#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.

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