Professional report on negotiation between
Danone and Wahaha (2007-2009)

On the 30th of September 2009 an almost 12 year relationship between French multinational enterprise Danone and Chinese Wahaha group ended by Danone withdrawing from the IJV (International Joint Venture) for monetary settlement. This report analysis the negotiation journey of the dispute and tries to classify the different negotiation steps based on the challenges of negotiating business deals in China. As a tool IRENEs framework on “Who/ How/ What” is used. Based on the analysis of the negotiation and the review of the cultural differences between western oriented and Chinese businesses suggestions will be made what could have been done differently by Danone.

Overview of the Situation between Danone and Wahaha early 2007

The multinational Danone Group SA based in Paris in France is one of the biggest players on the global dairy product and bottled water markets. They are active on all five continents and the net sales in 2007 was more than 12 billion €.
The Hangzouh Wahaha Group Co., Ltd. is a company that has grown from a small business, selling drinks to school children to become one of the most important and largest Chinese bottled-water companies already in 2007. Although it is difficult to find detailed financial figures on Wahaha it can clearly be stated that in 2007 the Group was much smaller than Danone. At that time Wahaha contributed approximately 6% of Danone’s profits. Wahaha was successfully developed by its founder Zong Qinghou who is an exceptionally gifted business man and had the right approach to develop a business in China over many years in accordance with customer demand and government policy.
In 1996 both companies setup their first joint venture (JV) in China. Prior to China joining the WTO (World Trade Organization) in 2001, local partners were required by Chinese law to enter the market. On the other hand Wahaha profited from Danone’s export of expertise in the area of management skills, product management, finance, technology and processes. The number of JVs throughout the years increased to 39 with the revenue increasing from a couple of hundred million RMB to more than 14 billion RMB in 2006. The total share of Danone of the 39 JVs was 51 percent. Mr. Zong Qinghou was appointed the board chairman position of the JVs. Danone’s growth strategy has been to develop international joint ventures (IJVs) particularly in fast-growing emerging economies like China, India and Pakistan. Thus the IJV with Wahaha fitted well in their portfolio. During the 10 years between 1996 and 2007 the investment of $170 million Danone put in the enterprise had paid them back $307 million. By 2006 Wahaha Group controlled 70 subsidiary companies of which 39 had IJV relationships with Danone. The other 31, which used the same brand name “Wahaha”, were solely controlled by the Wahaha Group.
During this decade China and the world has seen big change. China has taken a leading role on the world stage and became the so called factory of the world. The transfer of sovereignty of Hong Kong and Macao to China took place and Beijing won the bid to host the 2008 Summer Olympics. At the same time the steady reform of China and the enormous economic growth have changed not only China itself but the whole world. Looking at those changes and the tremendous change of the business environment, the country China of 2006 was a different world compared to the China of 1996.
Overview of IJV journey Danone and Wahaha (1996-2006)

1996/02 The Wahaha joint venture (IJV) is formed among three entities: Hangzhou Wahaha Food Group (Wahaha Group), led by its chairman Zong Qinghou; Danone Group, a French corporation (Danone); and Bal Fu Qln, a Hong Kong corporation (Baifu). Danone and Baifu invest under a Singapore JV named Jin Jia. Upon the formation of the IJV, Wahaha Group owns 49% of the shares, Danone 25.5% and Baifu 25.5% Wahaha Group changes status from state-owned enterprise owned by the Hangzhou city government to private corporation, effectively controlled by Zong. The Wahaha trademark transfer is rejected by the China's Trademark Office (CTO)
1998 Danone buys out the interest of Baifu becoming 100% owner of Jin Jia and effectively 51% owner of Wahaha JV.
1999 Danone and Wahaha Group enter into an exclusive license agreement for the Wahaha trademark. Wahaha IJV registers an abbreviated trademark license which is accepted by the Trademark Office.
2005 - 2006 Danone learns of Zong’s non-joint venture subsidiaries and insists on controlling 51 percent of said non-joint venture companies. Zong refuses the request. Overview of negotiation journey Danone and Wahaha (2007-2009)

2007/04/01 Zong publicly criticizes Danone
2007/05/09 Danone initiates arbitration against its Chinese partner Wahaha in Stockholm
2007/06/04 Danone initiates lawsuit against Ever Maple Trading, a BVI corporation with offices in California and Kelly Zong, allegedly daughter of Zong Qinghou. Zong resigns from board chairmen position of all JVs with Danone
2007/06/13 The Wahaha Group applies for an arbitration hearing by the Hangzhou Arbitration commission, declaring that the trademark license with Danone was illegal at the time it was granted because it avoided the requirement of brand name transfer by Chinese law.
2007/07/02 Wahaha Group threatens to bring a derivative action on behalf of the JV against the three Danone appointed directors of the JV, claiming that said the directors have violated Chinese Company Law by serving on the board of companies that are competitive with the JV.
2007/11 Trade union representing 10.000 workers sues Danone and freezes Danone’s ownership in the JVs leading to unsatisfactory revenue growth.
2007/12 Political dimension: After talks between French President Nicolas Sarkozy and Chinese Minister of commerce an agreement is reached to call off lawsuits and arbitrations.
2009/09/30 Danone withdraws from IJV with Wahaha for monetary settlement.

Analysis of negotiation process between 2007 and 2009
.
At the start of the IJVs both parties Danone and Zong representing Wahaha had their own interests. Danone had the need to develop a growth strategy that would satisfy their stakeholders because the domestic markets were already saturated. They chose as part of their growth strategy to use IJVs to enter fast-growing emerging markets. In addition Danone had the need in 1996 to work with a partner for legal reasons.
Wahaha on the other hand was in need for cash for growth. They were interested in the transfer of technology and processes from Danone. For example they had the need to receive timely technical support for product quality development, which was a very important issue on the Chinese market. To be competitive and distinguish from other suppliers implementing measures to ensure and improve quality was a must for them.
Following the fairly successful IJV relationship between Danone and Wahaha represented by Zong Qinghou over nearly 10 year a dispute arose that can be traced back to 2005. At that time Danone had discovered, that Zong had established 31 Wahaha subsidiaries using the same name as the IJVs with Danone. Now Danone who owned 51% of the 39 IJV’s with Wahaha wanted to take over the other 31 subsidiaries of Wahaha as well. Both parties could not agree on a price at that time. Zong didn’t accept the offer from Danone as he claimed that the companies were worth more as $790 million compared to the $566 million offered by Danone.
Why the two parties weren’t able to find and agreement was based on several factors. The main issue was the dispute of an agreement around the trademark transfer from the Wahaha brand to Danone which, for legal reasons had never been completed. Both parties had a different perception of this legal situation and for that reason had the perception not having been treated in a fair way. Danone on the one hand claimed that Zong had illegally build up the other 31 brands breaching the JV agreement. Zong on the other hand and this is a generic Chinese perception did not accept that a 51% ownership of the company grants the full control. In China you should at least own 60% or 70% of a company to ensure you have the power to control. At the same time Danone was also cooperating with competitors of Zong in the Chinese market. He also claimed that Danone kept quiet with respect to Wahaha’s use of the trademark and apparent breach of the non-compete agreement over years. All those arguments led him to the assessment of the offer being a hostile takeover. Both parties evaluated the situation as being in favor for them and no common ground for an agreement, to consolidate the 39 Dananone/Wahaha IJVs and the 31 subsidiaries controlled by Zong, could be found.
The initial start of the negotiation journey between Danone and Wahaha in 2007 started with Zong publicly rejecting the offer and criticizing Danone. This action started to involve the public as additional stakeholder in the whole dispute. The public view and the PR of the two parties became an important role in the course of the development over the battle of Wahaha. The Wahaha Group was generally seen as a national treasure by most parts of the Chinese public, personalized through the representation of Mr. Zong. He was and most likely is perceived in some respect by the Chinese public as national hero. So opening the discussion to the public the dimension of “Nationalism” was added to the dispute. This perspective can be explained partly at least with bad historical experiences of China with foreigners over the past two hundred years (e.g. Opium Wars, destruction of Summer Palace in the 19th century).
However Danone trusted that the law was on their side and their view of the legal situation was the right one. After the rejection of Zong Danone in the aftermath produced the following press release:
Danone Announcement on the Wahaha Dispute (Groupe Danone. News and Events, 2007a)
On April 9th, as the majority shareholder of Wahaha joint ventures, Danone sent a formal letter to the Chairman of the Wahaha joint ventures, requesting him to take legal actions against Hangzhou Wahaha Food and Beverage Marketing Co. Ltd, who illegally sells the products which are the same as Joint Venture’s products under Wahaha trademark without proper authorization. This is our first step of legal actions, and we set a time frame of 30 days to solve the dispute.
As of today, Wahaha Joint Venture management has not taken any actions against non JV’s illegal activities.
Therefore Danone has commenced appropriate proceedings today. Danone will not comment further on such procedures and its discussions with its partner.
Groupe Danone still hopes we can solve the dispute through peaceful discussion, and we are working hard towards this direction.
Groupe Danone appreciates all your attention and we will update you in timely manner when we can report further progress.
Group Danone had decided to go down the route of legal actions involving the judiciary as another important stakeholder in that conflict. Of course after the above announcement, actions had the follow and Danone launched those shortly after the announcement. In May 2007 Danone filed arbitration in Stockholm as required in the original JV agreement. Here Danone Asia Pte Ltd. and Hangzhou Wahaha Group Co. Ltd., three Wahaha mirror companies and Zong Qinghou were the Claimant and the Repondents. The claim Danone made was the violation of JV contract and the violation of the service agreement. In addition Danone filed a lawsuit against two Wahaha mirror companies and Zong’s wife and daughter and California. The claim Danone made here was illegal sales of same products and illegal use of Wahaha JVs’ resources. Zong had started a series of non-joint venture companies through the Wahaha Group that sold the same products under the same Wahaha trademark. Those were partly owned Zong and partly by an offshore British Virgin Island company owned by Zong’s daughter and wife. In Chinese culture the trust towards the family is much higher compared to the western culture and therefore for Chinese businesses it is a logical consequence that family members are deeply involved in the business. Although Zong had breached the JV agreement with the setup of the non- joint venture subsidiaries the action against his wife and his daughter was most likely perceived by him as a personal attack. When he learned about the lawsuit against his family he resigned as the board chairman of all the IJVs with Danone.
Now Zong decided to fight back in kind and the Wahaha Group applied for arbitration before the Hangzhou Arbitration Commission, Zhejiang against the Danone-Wahaha JVs. The claim was about the transfer of the trademark being invalid. The initially intended transfer of the trademark had never been completed because China’s Trademark Office had rejected the transfer. They argued that the trademark belongs to the state and Wahaha group did not have the right to transfer it to a private company. The following text was posted on Wahaha’s corporate website on the section “company news”. The way Zong perceives the situation can be seen in that text. His view is that Danone is a hungry short-term profit oriented company whereas Zong himself and his company represent China’s long-term interest
Wahaha and Danone Gaming on ‘Emotions, Reasoning and Laws’ (Wahaha Group. Company News, 2008)

VII. We have ended with the reasoning and started getting justice
[1] Wahaha and President Zong had a hard cooperation with Danone for 11 years . . . sustained by adopting the strategy of ‘Danone get out of the way, we earn money, and you wait for your shared part, without one penny less.’ We really couldn’t figure out why you do not satisfy with the good deal, but choose to stir the mass.
[2] Now because of the failure on low-price acquisition, Mr. Emmanuel Faber broke up the relationship with us so fast, . . . the arbitration would bring you the money more easily by submitting a few papers . . .
[3] You have been ignoring the Chinese laws and regulations . . . Firstly, we negotiate everything according to the law henceforth . . . Secondly, we would prepare a positive response to the lawsuit in Stockholm . . . We would submit an arbitration request at an appropriate time . . .
[4] . . . we would be able to do whatever you are able to do. ‘Just as the weary traveler despairs of finding a road, a village appears and the shade of willows and riotous flowers beckon.’ . . . We could also tell you that the situation in Wahaha is now ‘Forests blaze red beneath the frosty
The interpretation of the text needs to take into accounts the sources of the citations used which are from a Sung Dynasty poem, a Mao Zedong poem and the heroic poem “Loushan Pass” form Mao. A detailed interpretation can be found in [1]. It shows that Mr. Zong’s and Wahaha’s negotiation strategy is deeply connected to the Chinese culture and the Chinese history. This example is another evidence which leads to the conclusion that his approach in terms of negotiation strategy was based on the “Chinese meaning” of a “Contract”. The basic Chinese mentality of contracting is problem solving based on the changing situations instead of contracts (IRENE, Negotiating Business Deals in China, Ta-Wei Chao). That means that there are always renegotiations even after signing the contract. A very good example for the this kind of negotiation strategy is the transfer of the trademark which Wahaha and Danone agreed upon at the beginning of the their JV relationship.
The first IJV contract included an agreement that the Wahaha trademark was brought to the Joint Venture as contribution. The Wahaha Group also agreed not to use the trademark for any independent business activity or allow it to be used by any other entity. Then it happened that the Trademark Office of China would not allow the transfer. The problem was solved by both parties working around the issue by filing in an abbreviated license. Although there is no detailed public available information on that negotiation process, it seems that Zong could convince Danone to go ahead with this approach although from a western businessmen view the issue of the transfer of the Trademark was still pending. Danone’s strategy at that point in time seemed to be to accept the legally insecure situation and rather go ahead with the IJV’s than looking for other possible options. Danone was hit hard later when the Hangzhou Arbitrations Commission decided the case in favor of Zong and Wahaha. The following text illustrates how Danone perceived the decision in total disbelief this could have happened:
Groupe Danone’s Media Statement on Hangzhou Arbitration (Groupe Danone. News and Events, 2007b)
Today we have received the decision issued by the Hangzhou Arbitration Commission (HZAC). We are shocked by the result, simply because this was made after the key evidence presented by Hangzhou Wahaha Group for its arbitration request was completely rejected by the fundamental facts of the matter . . . In the arbitration, the key evidence of Wahaha Group was a letter issued by the State Trademark Office (STO) to Zhejiang Administration of Industry & Commerce on June 7, 2007, entitled ‘Reply on the Status of Examination of the Application for the Wahaha Trademark Transfer’ (the ‘STO Reply’). Based on the STO Reply, Wahaha Group claimed that the trademark transfer was ‘rejected’ by the STO.
However, the STO has already made clarification about the STO Reply in its legal papers in September 2007, pointing out that Wahaha Group’s 1996 and 1997 submissions were not duly made applications for trademark transfer and therefore the STO’s informal response could not be an official action on the trademark transfer, and that Wahaha Group had never completed formal application process and therefore the STO had no ground to either ‘approve’ or ‘reject’ it.
Based on these facts, it is very clear whose position is right in the arbitration. Regrettably the HZAC has totally ignored these fundamental facts in making its wrong decision that the TTA had been terminated.
Latest at that stage were Zong filed in the case of the trademark to the Hangzhou Arbitration, had the two parties stopped looking at their interest to try to analyze the situation with the options that would help them to find a congruent goal. Both parties had moved back to positions fighting for their convictions instead of trying to work on a joint solution which would help both sides. This attitude lead to at least 12 publicly know arbitrations and court actions in 7 different jurisdictions until the Fall of 2007 of which tree of them have already been introduced above. After Danone filed another legal action against Wahaha in France several Wahaha companies initiated proceeding against Danone nominated JV directors. The claim was that they were working on the boards of Danone-Wahaha JVs and other Chinese companies which were competitors of Wahaha at the same time. In the following month towards the end of 2007 the situation began to get worth and the publicly fought bitter quarrel escalated more and more. At the end of 2007 even Wahaha’s trade union sued Danone demanding $1.36 million in Damages. The union was even able to freeze Danone’s ownership in the JVs. Now the case even reached the level of the highest political circles. In November 2007 the issue was discussed by PRC president Hu Jintao and French President Nicolas Sarkozy. Following this escalation both parties announced a truce in December 2007 and that they are willing to resolve the dispute by negotiation. Negotiations over several months did not result in a resolution of the situation. Wahaha rejected a proposal (March 2008) by Danone to merge the China assets of the two companies and list 20 percent of the new JV’s shares. At that point in time the only remaining option to stop the ongoing conflict between the two parties was divorce. Finally after another 18 month had passed by Danone withdrew from the IJV for a monetary settlement in September 2009 which both sides had agreed upon.

Suggestions on different negotiation options of the chief negotiators of Danone

Although Danone defended the IJV strategy with the words: “If we now have 30% of our sales in emerging markets and we build this in only 10 years, it’s thanks to this specific [JV] strategy. We have problems with Wahaha. But we prefer to have problems with Wahaha now to not having had Wahaha at all for the last 10 years.” it is clearly not the outcome Danone would have wished for and the question can be asked what could or should they have done differently to avoid that situation.

We have identified several matters which had an impact on the negotiation journey:

• Ownership and Nationalism
• Managerial involvement at the operation level
• Public Relations strategy (mainly in China) and how to manage negative publicity
• Transfer of technology and processes

The biggest matter of the case was the one of Ownership which is also linked to the subject of Nationalism. The roots of the conflict between Danone and Wahaha can be traced back to the very beginning of the IJV. It is important to understand that the Chinese perception in terms of having control over company is different than the one of western businessmen. In western countries a majority bigger than 50% is usually enough to control the company even if it is only minimal like 51%. This is the reason why western companies usually try to go for a 51% share in a company if they do not want to invest much more anyway. In China this generally seen differently and a majority there is expected to be at least at a 60/40 or 70/30 divide of the shares.
In case of the Wahaha dispute it seems that this differences in business culture perhaps led to a misunderstanding in that Wahaha felt outsmarted by Danone. In that case it was even more tricky since Danane didn’t have the 51% share from the beginning but only a 25,5% share. Only when they bought the 25,5% share from Bai Fuqin did they have the full control in their opinion. Wahaha did never have the chance to become the major shareholder since they haven’t been given the chance to bid for the shares from Bai Fuqin. This was quite frustrating for Wahaha who wanted to be the biggest shareholder himself. On the other hand Danone in the end did also not succeed since due to the differences in national culture they weren’t able to control the IJV through ownership. Furthermore Zong strengthened his position by arousing nationalistic sentiments to create positive image for Wahaha. In hindsight Danone might have been better of at the and if they would have chosen a different approach. If Wahaha would have been given the chance by buying parts of the Bai Fuqin shares they could have gained full control of the IJV. I could have been a good opportunity for Danone to insist in return on the completion of the transfer of the trademark to the IJV which had never happened. Also the chance to get the transfer approved by China’s Trademark Office might have been much higher with a Chinese majority shareholder.

Another important matter Danone seemed to underestimate was the involvement in the day-to-day running of the company. A 51% share of an IJV in China does not give you control. It is different from western countries. In this case Danone was relying on the managerial control of the business by Wahaha. Danone needed to make sure they get involved more in the operations of the company to gain control. Therefore they should have insisted on the power to appoint and control the managing directors and the general managers of the IJVs. Not only would they have gained more control over the operations by doing so, but in addition it would have opened an opportunity to understand better the needs of the Chinese partner and avoid frustration because of different expectations e.g. the involvement in products and improvement of quality.

Public in relations in China are an important issue and Zong did know how to make use of it for its own purposes. On the other hand Danone did not seem to have the right touch to handle PR in China in the right way. It is necessary to have a clear PR strategy to be able to manage how it appears in Chinese media. Below is an example on how the Danone case was reported on the news.

Danone to appeal after losing dispute to Wahaha (Chinadaily, 11 December 2007)

French food group Danone Tuesday voiced displeasure and vowed to appeal after losing its battle with Chinese beverage giant Wahaha Group in a trademark dispute.

Danone said that it was ‘shocked’ by the verdict handed down by the Hangzhou Arbitration Commission the previous day and would appeal according to the legal procedures . . . The move was the latest in the dispute between the Chinese drink group and the French giant that emerged in April and has become highly public.

Danone did struggle due to the lack of a good PR strategy and PR work to get their views across in the Chinese media. They had problems getting away from the image of being a foreign multinational company trying to take over a national Chinese brand. In the course of the negotiation it did not seem that Danone had been carefully planning their PR strategy including the anticipation what Wahaha will do as a response to Danone’s actions. This led to public discussions in China whether Danone products should be boycotted. It was also publicly discussed how Danone may be damaging its reputation. Especially for foreign companies in China it is important to understand the Chinese culture history and the perception of businesses entering the Chinese market in order to develop a clear and successful PR strategy.

Another important matter in the Danone Wahah case is the common understand of the needs and interest of the other party. Here it seemed that Danone did not really understand and focus on the need of Wahaha with regard to technology and process transfer and wish for deeper involvement with new product developments. For Wahaha this was an important need since they wanted to have an advantage when competing on the Chinese market. For example, Danone achieved top quality in its bottled water division with Evian, but there was no quality difference between the IJV’s bottled water and other brands in China. The idea of Danone not to transfer technology to the local partner in a way it had been expected by Wahaha seems to have caused frustration. This for sure didn’t help the further negotiation process. Therefore Danone should have developed a clear strategy as well with regard to the transfer of the technology and processes to Wahaha. This matter also sheds some light on the already mentioned lack of involvement of Danone with the Wahaha JVs. They seemed to have made no attempt to integrate themselves within the JVs. This matter is also linked with the matter of managerial control which has already been discussed above.

Summary

References

[1] Isabel Corona, Universidad de Zaragoza, Spain and City University of Hong Kong, China, Confidentiality at risk: The interdiscursive construction of International Commercial Arbitration
[2] Jingzhou Tao and Edward Hillier, May-June 2008, A Tale of Two Companies, chinabusinessreview.com
[3] Peter Ollier, Danone v Wahaha: the lessons for trade mark owners, Managing
Intellectual Property. Nov2009, Issue 194, p6-7. 2p. 1
[4] Pingying Zhang and Cheryl Van Deusen, 2010 4(1), University of North
Florida, French Danone and Chinese Wahaha: Yet another Example of an unsuccessful International Joint Venture, International Business: Research, Teaching, Practice
[5] Steven M. Dickinson, Shanghai office of Harris & Moure PLLC, Danone v. Wahaha, 10/8/2007, China Economic Review
[6] Sunny Li Sun and Hao Chen, University of Texas Dallas, Opening Case:
Danone versus Wahaha: From Alliance to Divorce