#97 Ooops, they did it again….

Danone-LogoPeople who follow foreign companies in China are well aware of the challenges that Danone has had in that market over the last few years. We’ll never quite know why Danone’s joint venture relationship went sour (not good for a company dealing in dairy products…) but it may not be completely unfair to assume that it often takes two to make and two to break a relationship. The simplistic and official story is that Wahaha reneged on a deal to let Danone buy the majority stake in the joint venture, after which Danone filed for arbitration and then took legal action. It probably was right there when the real trouble started. In China, you don’t sue your partner before a court of law, you chit-chat it out. But there was definitely more to it, including the fact that the Chairman of Wahaha, Mr. Zong Qinghou didn’t exactly appreciate the tight shackles that Danone placed on him in all business decisions – not recognizing that China is a market that often calls for entrepreneurial approaches rather than the central control that French companies are known for.

But these are things past. More importantly, Danone seems to be in the middle of its next quagmire. Granted, it was unfounded allegations of contamination that caused their Dumex baby food division to recall baby formula on a large scale, but the allegations of price fixing in the same product market were very real and ended in a fine ordered by Chinese courts (a total of $ 110 mio including five other companies) and more negative press by the media which is just waiting for Danone to get more scrambled egg on its face.

Then, as the Wall Street Journal reported last week, Danone’s Nutrica unit, a division which specializes in medical nutrition, had to deal with allegations that it bribed more than 100 doctors at more than a dozen hospitals in Beijing. How much more does Danone want to work on the image of the ugly, imperialist company? If that’s their goal, they can stop, because they have succeeded! If not, they can stop, too, because it is time to embark on a focused campaign to restore their own image and that of Western companies in China in general. And if they don’t care about image (let alone about being a good corporate citizen), maybe Danone should simply look at their challenges in China from a bottom line perspective as sales are already declining.

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6 Responses to “#97 Ooops, they did it again….”

  1. Thomas Pusterhofer Says:

    Hi there,
    I would like to expound this case by applying the model of Hofstede’s Cultural Dimensions to the issues mentioned. First of all I want to present the official scores Hofstede attributed to China and France.

    Power Distance: France (68) China (20)
    Uncertainty Avoidance: France (86) > China (66)
    Masculinity: France (43) > China (30)
    Long Term Orientation: France (39) < China (118)

    In the first case, the French company Danone did not make friends by legally charging Chinese Wahaha. Due to the face that China has strong collectivist characteristics, pointing out an individual (in this case a company) and embarrassing it in public (in this case court) is conceived as extremely shameful and degrading. Pride is surely also related to the strong power distance in China. Danone’s move there certainly spoiled the business relationship.

    The French headquarters of Danone putting “thight shackles” on the Chinese Chairman and forcing central control from Paris on him, was not favourable to the relationship either. China has an extremely high score in long term orientation and is therefore focused on business opportunities where they can emerge instead of being controlled.

    The contamination incident of Dumex baby food might be hardly related to cultural differences in general, but since China is aspiring after maximum control and safety in many ways, food contamination is totally unacceptable. China might have less diversity in their product range, but the ones available have to be decent.

    In the Danone Nutrica case corruption was exposed. Corruption is more likely to take place in companies with a very high power distance like China in the first place. France having a particularly high score in uncertainty avoidance did everything that ensured their success, not excluding illegal customs. Anyway, bribery also needs a party that accepts it in order to work, so maybe both sides are to blame here. However, Danone had to take responsibility for it in the press at the expense of the Western companies’ image in general.

    I hope this short hindsight analysis was insightful. It sure would be interesting to talk to the managers responsible in those cases to get their perspective.

    Regards,
    Thomas

  2. Daniela Höllweger Says:

    When clicking on the following link: http://geert-hofstede.com/china.html you can analyse the disparities concerning the 4 national cultural dimensions of Hofstede between France and China and will help you to follow my opinion.

    In my opinion, the not adhered deal on dedicating the majority of the joint venture to Danone by Wahaha can be led to the high value of China concerning masculinity. They are driven by success which means that in case of partnerships the chinese business partners need to dispose of enough power of decision in order to contribute to or to assure success. Moreover, also the high ranking in the dimension of power distance is responsible for the decision made by Wahaha as they long for leadership and control. It would have been too risky for them to delegate the majority to Danone, a French company with different views and management approaches regarding the discrepancies in the four dimensions of Hofstede. Though France is also heading for a high control and leadership (maybe one of the reasons why they insisted on the majority) they allocate a high importance to the avoidance of uncertainty, in other words french companies are not very risk taking and trusting not that well known partners with other attitudes can be seen as very risky.

    But Danone decided on a big mistake by suing Wahaha for not observing the deal as it is not common in China. As the Chinese are a very collectivist culture they try to solve conflicts by discussing them and trying to sort them out on their own. France is known for being individualistic and as in this case deciding on their own without a prior conversation with the partner. This approach caused a bad image of Danone in China.

    Due to their high score in uncertainty avoidance the French enterprise Danone dictated Wahaha many guidelines concerning how to operate in the chinese market. In comparison to France, China prefers more freedom and is adaptable and entrepreneurial.

    Not enough, Danone supported the already gained bad image by the need to recall baby nutrition products because of contaminations, by price fixing within the same market and to top it all by the bribery of more than 100 doctors in Beijing concerning their medical nutrition products.

  3. Ulrike Klappa Says:

    First of all I would like to say, I totally agree with you Thomas and Daniela. Using Hofstede’s model is a great way to explore the mistakes Danone has made by not having considered cultural differences.

    China and France both have a quite high PDI (Power Distance Index). However, there is a significant difference between China with a score of 80 and France at 68. This leads to the fact that Chinese workers would never officially disagree with their French (or Chinese) superiors, no matter if they were right or wrong. French managers, on the other hand, might have considered the opinions of their Chinese employees, but, as described, their employees would not dare to speak. This could be one problem the cooperation between Danone and Wahaha had faced.

    In addition to that, there is a distinction between the masculinity index in China (66) and the one in France (43). The Chinese society is a very masculine one. This means, that work and success is everything. In contrast to that, France is a little more oriented to femininity. This mismatch can lead to a totally different view of how to manage employees. Materialism and success stands against the quality of life. Also this certainly influenced the joint venture between Danone and Wahaha.

    Furthermore, the Chinese and French cultures differ in terms of individualism/collectivism. Whereas France scores quite high at individualism with 71, China has a very collectivistic society (score 20). This difference is one major aspect of the mistake, Danone made by legally charging Wahaha. Not considering the public disgrace this legal action brought to Wahaha, Danone did the worst they could. Instead of negotiating in private, they officially and (in the Chinese society really tough) individually blamed Wahaha.

    As a last point, but truly not as a less important one, I would like to mention the uncertainty avoidance. While in China, with a score of 30, the uncertainty avoidance is not the biggest issue, in France (86) it surely is one. Chinese people might trust more in what the doctors tell them, particularly in combination with the power distance that might exist between a doctor and his/her patient. French people tend to hedge against every possible risk – with every possible measure, obviously including the more illegal ones. By bribing those doctors, Danone destroyed the rest of the credibility they might have had left after their first big mistake.

    In conclusion, having a look at attempts to explain differences in cultures, would have helped Danone to avoid situations like these. Companies can consider that as a bad example that we all can learn from. We don’t know whether Danone will be successful in China on the long run, but for now it doesn’t look like as if they would. The only possible way I can imagine is to totally re-launch the Danone brand and strategy, probably better under a completely new name.

  4. Fabian Kampl Says:

    At first, I have to agree with your comments and I think that this case was well explained by the model of Hofstede. That is the reason why I do not explain it again with this model, because I think we have all got it.

    There are just a few things in general which I want to add.
    In my opinion a lot of companies still do not see the strength of the Chinese economy. They are the world largest exporting country and the second largest national economy and that is simply amazing.

    Furthermore Danone definitely do not want to has a partnership of equals (like Daimler-Chrysler), but they forgot one important fact. Chines do not want to lose their face and so they got really ashamed by the dominance of Danone.

    Another interesting fact is that the masculinity index of China (66) is much higher than the MAS of France (43). Why was France much more dominate and ruthless as China, shouldn’t it be conversely?

    At last I want to show you that this wasn’t the first scandal of Danone and that this company is often under-fire by the press and economy experts.

    http://mipedia.com/danone-a-huge-scandal-in-the-u-s/

    Danone was under-fire for the promise that Actimel and Activia will improve the immune system of the consumer. Danone got the “award” for the most barefaced lie in a commercial.

    Best Regards
    Fabian

  5. Lisa Flo Says:

    Hi,

    First, I would like to agree with all of you. As the article points out, Danone has made some huge mistakes when investing into the Chinese market. Using Hofstedes dimensions is a great way, to identify the differences of countries or cultures concerning to power distance, individualism, masculinity, uncertainty avoidance and long term orientation and according to Thomas’ post it can be seen that China and France are fare away from equality.

    Ulrike points out the gaps between China and France according to different scorings of Hofstedes dimensions, and the problems that can be caused due to this pretty well. Even if France can be seen as a short term oriented country the main objective of any establishment or organization should be continuance and increase. In order to this, in my opinion it is absolutely careless not to do research on consumer behavior on one hand and on the cultural background of business partners on the other, before entering a new market.

    In the case of Danone, not just the relationship with the chairman of Wahaha went sour, but additionally the company managed to lose face towards their customers by bribing doctors and hospitals.

    Finally it can be said that Danone has hopefully learned out of their mistakes and they are trying to do better in the Chinese market as well as in their other markets in the future.

  6. Helmut Staubmann Says:

    I totally agree with this article that DANONE got into a dramatically catch-22 situation and it would be really hard for them not to upset the boat. As far as I can see they only have one slight chance to get their problems under control. They have to make a total U-turn of their public appearance. They cannot sit back and wait that the problems will be resolved by itself. They have to restructure completely their strategies for the Chinese market (and maybe for the world market too). It is absolutely necessary for DANONE that they turn their evil image into reliable and trustworthy corporate image.

    Referring to this article (http://uk.reuters.com/article/2013/10/15/uk-china-danone-bribery-idUKBRE99E01Y20131015) the suspension of their current management from Dumex infant milk powder operation might be the first step into the right direction. But they should not believe that with an exchange of the management everything is back in order.

    They have to realize that this U-turn will be really expensive and a tough job for each and every member of the DANONE cooperation. But if they stay focused they will emerge victorious at the end of the day. Because one thing is for sure, and that is that Danone operations in China should become successful in the future or the whole company will get even more problems than it already has.

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