement. Alongside the partnership with Hangzhou Wahaha Group, Danone also formed another joint venture entity called Jinjia Investments with Peregrine, which is also based in Hong Kong. Initially, Danone and Peregrine collectively held 51% ownership in the joint ventures, while the Group held the remaining 49%. However, due to Peregrine’s collapse during the Asian Financial Crisis, its involvement in the joint venture ceased.
Originally, the Jinjia joint venture included two board members from Danone and one from Peregrine. However, due to the financial crisis, Peregrine’s board member, Francis Leung Pak-to, had to resign and was replaced by another Danone representative (Food & Beverage 1). Consequently, Danone acquired Jinjia shares, giving them the majority ownership in the joint venture with the Group. In 1996, Danone and the Group established four subsidiaries under their joint venture: Hangzhou Wahaha Baili Foods, Hangzhou Wahaha Health Foods, Hangzhou Wahaha Beverages, and Hangzhou Wahaha Quick Frozen Foods.
Shortly after that, Hyonong, a South Korean company, sold its shares in Hangzhou Wahaha Hyonong Canned Food to Danone, resulting in the renaming of the company as Hangzhou Wahaha Foods. This marked the formation of the fifth joint venture company, with a total of thirty-nine joint ventures being established by 2007, and an injected capital amounting to $131 million (Food & Beverage 1). As a result of the ownership restructure of Hangzhou Wahaha Foods, Zong Qinghou became the sole chairman for the Danone-Wahaha joint ventures. Hangzhou Wahaha Group had a multitude of reasons to pursue these joint ventures with Danone.
Wahaha could transform their company from a state-owned enterprise to a private company through this joint venture. By entering into this joint venture, Wahaha would be able to free up the assets previously owned by the government. If this was their motivation for entering the joint venture, they would have been pleased to see that the majority of shares held by the government were transferred to private hands by 2000. Additionally, access to Danone’s production technology and foreign capital likely motivated Wahaha to enter the joint venture.
Wahaha has already provided milk and yoghurt drinks, juices, and bottled water. However, Danone’s success in these markets on a global scale can be advantageous for Wahaha’s establishment in the Chinese beverage market. Moreover, Wahaha could utilize Danone’s international connections, foreign capital, and production technology to expand their operations beyond China. Despite already being a prominent beverage manufacturer in China, partnering with Danone can help Wahaha achieve a more significant global presence.
Again, Wahaha’s motivation proved successful as the Group became the fifth-largest beverage producer globally by 2006, with almost half of their profits coming from the joint ventures with Danone. Likewise, Danone had several reasons for partnering with Wahaha. As previously mentioned, Danone lacked the resources to enter new markets or countries through start-ups. Consequently, they formed joint ventures with other foreign companies as a means to enter those new markets. Additionally, Danone sought a joint venture with Wahaha to penetrate China’s market.
China’s thriving economy since the late 1970s economic reform and its largest population in the world made it an appealing market for Danone. By entering a joint venture with a well-established Chinese company, they could benefit from the profits generated by the flourishing economy and the vast consumer base provided by the Chinese population. In general, firms enter into joint venture agreements to create new products or services, enter new foreign markets, or achieve both objectives simultaneously (Beamish 75).
Despite not aiming to create a new product, Danone desired to establish themselves in the beverage industry in order to tap into the promising Chinese market dominated by Wahaha. The partnership with the Chinese firm surpassed expectations, contributing to almost 6% of Danone’s global profits. Moreover, Danone was likely enticed by the opportunity to sell products under the well-known “Wahaha” brand. According to their joint venture agreement, both companies committed to producing food and beverage items under the “Wahaha” brand.
Danone probably expected that the brand name would be highly lucrative for them, just like it had been for Hangzhou Wahaha Group. It must have been satisfying for Danone to see Wahaha as one of its top four brands. However, in 2007, a conflict emerged between the two partners in the Danone-Wahaha joint venture. Danone made public accusations against Zong Qinghou, its partner, alleging that he had been manufacturing and selling products with identical attributes and the Wahaha trademark through the joint venture’s distribution networks.
Zong was accused of using his own external network of operations alongside the joint ventures to sell products, thus reducing the 51% profits that Danone was supposed to receive according to the 1996 joint venture contract (Areddy 1). In addition, Danone alleged that the Group had been creating false documents in order to continue producing Wahaha products through these non-joint venture subsidiaries. Danone considered these actions a violation of the “non-competition clause” in the original joint venture contract, which prohibits engaging in any activities that compete with the businesses of the JV entities, including production or distribution/sales. It was estimated that Danone incurred losses exceeding $100 million due to Zong’s side ventures (Areddy 1). This dispute originated in 2005 when irregularities were detected by Danone in Wahaha Group’s financial figures, leading to accusations against Zong (Barboza 1). Several factors contributed to the emergence of this disagreement.
The initial conflict stemmed from the contract’s ambiguous terms. Zong disputed Danone’s claim that the joint ventures did not possess ownership of the “Wahaha” trademark. According to Zong, both they and the Group were the exclusive legal owners with authority to utilize the trademark in other endeavors without requiring Danone’s consent. Moreover, Zong perceived an imbalance within the contract’s “non-competition clause,” asserting that it favored Danone by granting them greater control over the “Wahaha” trademark while subjecting Zong to unequal obligations.
The dispute emerged partly because the original contract terms were unclear and unfair, failing to satisfy both parties. Moreover, the differing investment approaches of the French and Zong played a role in causing disagreement. Zong, known for their tendency towards aggressive investments, became frustrated with Danone’s hesitance to expand the business. According to Zong, they declined further investment while still permitting him to spend money. However, when these ventures proved successful, Danone sought a portion of the profits (Kurtenbach 1).
Zong expressed his desire to continue investing, while Danone was satisfied with collecting money on their previous investments. Zong believed that the joint venture between the two companies was a bad match from the beginning. He attributed many of the resulting problems to cultural differences, stating that the French did not understand the Chinese market and the necessary strategy for success (Kurtenbach 1). Danone’s allegations against Wahaha in the dispute present arguments with both strengths and weaknesses.
The assertion that Zong’s production of identical products outside of the joint ventures violates the “non-competition clause” is correct. This clause was agreed upon by both parties in the original contract to prevent such situations. By producing outside of the joint ventures, Zong prevented Danone from reaching consumers and sharing in the resulting profits, which constitutes competition against the partnership.
Despite Zong’s belief that this clause is unjust and gives an advantage to Danone, it is important to note that it was included in the original contract and therefore must be adhered to. One potential flaw in Danone’s argument in the dispute is that certain entities owned by Wahaha were already established before the joint venture with Danone. This suggests that Danone recognized the credibility of these entities and the products they manufactured.
If Danone did not have an issue with these non-joint venture entities when the contract was made, there is no reason for them to question their existence later. Zong claims that Danone was aware of these ventures from the beginning and only recently became envious of their profits, attempting to buy them at a lower price and share in the earnings (Barboza 1). Danone contended that these entities should not have existed initially; however, their “silent acknowledgement” of these entities weakens this argument.
Contrary to Danone’s argument, it was correct of Zong not to create additional non-joint venture entities after the formation of the contract. This would have violated the non-competition clause in their agreement. Zong also disputes Danone’s claim that Hangzhou Wahaha Group never transferred the “Wahaha” trademark to the joint ventures. According to Zong, the Group was the sole legal owner of the trademark and had the right to use it without seeking approval from the joint ventures. If this is true, then Zong had every legal right to use the trademark in his other business ventures. Additionally, Danone’s lack of contribution compared to the Group’s does not support their claim over the use of the “Wahaha” trademark.
The Group asserts that they have made a greater contribution to the joint ventures’ profits in comparison to Danone. Consequently, Zong maintains that their claim to the trademark is stronger than Danone’s. Assuming the role of a senior manager at Danone, my recommendation would be to terminate the joint venture partnership and propose selling our 51% stake in the venture to Wahaha. By doing so, this would grant sole ownership of the brand to the Group.
It seems that the partnership between the two firms has not been satisfactory. The cultural disparities and differences in investment strategy have become an issue, with Zong taking control of all investments for both sides. Additionally, Zong is not willing to address the dispute and remains firm in his position. This raises concerns about a potential unpleasant and unsuccessful resolution, as it is possible that the Chinese courts may rule in favor of Zong.
In addition, there are accusations and lawsuits being exchanged between the two firms that will harm the company’s reputation. For example, Zong accused Danone of engaging in harassment and a campaign to defame him and his family. Furthermore, Zong also accused Danone of mistreating the Chinese people (Barboza 1). To avoid significant damage to their company and national standing, it is advisable for Danone to step back from this conflict and terminate their partnership in the joint venture. Additionally, Danone should sell their 51% stake to Wahaha as the joint venture is clearly declining, recovering whatever funds they can.
Losing the Chinese market would be a major setback for Danone since it is their fourth largest market, after France, Spain, and the U.S. Their collaboration with Wahaha in 2006 accounted for around 10% of their global revenue (Areddy 1). However, while this loss is significant, it can still be overcome. Danone can explore new joint ventures in other markets and may even have the opportunity to reenter China in the future. Although it would be challenging to become a dominant player in China without the Group’s distribution power or the “Wahaha” trademark, it is not impossible considering their existing experience.
In summary, I suggest that it would benefit Danone to resolve the dispute with Wahaha and sell their 51% stake in the venture to mitigate potential damage to the company. Despite its initial success, the partnership between Danone and Wahaha eventually led to a contentious disagreement.
Danone discovered that Zong had been selling products under the “Wahaha” trademark that were not part of their joint venture. As a result, Danone wanted a portion of the profits from these products. Danone filed a lawsuit and accusations were made, leading to more lawsuits. As a senior manager at Danone, I would recommend that we terminate our joint venture with Wahaha and sell our 51% stake in the venture to Wahaha in order to sever all connections with the Group.
