Wahaha or who’s having the last laugh
The war of words between Danone and its Chinese partner Wahaha is a lesson in greed, cultural misunderstanding and crude but effective spin doctoring.
Doing business in China has never been a piece of cake if recent reports in the international media are to be believed. Readers of the London newspaper The Economist will remember a story a few weeks ago which told of the plight of western brands at the hands of Chinese consumer watchdogs and other government bodies. Playing the media skilfully, the authorities instigated scares of various sorts. These would lead to consumer boycotts from which the western brands took a long time to recover although later research would reveal that the accusations were wholly unjustified in the first place. According to The Economist, one company to have suffered badly from a safety scare is Procter & Gamble (P&G). Last September the authorities banned its SK-II beauty products after they found traces of chromium and neodymium. Never mind that these substances are tolerated throughout the world, are in locally made cosmetics and that the quantities were less than 1 percent of the level the World Health Organisation considers acceptable in foods. Still, Chinese newspapers reported that the creams could cause skin irritation and damage to the liver and lungs.
At whose behest did they whip up consumer anxiety?
After the negative reports on P&G, thousands of consumers are said to have stormed stores to demand refunds (often for counterfeit products). An angry mob even smashed the glass doors of P&G’s offices in Shanghai. A month later the Ministry of Health declared SK-II products safe. Yet in March, six months on, P&G is still struggling to restart SK-II sales in its former outlets.
The Economist concludes that western companies and brands have to face up to a new challenge in Chinese: protectionism which comes in the guise of bad publicity.
Danone’s troubles in China are of a different calibre. Bad press may seem the least of worries that Danone’s management has. The public spat between Danone and its partner Wahaha could potentially derail a joint-venture which was once held up as one of the great success stories between a western multinational and a local Chinese company. When Danone, a French food giant, acquired a 51 percent stake in Wahaha Beverage, a Chinese firm, in 1996, it considered it a coup. No minority stake for Danone. No, Danone got the majority in a partnership which turned the founder of Wahaha, Zong Qinghou, into a dollar billionaire and most recently contributed 5 percent to Danone’s operating profits with recorded sales of more than EUR 1 billion last year.
Apparently Mr Zong has been unhappy with the terms of the contract for some time which require him to ask Danone for permission if he wants to use the Wahaha brand on products launched by his own company. Alluding to China’s colonial past, when it was the victim of foreign invasions, Mr Zong, by all accounts, accused Danone of trying to take control of Wahaha’s subsidiaries that are not part of the joint-venture. Wahaha’s structure is extremely complicated with more than 100 companies that bear the three letter name Wa Ha Ha according to Chinese sources. Among them are 39 subsidiary joint-venture companies with Danone and there are even more employee held NJVEs (Non Joint-Venture Enterprises).
These NJVEs must have made Danone’s management furious. They suspected that these companies were set up by Mr Zong to mirror the joint-venture companies in order to sell identical products. Danone also claims that the parallel organisation was so large that it was making profits similar to the joint-venture.
Whether Danone decides to take the matter to court or whether it retaliates in kind through the media against Mr Zong, the problem remains: what to do about Mr Zong? Like it or not, Mr Zong is the driving force behind the whole Wahaha organisation. As was argued in the media: winning in the courts or pushing out Mr Zong are not solutions to Danone’s problems.
The whole tryst between Danone and Wahaha has even more profound implications. It reflects on the nature of joint-ventures in China in general. Danone is hardly the first to have encountered such obstacles. Faced with a geographically vast but promising market obscured by a thicket of complex and contradictory rules, many foreign firms have entered China via joint-ventures—and later left under a cloud, tearing their hair. The list includes about every industry, from cars (Peugeot), to spirits (Rémy Martin), to beer (Foster’s), steel (Fletcher Challenge), media (News Corporation) and even telecoms (too many to list).
In theory, argues The Economist, the case for joint-ventures in China was compelling. The foreign partner provided capital, knowledge, access to international markets and jobs. The Chinese partner provided access to cheap labour, local regulatory knowledge and access to what used to be a relatively unimportant domestic market. Although the Chinese government protected swathes of the economy from acquisitions, it nevertheless provided land, tax breaks and at least the appearance of a welcome to attract investment.
In practice, these arrangements have collapsed for three reasons. As says The Economist, Chinese companies were happy to receive money and technology, but did not want to be mere adjuncts to foreign firms. In many cases they have large, often global, ambitions of their own. Also all too often the allocation of profits and investments was unclear, leading to endless squabbling. But perhaps most importantly, China has gone through profound changes over the past decade which have led to the decline of joint-venture’s general appeal. In other words: Chinese companies are no longer seeking foreign partners.
Contradictory as it may seem, while China has become far more open legally because of commitments made to the World Trade Organisation, its desire for foreign investors has abated. In fact, the general sentiment has become increasingly nationalistic and self-complacent.
When Danone made its investment, Wahaha claimed it knew little about business and welcomed a partner. Now, alive to the opportunities, it is outraged that it must clear plans with a foreign majority owner who has its own alternative strategies in China through various other joint-ventures—and it is even more outraged that Danone wants full ownership.
Somehow the conflict will be solved. But how - we shall see.
