What Options Are Available for Danone? and for Wahaha? What Do You Think Will Happen Next?

Q. What options are available for Danone? And for Wahaha? What do you think will happen next?

In my opinion, both Wahaha and Danone have limited options available to them. Below I have elaborated the possible actions and identified the most probable future outcome.

1. Current JV maintained with a neutral 3rd party involved so that neither of the parties (Danone and Wahaha) have a majority stake in the JV. This set up allows Danone access to the sought after Chinese market and provides continual support to Wahaha technical advancements. In choosing French and/or Chinese government as the 3rd party investor the threat of multinational takeover of Chinese brand can be mitigated. This option will not be sustainable without the intervention of JV in non-JV competing companies. There are two options for resolving the non-JV competition threat to Danone – The JV can become the majority stakeholder of the competing non-JVs. This option will be opposed by Zong as then Danone, with 51% stake in JV, will be in control of all the non-JV businesses. Another option can be that the Chinese government can become the majority stakeholder of the non-JVs. This will be welcomed by Zong and the stakeholders because of the political clout held by Zong. On the other hand heavy investment by Chinese government in Wahaha’s operations might take Wahaha back to the times of being a state controlled operation.

2. Dilution of JV by buyout of either Danone or Wahaha’s shares. If Danone decides to leave the JV they will walk away from a profitable operation in China. The growth of JV will ensure that Danone walks away with a profit on its investment. At the same time Danone’s investment in Chinese operations of Wahaha’s competitors will ensure that they have a continued presence in China.  On the other hand the possibility of Wahaha quitting the JV is unlikely and damaging strategic decision for Wahaha. It will lose its operations and supply chain. With limited international assets controlled purely by Wahaha the option to be bought out by Danone is not feasible. Adding to that, Mr Zong’s entrepreneurial spirit and control over the management of both Wahaha and JV will make it very difficult for the JV to continue its operations.

Future

Regardless of the breach of agreement conducted by Mr.Zong, both the sales force of Wahaha and government of China are in support of Mr. Zong. The lawsuits in Los Angles and Stockhlomn might rule in favour of Danone, but the rising protectionism and economic nationalism of China will not provide a conducive environment for Danone to continue operation in China without Mr.Zong’s backing.

As such, the best possible outcome of this bad situation will be the resolution and buy out of JV by Wahaha. This is not to say that Danone and Wahaha cannot continue their partnership. Some alternatives to a JV can be a collaboration between the two parties where Wahaha licenses their know-how and shares it with Danone for all markets except China at a royalty cost. Additionally they can collaborate and Wahaha can help Danone establish and consolidate its investments in China without using the Wahaha name but by creating a separate entity.