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BIZCHINA / Weekly Roundup

Repairing relations for ventures

By Diao Ying (China Daily)
Updated: 2007-05-08 09:25

French food giant Danone wanted to find a way into China's vast market.
It needed a partner that understood the local business. Wahaha, one of
the country's biggest beverage makers, needed capital, technology and
international expertise to lead the market.

Danone took a 51-percent stake in a joint venture with Wahaha Group in
1996 to form one of the most successful joint ventures in China.

But cracks started appearing in the partnership several years ago. Wahaha
has been increasingly uneasy about Danone's ties with other Chinese firms
like Mengniu Dairy and Robust. And Donone revealed it wanted to take
control of Wahaha Group's other businesses, a public dispute erupted.

According to Danone, the joint venture was operating well until 18 months
ago when it discovered Wahaha had set up side ventures marketing similar
products.

Danone said it was considering legal action against Wahaha over the right
to use the brand, owned by the joint venture under the 1996 contract.

Zong Qinghou, the outspoken chairman of Wahaha, has drawn widespread
attention to the case. Zong, his distributors and even some local
government figures described Danone as a "foreign invader" of a national
brand.

Unlike other foreign ownership cases like Xugong and Carlyle, the
government has not weighed into the debate, despite all the media
attention. But it did issue a notice to Wahaha urging an end to the
public dispute.

"As China has already issued regulations on foreign mergers and
acquisitions of Chinese enterprises, the Ministry of Commerce will adhere
to these regulations so as to not only encourage foreign investment but
also to protect the rights and interests of Chinese businesses," said
ministry spokesman Wang Xinpei in answer to a question on Danone's
potential acquisition of Wahaha. That was the only response from the
government on the issue.

The government's neutral position has left enough space for the two sides
to solve the problem through discussion and agreement, according to Qiao
Xinsheng, a professor at the Zhongnan University of Economics and Law.

And that is also a reflection that nationalism and patriotism - be it out
of real concern, a colorful excuse or market strategy in disguise will be
less persuasive in an open market economy. Enterprises have to obey the
rules of the game. And if mistakes are made, they will have to deal with
the results.

The squabbling between Danone and Wahaha is largely the result of unclear
allocation of profits and investments. Under the contract, Wahaha gave up
ownership of the brand to raise its stake in the joint venture at the
very beginning. The Chinese company should have considered the cost of
losing ownership of its brand in exchange for technology and capital from
Danone when it signed the contract. Dumping Danone and establishing a new
brand, as Zong threatened in an interview, will not be that easy.

But it won't be easy for Danone, either. Zong's image as the
brand-builder and his social network with distributors complicates the
case beyond the legal issue. If relations between Danone and Zong
collapse, it will damage the joint venture. The venture's annual sales
are around $1.35 billion, 75 percent of Danone's sales in China, which
accounted for about 10 percent of its global total.

For now, as Danone suggested late last month, reallocating the benefits
and repairing relations seems to be the best choice for both parties.

(China Daily 05/08/2007 page15)

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