#137 Au revoir and zaijian, Danone!
In 1996, French dairy and water giant Danone entered the Chinese market. Recognizing that in order to succeed in the Chinese market, one had to have a good understanding of consumer behavior, access to suppliers, as well as outstanding network relationships – the famed “guanxi” – with government agencies and distribution channel partners, Danone decided to enter into a partnership with a local Chinese company, Wahaha. The partnership started out with a holding joint-venture, and should eventually grow to a total of 39 different joint-venture entities by 2007. Danone held 51 percent of the joint-venture, and left the Chinese partner with full operational control. Initially, things seemed to go well for the partners. Danone contributed the resources of a well-established multinational – its brand, products, and capital – and combined them with Mr. Zong Qinghou, Wahaha’s founder’s capabilities and contacts. Both Danone and Wahaha products rapidly gained market share, created sizable revenues for Danone, and made Mr. Zong a billionaire.
Then, however, close to a decade into the joint venture, things started to sour. Mr. Zong was no longer content with the original terms of the joint venture agreement. He felt offended by Danone’s behavior and openly voiced his disdain for Danone’s executives’ arrogance and lack of understanding of Chinese culture. Danone, on the other hand, was frustrated as it had unsuccessfully tried multiple times to acquire a higher stake in the joint-venture. The disputes entered the public sphere in 2007, when Danone accused Wahaha of illegally setting up parallel businesses outside their ventures, alleging damages of approximately $100 million. Legal battles followed with both joint-venture partners filing multiple lawsuits against each other in venues from Hangzhou, China to Los Angeles, USA. At one point, the disputes had grown so deep that the Chinese and French governments stepped in to mediate between the parties.
All of this was accompanied by personal attacks, carried out over the media. Danone investigated the family of Wahaha’s founder Mr. Zong, and Wahaha publicly denounced Danone executives by name. At times, Danone executives were locked out of the joint-venture’s buildings.
In 2009, the companies agreed to drop all lawsuits, ending battles inside the courtroom and in the media that had lasted for many years. Danone sold its 51 percent stake in the joint venture to Wahaha and left China.
February 24, 2018 @ 6:36 am
Since Danone is not the first company which left the market after having transfered all their know-how to a Chinese partner, is there any success story of a company? What are the key criterias for not failing like Danone? A product like Anton Paar‘s measurement instruments, which can‘t be adopted easily like Danone products?
Obviously Chinas legal system protects Chinese companies and their interests as well…
February 24, 2018 @ 8:49 am
I think the Danone case is rather simple. They did everything right except for how they treated their Chinese partner. He helped them get established and was taken aback when Danone tried to acquire his stake. He interpreted that as being regarded as “dispensable”. He wanted to continue to have a piece of the pie and be respected. Danone wanted full control….
February 27, 2018 @ 9:41 pm
The two previous comments highlight the pitfalls and misunderstandings we frequently hear about in connection with Sino-Western business ventures. While there are doubtless many material facts not disclosed in the story, it seems likely the parties were never on the same “wavelength”. While Danone’s primary objective was probably long-term market penetration and growth, Wahaha’s primary objective was probably retaining control over all Chinese operations. Danone’s retention of 51% equity while giving up operational control seems to me to reflect a misunderstanding of the respective strengths of equity and control in China as opposed to the West. The “proof is in the pudding”; i.e., Danone relinquished its stake in the J.V. (possibly at less than market value) and left China. Hopefully, the underlying contract documents protect Danone’s rights to their intellectual properties.
March 14, 2018 @ 4:10 pm
I found it especially interesting to discuss this case in person. With a background in anthropology, politics and economics I feel that the given case perfectly depicts a situation in which issues from all three spheres collide.
Having heard about Hofstede’s power dimensions and intercultural awareness and intercultural differences in a business context from multiple perspectives, I feel like this is truly a textbook example. Instead of filing lawsuits and battling each other publicly when apparently all had been lost already, diplomatic interventions and country leaders intervened only to leave this lost case a failure after all.
As shown, cultural differences and – diversity, intercultural awareness, differences in mindset and perception can be crucial when going global. While these topics are often associated with “soft skills” and less with the core business and “facts and figures” of a company, Danone’s development shows that there can not be enough awareness raised in this regard. The personal connections and established business contacts of the Asian partners underline the importance of good partnerships, leaving the reader speechless about the efforts and resources that were wasted here.
Of course, if the Asian customers don’t buy dairy products, the brand cannot succeed, but this seemingly huge issue appears miniscule compared to the childish and deeply narrow-minded behaviour of high-paid company leaders on both sides. Let’s hope that as globalization progresses, there will be a natural rise in mutual cultural understanding. If not, companies may finally realize that something a few thousand dollars spent on a set of high quality cultural training are better invested than in a lawsuit destroying the last hope of a peaceful agreement. For the two favourite words of the 21st century Win Win are only made possible if both sides are willing to loose (loose) a little.
December 18, 2021 @ 8:48 am
Danone, a French dairy and water giant, is earliest to enter the Chinese markets and got a big success in the front 10 years. It recognized that in order to succeed in the Chinese market, one had to have a good understanding of consumer behavior, access to suppliers, as well as outstanding network relationships – the famed “guanxi” – with government agencies and distribution channel partners, so Danone created the partnership with a local Chinese company, Wahaha. At the beginning of 10 years, they cooperated well and got a huge profit. However, their relationship became worse aftet 10-year cooperation. Mr. Zong was no longer content with the original terms of the joint venture agreement, and it is unsuccessful for Danone to try multiple times to acquire a higher stake in the joint venture. Danone recognized the importance of relationships or “guanxi”, but it did not understand the Chinese culture well. It thinks the 51% stake could keep their right, so they Danone held 51 percent of the joint-venture and left the Chinese partner with full operational control. At the end, it lost their core technology and all the kinds of relationships, such as customers, supplier, and contributions. Therefore, it got the success at the beginning because of recognition of “guanxin”, but it had the failure at the end because of not understanding of the Chinese culture. If the company would enter the global market, it should do a lot research to understand the differences of culture and adapt the different culture.