Danone and Wahaha: Ten Years’ of Cooperation and Conflict

Danone and Wahaha: Ten Years’ of Cooperation and Conflict^[1] 

Introduction

The cooperation and conflict between Danone and Wahaha resembles a dramatic marriage. Started in 1996, their joint venture (JV) seemed to promise great success. The foreign side gained access to one of the largest beverage markets in the world and the Chinese side received the much needed cash to accelerate growth. However, in recent years, conflicts began to surface and the relationship deteriorated so much that the two partners are now fighting a legal battle that will determine the fate of the JV. Danone insisted that Zong Qinghou, the central character of the twelve-year story, had undermined the interests of the joint venture. Mr. Zong, on the other hand, accused Danone of imperialist behavior. How did the conflict develop and what role did Zong Qinghou play in the whole process?

The Formation of the Joint Venture

In 1989, Zong Qinghou founded Hangzhou Wahaha Nutrient Food Plant and developed a famous ad: “Have a good appetite after drinking Wahaha”. Soon after, Wahaha products started to become popular throughout China. In 1990, Wahaha’s revenues surpassed RMB 100 million and formed a strong foundation.

In the middle of the 1990s, the “Wahaha” brand was already famous in China. Mr. Zong, however, realized that Wahaha’s development was facing two major problems: First, with a small scale production, it was in an inferior position in the competitive environment. Second, the management team was becoming less innovative. Mr. Zong hence drew up an expansion plan requiring investments as high as several hundred million RMB. At that time, investments of such a magnitude could only come from overseas sources.

In 1996, Mr. Zong reached an agreement to join forces with Groupe Danone of France. Four parties invested in the “Danone-Wahaha” joint venture (JV): Groupe Danone, Peregrine Ltd. (Hong Kong), Wahaha Group, and Hangzhou Wahaha Food City. The foreign parties (Danone and Peregrine) held 51% equity while the Wahaha side owned 49% of the entity. However, the actual controller and manager of the newly formed joint ventures was the founder of Wahaha Group – Zong Qinghou. On March 28th 1996, five joint ventures were founded by both parties as the first batch.

Over the next 11 years, Danone and Wahaha altogether formed 39 joint ventures. Thanks to Danone’s capital investment, Wahaha had tremendous growth and rose rapidly to the biggest beverage company in China and to the fifth largest in the world. In 1998, Wahaha achieved an output of 930,000 tons of beverage and exceeded Jianlibao for the first time. In 2000, Wahaha continued its incredible growth at a pace of nearly +100% that year. It also became leader in three areas, namely: pure water, milk beverages and carbonated beverages, achieving a total output of 2,240,000 tons.

At present, in China, Wahaha holds a 30% market share on the bottled water segment and 15% on the soft drinks segment. In 2006, the Wahaha JV exceeded €1 billion in sales, with profits reaching RMB 1.04 billion, thus accounting for 8% of Danone’s global sales and 5%-6% of its global profit. Above and beyond this, Wahaha has been holding the first place in the Chinese beverage industry in terms of asset scale, output, sales revenue, profit and taxes for nine successive years.

The Evolution of the Joint Venture

For the first year of cooperation between Danone and Wahaha, the JV achieved a revenue of RMB 1.11 billion. In 1996, the two parties signed a transfer agreement concerning the “Wahaha” trademark,. According to this agreement, the Wahaha Group would transfer to the JV the Wahaha trademark, all its associated rights, ownership and interests under legal protection. The total value of the trademark was estimated at RMB 100 million. However, the State Administration for Industry & Commerce did not approve this transfer under the principle of “national brands protection”. Therefore, Wahaha and Danone signed an exclusive “trademark licensing contract” in May 1999. According to the state laws, trademark licensing is not required to be reported to the State Administration for Industry & Commerce for approval. The contract stipulates that Wahaha Group shall “offer an exclusive and irrevocable right and trademark license” to the joint venture; it also stipulates that Wahaha Group shall not permit any other party to use the trademark without written consent of the JV. Wahaha Group itself shall not use the trademark for products either.

In 1998, Hong Kong Peregrine, one of the four initial investors, went bankrupt and transferred its equity stake in the JV to Danone. This meant that Danone controlled 51% of the JV. Mr. Zong, however, was afraid that he no longer had sufficient control over the JV.

That same year, the JV had already made good progress in the non-carbonated beverage industry in China. Pepsi and Coca-Cola, on the other hand, held 80% of China’s carbonated beverage market. Despite opposition from Danone, Mr. Zong insisted on entering this market by offering “Future Cola” in May 1998. Adopting a marketing strategy “the countryside first”, Future Cola gained overwhelming advantage in the Chinese rural market, and by 2001 achieved revenues of RMB 6.3 billion and a market share of 12%. Success in this endeavor convinced Mr. Zong that Danone did not really understand the Chinese market.

In March 2000, Danone purchased 92% of Robust Group (Guangdong), one of Wahaha’s strong competitors. Mr. Zong opposed the acquisition and threatened to compete even harder against Robust if it became part of Danone. In the following few years, under Danone’s management Robust’s market position deteriorated gradually. Mr. Zong was convinced that Danone could not operate without him in China. Moreover, it became clear to him that, instead of being loyal to the JV, Danone would continue to seek other “alliances” in China.

Realizing that the JV was not Danone’s only interest in China, on his own initiative, Mr. Zong decided to establish a number of companies independent of the JV. According to statistics by Groupe Danone, from 2001 to 2006 Wahaha Group permitted more than 80 enterprises to use “Wahaha” trademark without the consent of the JV, “which constitutes severe breach of the contract”.

Since 2005, Danone reached conclusion that Mr. Zong had shifted from a “win-win mode” to a “hollowing-out mode” in the JV. According to investigations by Danone, there are altogether 37 non-JV firms that use the “Wahaha” trademark “illegally” and directly compete against the JVs, out of which 29 non-JV firms are directly held by Mr. Zong and his family members.