Case Study on Danone Wrangle with Wahaha

Question One:Danone Expansion’ Into the Chinese Market

According to the case study, Danone Group expanded its businesses into the Chinese markets at the end of the1980s. In China, the firm focused on setting up factories that would contribute to an increase in production. Besides, Danone Group majored in the manufacturing of dairy products, biscuits, beverages, and drinking water in the same country. The firm invested heavily in the establishment of plants and the manufacturing process. 

Danone Group expanded into China by employing several strategies. Firstly, it acquired the assets of the top leading companies by buying their shares. The firm purchased the assets of such firms as Shenzhen, the Robust Group, Baifu, and Mengniu Company (Luthans & Doh, 2018). The acquisition of the shares of these business organizations enabled Danone Group to internationalize its operations into the Chinese market.

In addition, Danone employed a joint venture to expand its operations into China. The firm is known for using the joint venture strategy extensively to enter and create new markets, which in turn facilitated the development of local knowledge and improved its ability to utilize effective distribution channels (Academic Assist, n.d.). For instance, it established a joint partnership with the Fengxing Milk Company, a Guangzhou-based dairy firm.  The firm also employed the same strategy by creating a business with the Wahaha group in 1996 (Luthans & Doh, 2018). Danone had initially partnered with Baifu to formed Jin Jia Investment, a scheme which the company used to set up Danone-Wahaha Joint Venture. The main shareholder, the Wahaha Group, owned 49 percent of group assets, while Danone and Baifu shared 51 percent of the company’s ownership equally. For this reason, Wahaha thought it was responsible for managing the business and controlling the intellectual properties of the JV.  

Problems Encountered by Danone Group While Operating In China

Danone Group faced many problems while conducting its business activities in the new market. The former started encountering troubles after acquiring 25 percent of Baifu’s shares. Contrary to the prior agreement, the firm became the major shareholder of the joint venture. As a consequence, Wahaha’ founder, Mr. Zong Qinghou, was concerned that a foreign company would operate and control the China-based business (Luthans & Doh, 2018). However, China’s Trademark Office declined to transfer Wahaha’s trademark to the Danone Group. Therefore, Zong continued to control the brand name and the JV operations despite Danone’s ownership of the majority shares.

Apart from denying Danone the intellectual property and managerial rights, Zong breached the terms of the trademark agreement. According to the contract, a member of the joint venture should not utilize the logo to conduct any independent business activities or permit the third party to use it. Nonetheless, Zong leveraged the Danone-Wahaha trademark by establishing a series of non-JV enterprises. When Danone discovered Zang’s activities, he proposed to buy 51% of the shares of the parallel companies (Luthans & Doh, 2018). Wahaha’s owner rejected this offer, forcing Danone to seek legal assistance. Unfortunately, the verdicts of the courts of law favored the Chinese-based firm.

Danone Group also incurred losses in 2000 following the acquisition of the Robust Beverage Company. The latter was Wahaha’s main business rival (Zhang &Van Deusen, 2010). Wahaha experienced problems after dismissing all the skilled management staff in order to operate the new-acquired firm directly. Danone employed less-experienced people to manage the Robust Beverage Company. The staff members had little knowledge about the Chinese market, making the business generate losses.

Additionally, the company faced difficulties while trying to expand its operations in Asian markets. For instance, Danone's conflicts with his joint partner exposed the challenges of attempting to penetrate the Chinese markets. The court ruling during the Danone-Wahaha case demonstrates that the Chinese government favors local companies over foreign ones. In addition, local firms in the Asian nation could access the secrets of their joint partners and form parallel firms to compete with their joint ventures. Therefore, international companies should employ appropriate entry strategies to thrive in China.

Question Two:The Formation of “Danone and Wahaha Joint Venture”

A joint venture is established when a corporation desires to maintain business control by finding a partner in the global markets. The wish of companies is to capitalize on investment competencies in another country (Lynch, 2006). But this is associated with some risks that companies are willing to take regarding uncertainties of global expansion. Practically, these considerations lead to strategies like acquisition, joint ventures, and alliances for international business expansion. There are several lessons, as well as values that one can learn from the case of Wahaha and Danone venture. Based on the case study, the managing director for consultancy inter-brand pointed out the essential lessons of this joint venture. If companies such as Wahaha and Danone are willing to operate in China, they should build their business operations from the ground (Luthans & Doh, 2018). The desire of multi-national corporations (MNC) is to operate in China through the joint venture. Even though this could be difficult, especially when the MNC design is characterized by proper planning, a company also can be turned into a joint venture.

The Wahaha Group Corporation started to operate as a joint venture with Danone Group. Since they were a group of companies, there existed five emerging subsidiaries. As a result, this attracted a large pool of foreign investment into the joint venture. Due to the presence of venture funds, Wahaha introduced world-class investment skills that improved production lines from different countries such as Germany, Japan, Canada, and Italy. The terms and conditions of Danone and Wahaha joint venture enabled the latter to maintain all the managerial decisions, including operational rights and the brand name of Wahaha. The joint venture consisted of such participants as Wahaha Food Group, Bai Fu Qin, and Danone Group.

According to the case study, this joint venture was established in 1996. However, Danone and Baifu invested indirectly in the joint venture. Conversely, Danone and Baifu formed Jin Jia investment, which is a corporation of origin from Singapore. Based on this formation, Wahaha Group owned 49 percent of the entire state from the joint venture. On the other hand, Jin Jia owned the remaining 51 percent of the shares.

The Structure of Danone and Wahaha Joint Venture

The Wahaha-Danone joint-venture business had three participants. In this case, Danone and Bai Fu set up Jin Jia Investment, which enabled them to invest in the venture. The joint partners delegated Zang to run the day-to-day activities of the firm. The following list represents the venture’s ownership structure:

• Jinjia Investment Company: 51 percent of the JV assets (Danone Group and Bai Fu Qin Ltd)
• Wahaha Group (under the leadership of Zong Qinghou as the chairman): 49 percent of JV assets

Reasons Why Danone Formed a Joint Venture Instead of Establishing a 100 Percent-Owned Subsidiary

Danone formed a joint venture contrary to fully-owning subsidiaries because it realized that there were several benefits of having a joint venture. Through a joint venture, a company like Danone can attract investment funds more than a 100 percent-owned subsidiary. When there are more investment funds, the R&D department of Danone will be able to launch innovative products and ameliorate the quality of the existing products. Thus, sales and revenues are likely to increase in a joint venture. Additionally, Danone entered into a joint venture to share costs and risks with its partners. Every company cannot be 100-percent successful in its business objective. Therefore, the risk of failure should be considered the most by a new company.

Question Three:The Problem of the Danone-Wahaha Joint Venture That Triggered the Conflict Between the Companies

The partnership between Danone Group and Wahaha encountered problems that caused the conflict between the two firms. The two companies’ views on the ways to trademark the joint venture were different, thereby causing serious disagreements and conflict (Luthans & Doh, 2018).  When the two companies formed the alliance, Wahaha had 49 percent of the joint venture, while Jinjia had 51 percent on the venture assets. This ownership structure prompted the firms to misunderstand each other during the initial stage of their joint project (Luthans & Doh, 2018). Wahaha thought that Danone and Baifu would equally share 51 percent of the venture’s shares, and the group would be the majority shareholder. For this reason, Wahaha felt that it was in charge of the joint venture; thus the organization had no concerns during the transfer of its trademark to the joint partnership. However, when Danone acquired Baifu’s interest in Jinjia, it gained the full ownership of Jinjia and gained 51 percent ownership of the joint venture. As a result, Danone found an opportunity to control the joint venture legally as it had the right to participate in the election of the board of directors (Luthans & Doh, 2018). Due to these reasons, Wahaha felt that a foreign firm would ultimately control the joint venture and its trademarks. Wahaha also misunderstood the implications of the joint scheme and therefore felt that Danone misled it during the formation of the joint venture. These issues caused resentment in the organization; thus, Wahaha chose to take back its intellectual property (Barbara and Stepha, 2013). Therefore, trademark transfer made the two firms to develop a conflicting and thorny relationship.

In addition, Danone’s decision to request for 51 percent of ownership interest from the non-JV firms led to conflict. In 2000, Wahaha developed a number of firms that used to sell the same items as the joint venture while utilizing the Wahaha brand. Apart from that, the JV staff members used to sell the products produced by both the joint venture and Wahaha’s non-JV companies. When Danone realized this situation and the value of Wahaha and Zong’s businesses, the firm demanded a 51-percent ownership of the non-JV firms. However, the two Chinese companies turned down Danone’s proposal. The establishment of non-JV businesses was a breach of the agreement, and this violation of the JV terms triggered the conflict between Danone and Wahaha.

Differences in Danone’s And Wahaha’s Understanding of Their Own Respective Roles and Responsibilities in This Venture

Both Danone and Wahaha’s views differed in terms of the roles and duties to perform in the joint venture. Wahaha thought that it would fully control the intellectual property in the venture, and this led to disagreements between the two firms. For this reason, Wahaha breached the JV contract by using its brand to establish and operate a series of enterprises in China. On the other hand, Danone understood that the joint venture owned the trademark rights, and was in charge of the venture. When Danone acquired Baifu’s share of Jinjia investment, Wahaha felt betrayed and misinformed. The acquisition made Danone believe that it would control the trademark because of being a major shareholder. These misunderstandings triggered conflicts, leading to disputes and lawsuits.

Aspects of National and Organizational Culture Affected This Perspective

The cultural aspects that affected this practice are government, rules, identity, and values. The government participated in the processes of transferring intellectual properties to the joint venture and addressing business lawsuits. Organizational culture also affected the identity and values of the joint venture (Alton, 2017). In the case study, the trademark represented the brand, while the terms and rules of the contract were the guiding principles of the agreement. The breach of the JV contract led to serious accusations and the dispute between Wahaha and Danone.

Question Four:Reasons Why Danone Was Unsuccessful in Proving Its Claims in Court

The abbreviated license was approved failed to obligate the trademark of Wahaha to be used explicitly for a joint venture. According to the case study, the legal documents produced indicated that the Wahaha brand was to belong to the Wahaha Group. Therefore, the joint venture only had a right to its use (Luthans & Doh, 2018). This issue is one of the reasons why Danone failed in the court case.

Danone lacks consideration before taking action. Therefore, it lost most of its lawsuits or legal cases. It should have had a clear back-up strategy if it would fail to win the court case. Also, Danone lost the loyalty of Wahaha workers to proceed with business activities. Since the dispute was of public interest, Danone faced several problems as a result of this case. The distributors of Wahaha were in support of their clients, and they were, therefore, against the products of Danone.

Resolving the Conflicts Between Danone and Wahaha Companies

After the prolonged business conflicts between the two companies, Danone eventually accepted the cash settlement, and this terminated the joint venture. As a result, Danone relinquished claims to the name Wahaha.

The Significant Lessons for Danone Concerning Doing Business in China

The first lesson from the case study is that Danone must understand and respond quickly to political, economic, and socio-cultural changes. If a multi-national company wants to be successful in a changing business environment, it needs to understand the effects of risks associated risks with a contractual agreement. The appropriate clauses should be in categorical in the JV agreement. Nevertheless, Danone failed to take action from the beginning of such occurrences. For instance, the case study highlighted that the concept of non-competition did not exist for a long time, but the chairman of Danone extended the Wahaha brand into other entities through the set-up of new firms.

Danone experienced the issues of public opinion, nationalism, and laws and regulations. Generally, the Chinese strictly adhere to the rules and regulations of their country. Thus, they believe that there should be an exception to issues related to an emotional appeal. The statement is diverse for corporations such as Wahaha in China. For example, members of the public unconditionally support Wahaha Company as a victim in the conflict between Danone and Wahaha. In their views, Danone is an aggressor to control the dairy and beverage market in China. Therefore, Danone has been overlooking, as well as underestimating the level of Chinese nationalism. As a result, it indicates that China has been in dilemmas regarding the law and regulations of the marketplace. Additionally, a joint venture has to share both business risks and growth.

Another lesson for Danone is that it should not proceed with a joint venture that has been established on weak legal ground. When controlling the joint venture, Danone, as a foreign firm, was to participate fully in the daily management of the business. By Danone having 51 percent ownership in the joint venture, it does not mean it was entitled to fully control the venture. Therefore, for Danone to gain control of the joint venture, it could not have relied on technical and legal procedures since it was a foreign investor (Luthans & Doh, 2018). Danone should have obeyed business customs in China, especially on how they conduct businesses in private rather than in public.

Question Five:Determine Whether Danone Followed the Advice Concerning JV in China.

Danone did not adhere to the advice about the joint venture in a foreign country (China). Firstly, the former applied technical and legal methods. Secondly, Danone, as a foreign country, was in control of the joint venture due to their rights to elect the board of directors. Thirdly, Danone held 51 percent of the joint venture, and this led to immediate misunderstanding since Wahaha felt that Danone misled them from the beginning of the joint venture. Lastly, Danone left the daily management of the joint venture to be managed by Wahaha through its chairman, Zong (Luthans & Doh, 2018). These issues can be considered as the source of Danone’s misfortunes.

The Aspects That Danone Followed in the JV

Danone has been expanding its operations around the globe because it had a presence in all continents (Luthans & Doh, 2018). However, it has been facing challenges while operating in Asia, particularly China. Due to inadequate market knowledge as compared to its competitors, such as Robust. Robust is the second biggest corporation in the beverage industry in China, and Danone acquired it. Therefore, Danone followed the right procedure by forming a joint venture with Wahaha Group. It was an excellent decision to purchase Robust because it enabled Danone to manage the company directly rather than using the original management. The new management team was not familiar with the beverage market in China. As a result, Robust struggled and almost lost all its products in the market.

The Aspects That Danone Did Not Follow in the JV

After sealing the joint venture agreement, Danone transferred all responsibilities, as well as leadership, to Zong to manage the business activities of the JV (Luthans & Doh, 2018). Besides, Danone did not take part in the control of the joint venture since it did not even send an executive representative to China. Consequently, trust with the joint venture disappeared over time as disagreements started to arise, leading to court battles. Another mistake is that Danone sold all its 51 percent shares of the joint venture. Interestingly, Danone received less cash from the sale of the shares than the book value of the shares.

Danone did not stop Wahaha from establishing a series of companies that sold the same products as the joint venture (Luthans & Doh, 2018). Moreover, these companies used the trademark of Wahaha. However, Danone did not realize this situation even after there were press reports about the same. The organization understood the situation in 2005 and failed to solve the issue privately through negotiations, which is the usual case in China.

Danone did not participate in the daily management of the joint venture. That is, it left the JV to be fully controlled by Zong, and he was, therefore, entitled to choose the actions to take place within the joint venture. This is where Danone lost control of the joint venture. Danone only received the benefits from the JV as Wahaha did all the work. Thus, it gave Wahaha adequate space to manipulate the joint venture.

Danone failed to align its interests with Wahaha. Instead, it started to compete and challenge Wahaha in courts, which was against the Chinese culture. Moreover, Danone formed a joint venture based on uncertain and weak legal systems. Hiving 51 percent of the stake in the joint venture did not mean that Danone would effectively control the business and its trademark.

References

Academic Assist (n.d.). Danone strategy. Academic Assist. Retrieved from http://myacademicassist.com/pdfs/Danone%20Strategy-1.pdf

Alton, L. (2017, February 2). Why corporate culture is becoming even more important. Retrieved from https://www.forbes.com/sites/larryalton/2017/02/17/why-corporate-culture-is-becoming-even-more-important/#5be4b96769da

Barbara, K., and Stepha, R (2013). Match and mismatch: The Wahaha-Danone dispute. ERIM.  Retrieved from https://www.erim.eur.nl/erasmus-china-business-centre/our-research/teaching-cases/detail/4152-match-and-mismatch-the-wahaha-danone-dispute/

Luthans, F., & Doh, J. P. (2018). International management: Culture, strategy and behavior (10^th Ed.) New York: McGraw-Hill

Lynch, R. (2006) International Acquisition and Other Growth Strategies: Some Lessons from the Food and Drink Industry, Thunderbird International Business Review, 48 (5), 605-622.

Zhang, P., & Van Deusen, C. (2010). French Danone and Chinese Wahaha: Ret another example of an unsuccessful international joint venture. International Business: Research, Teaching, and Practice, 4 (1), 1. Retrieved from http://www.aibse.org/wp-content/uploads/2012/02/ZhangVanDeusen2010.pdf