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Joint Venture Case Study

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    A joint venture is a contractual agreement joining together two or more businesses in which each agrees to share profit, loss, and control in a specific enterprise. While a joint venture might seem similar to a partnership, there is one key difference that sets them apart. Members of a partnership have joined together to run a “business in common,” while members of a joint venture have joined together for a particular purpose or project (Ward 1).

    The joint venture in our case is between Hangzhou Wahaha and Danone, which was formed by the two companies to gain a competitive advantage in the food and beverage industry. The Chinese company, Hangzhou Wahaha Group, was the country’s leading beverage manufacturer at the time of the joint venture’s inception. China’s adoption of the Open Door Policy paved the way to an economic reform, in which the result was economic growth and an increase in consumer spending. This reform paved way for Zong Qinghou, who would later found the Hangzhou Wahaha Group.

    Group Danone, a French company, specialized in selling a variety of food and beverage products. The two companies came together in 1996 to form this joint venture partnership; however it wouldn’t be too long before a dispute would arise out of this contractual agreement. Hangzhou Wahaha Group (“the Group”) was founded by Zong Qinghou in 1991. Zong had showed his ambition long before he founded China’s leading beverage maker, as he worked his way up at the school-run enterprise where his mother had worked, and later decided to begin a venture of his own.

    He set up his own business at the school, which began by selling soft drinks, stationery, and popsicles. His business would later evolve into Hangzhou Wahaha Nutrition Food Factory, where he sold a children’s nutritional supplement. Two years later, in 1991, his business strategy had proved to be quite successful. As a result of their success, Hangzhou Wahaha Nutrition Food Factory bought shares in Hangzhou Canned Food Factory, to form the collectively-owned enterprise, Hangzhou Wahaha Group. By 1994, the Group had expanded their product offerings to include a variety of drinks.

    They now offered milk, yoghurt drinks, juices, colas, and bottled water, and had become China’s leading beverage company as a result. The Group’s rousing success can be partly attributed to the establishment of over fifty subsidiaries across China. Group Danone was founded in 1966 in Paris, France. Danone was originally a glass and packaging manufacturer, while also being involved in the food and beverage industry. During the early years, Danone produced fresh dairy products on a global scale, and offered a wide variety of other products, including cereals, biscuits, bottled water, and baby food.

    Because they lacked the resources to enter new markets that the bigger companies had, they formed a number of joint ventures with local companies in their host countries. Using this strategy, Danone proved to be successful, and expanded to over 120 countries around the world. Drawn in by the recently reformed and emerging Chinese economy, Danone began developing its business in China by building factories there. Danone also continued with their joint venture strategy by teaming up with local Chinese companies, including Hangzhou Wahaha Group.

    A joint venture partnership was formed between Danone Group and Hangzhou Wahaha Group in 1996. The agreement was facilitated by Peregrine Investments Holdings, a Hong Kong-based investment bank. In forming the joint venture partnership with Hangzhou Wahaha Group, Danone formed another joint venture entity, Jinjia Investments, with the Hong-Kong based Peregrine. Originally, Danone and Peregrine owned a total of 51% in the joint ventures, and the Group owned the remaining 49%. However, following Peregrine’s collapse during the Asian Financial Crisis, Peregrine’s role in the joint venture disappeared.

    The Jinjia joint venture originally consisted of two board members from Danone, and one from Peregrine. Peregrine’s board member, Francis Leung Pak-to, was forced to step down due to the financial crisis, and was subsequently replaced by another Danone representative (Food & Beverage 1). Jinjia shares were then transferred to Danone, making them the majority leader in the joint venture with the Group. At the inception of their joint venture in 1996, Danone and the Group formed four subsidiaries: Hangzhou Wahaha Baili Foods, Hangzhou Wahaha Health Foods, Hangzhou Wahaha Beverages, and Hangzhou Wahaha Quick Frozen Foods.

    Shortly after that, the South Korean company, Hyonong, sold its shares in Hangzhou Wahaha Hyonong Canned Food to Danone, and the company was then renamed Hangzhou Wahaha Foods. Hangzhou Wahaha Foods would become the fifth joint venture company that was formed, and this number would grow to thirty-nine by 2007, with a total injected capital of $131 million (Food & Beverage 1). Following the ownership restructure of Hangzhou Wahaha Foods, Zong Qinghou became the lone chairman for the Danone-Wahaha joint ventures. Hangzhou Wahaha Group had many incentives to pursue the joint ventures with Danone.

    First of all, 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 those assets that had previously belonged to the government. If this were part of their motivation to enter the joint venture, they would have been pleased by the fact that the majority of the shares that had previously been held by government were transferred into private hands by 2000. Furthermore, Wahaha was likely motivated to enter the joint venture by the promise of access to Danone’s production technology and foreign capital.

    Wahaha already offered milk and yoghurt drinks, juices, and bottled water, but Danone’s worldwide success in these markets could prove helpful to Wahaha in further establishing themselves in the beverage market in China. Additionally, Danone’s ties with other countries, coupled with their foreign capital and production technology, could give Wahaha the avenue they needed to expand their operations outside of China. While they had already established themselves as a prominent beverage manufacturer in their home country, Wahaha could benefit from partnering with Danone by using them to expand into a more global relevance.

    Again, this motivation panned out well for Wahaha, as the Group had become the fifth-largest beverage producer worldwide by 2006, with nearly half of their profits being attributable to the joint ventures with Danone. Similarly, Danone had a number of possible motivations for entering the joint venture with Wahaha. As mentioned earlier, Danone lacked the resources for start-ups entering into new markets or countries. Because of this, they had entered into joint ventures with other foreign companies in order to enter that new market. Similarly, Danone wished to form a joint venture with Wahaha to enter into China’s market.

    The fact that the Chinese economy had begun to thrive since the economic reform of the late 1970’s made China’s market particularly appealing. Additionally, China had the world’s largest population, which was another attractive aspect of the venture for Danone. If they could enter a joint venture with an established Chinese company, then they could share in the profits that result from the thriving economy and the immense Chinese population and consumer base. Firms typically enter into joint venture agreements in order to “create new products or services, enter new foreign markets, or potentially both” (Beamish 75).

    We have seen that Danone hoped to enter the new Chinese market, and while Danone didn’t enter into this venture to create a new product, they did hope to further establish themselves in the beverage industry, which Wahaha had proven to be dominant in. The joint venture proved to meet their expectations, as the partnership with the Chinese firm accounted for nearly 6% of Danone’s global profits. Furthermore, Danone likely was motivated by the fact that they could sell under the successful “Wahaha” brand name. Under the joint venture contract, the two firms agreed to produce food and beverage products bearing the “Wahaha” brand name.

    Danone likely anticipated that this brand name would prove very profitable for them, as it had been in the past for Hangzhou Wahaha Group. They were likely pleased by the fact that Wahaha was among the top four brands under Danone. In 2007, a dispute erupted between the two members of the Danone-Wahaha joint venture partnership. Danone went public with allegations against its partner, Zong Qinghou, claiming that Zong had been producing identical products bearing the Wahaha trademark and had been selling them using the joint venture’s distribution channels.

    They accused Zong of using an outside network of operations that he owned in parallel to the joint ventures to sell these products, thus cutting into the 51% profits that Danone was entitled to under the joint venture contract signed in 1996 (Areddy 1). Danone also claimed that the Group had been falsifying documents to ensure that these non-joint venture subsidiaries would be able to continue to produce the Wahaha products. Danone saw these actions as a reach of the “non-competition clause” that they had worked into their original joint venture contract, which says that they must not engage in any activities that are in competition with the businesses of the JV entities, including: production or distribution/sales. Danone estimated that its losses from Zong’s side ventures exceeded $100 million (Areddy 1). The Dispute began in 2005, when Danone noticed something peculiar in the Wahaha Group’s financial figures, which led to these allegations against Zong (Barboza 1). A number of factors led to the emergence of this dispute.

    First of all, the dispute seemed to be caused by the ambiguity of the contract. Zong insisted that, contrary to what Danone had claimed, the “Wahaha” trademark was never transferred to the joint ventures. Instead, Zong and the Group were the only legal owners of the trademark, and had every right to use it on other ventures without the need to seek approval from Danone. Additionally, Zong also considered the “non-competition clause” of their contract to be an attempt by Danone to take full control of the “Wahaha” trademark, and considered this to be unfair, since these obligations did not apply to Danone equally.

    The original terms of the contract partially led to this dispute because they were not entirely clear, and were not regarded as fair by both parties. Another factor that led to the dispute was the differing investment strategies between the French and Zong. Zong has long been an ambitious businessman, investing aggressively. When asked about the differences between Danone’s investment strategy and his own, Zong said that “whenever we wanted to expand the business, they said no… they refused to invest more, but they let us spend the money and then when the ventures made money they wanted in” (Kurtenbach 1).

    Zong wanted to continue to invest, while Danone was content to sit back and collect money on their previous investments. When asked about the joint venture match between the two companies, Zong expressed that he felt it was a bad match from the start. He believes that cultural differences also caused a lot of the resulting problems, because the French didn’t understand the Chinese market and the strategy that was necessary to be successful (Kurtenbach 1). There are both strengths and weaknesses to Danone’s argument in their allegations against Wahaha in the dispute.

    First of all, they are correct in asserting that Zong’s production of identical products outside of the joint ventures is a violation of their “non-competition clause. ” This clause, which was agreed on by both parties in the original contract, was intended to prevent such situations from happening. Since Zong’s production outside of the joint ventures prevented Danone from reaching these consumers and sharing in the resulting profits, this would be considered competing against the partnership.

    Although Zong considers this clause to be unfair and advantageous for Danone, this doesn’t change the fact that it was written into the original contract and thus must be followed. One weakness in Danone’s position in the dispute is the fact that some of the non-joint venture entities owned by Wahaha already existed prior to the joint venture partnership with Danone. Since this is true, this implies an acknowledgement of sorts by Danone of the legitimacy of these entities and the products that they produced.

    If Danone had no problem with these non-joint venture entities at the time the contract was formed, then there is no reason for them to question their existence at a later time. Zong argues that Danone knew about these ventures all along, and had only recently become jealous of their profitability, and that this was an attempt to purchase them cheaply and share in the profits (Barboza 1). Danone argued that these non-joint venture entities should not have existed in the first place; however their “silent acknowledgement” of these entities takes away from this argument.

    Contrarily, Danone is correct in asserting that Zong should not have created more of these non-joint venture entities after the contract had been formed, because this would be in violation of the non-competition clause of their contract. Another weakness of Danone’s argument lies in Zong’s claim that Hangzhou Wahaha Group never transferred the “Wahaha” trademark to the joint ventures. The Group was then the only legal owner of the trademark, and had every right to use the “Wahaha” trademark, without having to seek approval from the joint ventures. If this were true, then Zong had every legal right to se the trademark in his side ventures. Furthermore, Danone’s lack of contribution towards the joint venture in comparison to the Group’s doesn’t bode well for their claim on the use of the “Wahaha” trademark.

    The Group claims to have contributed much more towards the joint ventures profits than Danone had, which is why Zong believes that he has more of a right to use the trademark than Danone does. If I were a senior manager at Danone, I would recommend that we end the joint venture partnership and attempt to sell our 51% stake in the joint venture to Wahaha, rendering the Group as the sole owner of the brand.

    First of all, it doesn’t seem like the two firms have been a great fit in this partnership. The cultural differences and differences in investment strategy have proven to be an issue, with Zong basically controlling all investments for both sides. Secondly, Zong has proven to be very stubborn in his responses to the dispute, and doesn’t seem to be budging on his position. This would make for an ugly and possibly unsuccessful resolution to the dispute, since it is quite possible that the Chinese courts would rule in favor of Zong.

    Furthermore, the accusations and ensuing lawsuits being hurled back and forth between the two firms will only damage the company’s reputation. For example, Zong accused Danone of harassment and a smear campaign against him and his family, and even went as far as accusing Danone of treating the Chinese people poorly (Barboza 1). Danone should back down form this dispute and leave the joint venture partnership before their company and country’s reputation are severely damaged. Furthermore, Danone should exit the venture and sell their 51% stake to Wahaha in order to receive whatever money they can from this clearly dying joint venture.

    Understandably, losing the Chinese market would be a big blow for Danone. China was Danone’s fourth largest market after France, Spain, and the U. S. , and Wahaha business generated about 10% of Danone’s global revenue in 2006 (Areddy 1). While this is a substantial amount of their business, the loss could be recovered from. There are other markets to explore through new joint ventures, and the possibility of reentering the Chinese market is not completely out of the question. It would be difficult to become a dominant force in China without the Group’s distribution power r the “Wahaha” trademark, but it would not be impossible to become relevant, since they have some experience in the market.

    Overall, I believe that it would be in Danone’s best interest to end this ugly dispute with Wahaha, and sell the 51% stake in the venture to get some money out of it before things become too damaging to the company. In conclusion, although the joint venture partnership between the French company Danone and the Chinese company Wahaha had promise and proved to be successful for some time, it ultimately resulted in what would turn out to be an ugly dispute.

    When Danone got word of the non-joint venture products Zong had been selling under the “Wahaha” trademark, they felt as if they should get a share of these profits. Danone responded with a lawsuit, and a series of ugly accusations and further lawsuits were exchanged for quite some time. Because of this dispute, I would, as a senior manager at Danone, recommend that we end our joint venture partnership with Wahaha and sell our 51% stake in the venture to Wahaha, thus ending all ties with the Group.

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