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2010 4(1)
During a five-day visit to Taiwan on November 26, 2009, Zong Qinghou, Managing Director
of the Chinese firm Wahaha, was impressed by the quality of Guangquan Corporation’s dairy
products. An opportunity for another international joint venture (IJV) arose in Zong’s mind.
It was too attractive to ignore in that it might give Wahaha a competitive edge in establishing a
quality image after the scandal involving contaminated milk formulas by the Sanlu Group in
2008 had greatly shaken consumers’ faith in Chinese brands. However, the bitter dispute with
the French multinational enterprise Danone, Wahaha’s first IJV partner, caused Zong to
reconsider whether to take advantage of this opportunity. Danone finally pulled out of the IJV
on September 30, 2009 after years of fighting, ending the almost 12 year relationship with
Wahaha. Because this relationship had not worked out, Zong was thinking about what went
wrong during the previously unsuccessful IJV. He was deep in thought (Lucy, 2009).
Email: pingying.zhang@unf.edu
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Zhang & Van Deusen Danone and Wahaha: Unsuccessful IJV
SPOTTING OPPORTUNITIES
Zong Qinghou was born in 1945 in Hongzhou during a turbulent period in
China (Yang, 2004). Zong did not receive much formal education, thus he had
various menial low paying jobs from 1963 to 1982, including jobs at the
Zhoushang Salt Farm, the Luxing Farm, and a small paper carton factory. Like
millions of other Chinese workers without many opportunities to earn a decent
living, Zong dreamed of starting his own business. The opportunity came in
1986 after Zong returned to Hongzhou to take care of his mother who was sick.
Zong got a job selling milk in a mini-grocery in a local school in the Shangchen
District where his mother worked as a teacher. From this job, he identified
opportunities. It was an era when the one child policy had just started. The only
child became the apple of the entire family. Their parents and grandparents
would generously spend more to make these small “kings” and “queens” healthy
instead of spending on themselves. However, what they could buy in the market
was rather limited. Zong saw the opportunity to produce milk drinks which were
not common in China but were deemed as healthy, particularly for kids. Using
the campus as his first testing ground, he started a business with two retired
teachers and borrowed 140 000 Yuan (about $17,000 at that time; Yang, 2004).
In 1989, Zong created Hangzhou Wahaha Nutritional Foods Factory, partnering
with the local government to formally enter the niche market of nutritional drinks
for children (Liu, 2007). Since private ownership was not allowed by law, Zong
partnered with the municipal government in Hongzhou. In 1991, Wahaha
Nutritional Foods Factory changed its name to the Wahaha Group. It was a state
owned enterprise and Zong was the Managing Director. The Wahaha Group was
later converted into a private corporation during the IJV formation with the
French company Danone.
Between 1992 and 1995, after the success in selling nutritional drinks for
children, Zong started to explore other product markets in addition to healthy
drinks. These products included sour plum drinks, alcoholic beverages, pseudo-
medicinal potions, and even Peilin pickles from Sichuan (Wu, 2007). The sales,
however, were disappointing. Also in May 1992, Wahaha Group raised additional
capital of 236 million Yuan ($30 Million) internally to build the Hangzhou
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Wahaha Food City Co. Ltd. and to finance the construction of Wahaha Food
City in Hongzhou (Wu, 2007). Poor revenues from non-healthy beverages,
inexperience in project management, and delayed construction all started to
jeopardize the survival of the Wahaha Group. Zong needed cash to save his
falling empire and started exploring options.
Over the past decade, Danone‟s growth strategy has been to establish
international joint ventures, particularly in fast-growing emerging economies like
China, India and Pakistan. For example, Danone acquired a 49.5 percent share in
Pakistan‟s Continental Biscuits Limited in 1984 and formed an IJV with Britannia
Biscuits in India in 1995 (David, 2007). In these IJVs, Danone exported
management skills, new product development capabilities, growth capital, and
current technologies and processes that its local partners desired. The huge and
largely untapped markets satisfied Danone‟s yearning for growth that would keep
their stockholders happy, since their domestic market was saturated and
maturing. The IJVs also allowed Danone to gain experience with the very
different cultures of emerging economies and communistic societies. In addition,
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Zhang & Van Deusen Danone and Wahaha: Unsuccessful IJV
prior to China joining WTO (World Trade Organization) in 2001, local partners
were required by Chinese law. Thus, each partner entered the IJV with distinct
goals and objectives.
Prior to establishing the IJV with Wahaha in 1996, Danone already was an
active player in the Chinese market. In 1987, Danone established Guangzhou
Danone Yoghurt Company, and in 1994, Danone and Bright Dairy launched two
projects to establish yoghurt businesses in Shanghai, in which Danone owned
45.2 percent of the IJV. In 1996, Danone acquired 54.2 percent of Wuhan
Dongxihu Beer (Group) Co. Ltd., and in the same year, Danone also bought 54.2
percent of Shenzhen Health Food Co. Ltd. (Qiu, 2007).
THE BEGINNING
The IJV between Danone and Wahaha was orchestrated by a Hong Kong
based firm Bai Fuqin. Danone and Bai Fuqin first formed Jin Jia Investment as
an IJV. Danone approached Wahaha through this IJV. Danone‟s proposal of
$450 million cash was accepted by Zong (Bai, 2008), though he publically rejected
the „rumor‟ that Wahaha Group could not survive without the fresh cash infusion
from Danone. Instead, Zong reiterated the fact that the Wahaha Group had
revenue of $125 million and net profit of $25 million in 1996 (Qiu, 2007). He
stated that there was no “emergency” driving the formation of the IJV with
Danone. The vice section chief, Hongbin Zhang, from the Foreign Trade
Cooperation Office in Zhejiang pointed out, “Wahaha‟s problem is not in the
management, but the lack of funding” (Qiu, 2007) in that cash for growth was
not available (Wu, 2007). According to Zhang, Wahaha started as a factory type
of enterprise, thus, fund raising for growth had always been a problem. This
ultimately limited Wahaha‟s growth potential and a foreign partner in an IJV was
one way to remedy this issue. Also, during the early 1990s, the financial market
in China was weak, and many banks had high levels of bad debt from companies.
This environment pushed the regulators to tighten up on lending to corporations,
and thousands of firms went bankrupt (Bai, 2008). Danone‟s generous capital
injection came at the right time for the survival and growth of Wahaha.
The IJV was formed by three companies with various levels of ownership:
Wahaha Group (owned by Hangzhou municipal government with Zong as the
managing director) owned 49 percent of the joint venture, while Bai Fuqin and
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Danone had 25.5 percent each (Dickinson, 2007). Initially, only the five best
performing subsidiaries of Wahaha Group were in the IJV. By 2007, the original
five IJVs had grown into 39 ventures (Liu, 2007). The media had a positive view
of the IJV during this time. The local newspaper Hangzhou Daily named the
venture as “a profitable matching, gaining competitive edge in the competition”
on March 29, 1996, and praised Danone‟s deep pockets that greatly strengthened
Wahaha‟s financial position in the turbulent dairy market (Qiu, 2007).
Zong later explained that the formation of the IJV focused on two areas:
bottled waters and dairy products (Qiu, 2007). Danone had the control over the
bottled water division, and the production line was not allowed to manufacture
other nutritional drinks, which were considered attractive by Zong. This drove
Zong to compete with the IJV through his independent ventures. The marketing
director of Wahaha, Xiuling Zhang, commented that any new product line had to
be decided by the board of directors; however, Danone did not seem to have
time to consider any new business lines or products because it was busily
occupied by other mergers and acquisitions it had in China (Qiu, 2007). This was
very frustrating to Zong and other Wahaha managers.
During the 12 years of the IJV with Wahaha, Danone had initiated several
IJVs with other partners, expanding its market share in the industry but also
creating control problems (See Appendix 1; Areddy, 2009; Qiu, 2007). After first
investing in Bright Dairy in 1994, in 2000 Danone increased its ownership to
20.01 percent, to become the third largest shareholder. Danone‟s ownership
control threatened Bright Dairy‟s independent operation strategy, and Bright
Dairy decided to end the 15-year relationship. Soon afterwards, at the end of
2006, Danone started another IJV with Mengniu, a direct competitor of Bright
Dairy. This IJV ended in dismay at the end of 2007. Also, in 2000, Danone
bought 92 percent of Guangdong Robust Group, which has suffered continuing
losses since Danone took over.
During the early years of the Danone Wahaha IJV, performance was solid
but growth was slow. Dissatisfied with the growth rate, in 2000 Zong started to
create a series of non-joint venture companies through the Wahaha Group that
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Zhang & Van Deusen Danone and Wahaha: Unsuccessful IJV
sold the same products under the same Wahaha trademark. These non-joint
venture companies were partly owned by Zong, and partly owned by an offshore
British Virgin Islands company controlled by Zong‟s daughter and wife. The
creation of non-joint venture companies violated both the trademark license and
the IJV agreement (Dickinson, 2007). However, this was not an issue until 2005,
when Danone learned of this direct competition with the IJV and insisted on
controlling 51 percent of the non-joint venture companies. Zong refused the
request. Bitter verbal attacks started, and on May 9, 2007, Danone filed for
arbitration in Stockholm, accusing that Zong, through his non-joint venture
companies, had violated the trademark license and the IJV agreement. On June
4, 2007, Danone also filed suit in California state court, alleging that Zong and his
family‟s control of non-joint venture companies violated the trademark license,
and asked the court to stop the non-joint venture companies from using the
Wahaha brand. Wahaha fought back and on June 13, 2007, the Wahaha Group
applied for an arbitration hearing by the Hangzhou Arbitration commission,
declaring that the trademark license was illegal at the time it was granted because
it was intended to avoid the requirement of brand name transfer by Chinese law.
Finally, on July 2, 2007, Wahaha Group threatened to remove three board
directors appointed by Danone, accusing that these directors had violated
Chinese corporate law by serving on the boards of companies that were
competing with the IJV. The bitter quarrel continued until September 30, 2009
when Danone withdrew from the IJV for a monetary settlement that both sides
had agreed upon.
In early 2000, Bright Dairy started selling Danone brand yoghurt using
Bright Dairy‟s extensive distribution networks. Over the next few years, Danone
yoghurt became popular in the middle-eastern and the middle-southern part of
China with market share of about 15 percent in 2006. Jiafeng Wang, the CEO of
Bright Dairy, was proud of their success. In fact, it was the Bright Dairy
relationship that turned around nine years of losses for Danone yoghurt in China.
For reciprocity, Danone authorized Bright Dairy to sell other Danone brands
which benefited Bright Dairy‟s total sales by $225 million between 2002 and
2006, ultimately building to $75 million in 2006 (Ye, 2007). Yet Danone was
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looking for another alternative that could boost its 15 percent market share.
Mengniu became the next partner for Danone. Danone separated from Bright
Dairy as a prerequisite to establishment of the IJV with Mengniu in December
2006. Thus in 2007, Danone halted sales of Biyou yoghurt by Bright Dairy and
authorized Mengniu to sell the yoghurt instead.
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Zhang & Van Deusen Danone and Wahaha: Unsuccessful IJV
that Danone prevented the Chinese (e.g. local) brand disappearing from the
market, but Danone did not help the IJV to improve the brand either.
Like many multinationals, Danone wanted to enter the Chinese market and
learn about the culture without transferring technology to the local partner,
fearing Wahaha would become too strong to control. Zong was also dissatisfied
that Danone did not share with Wahaha its new product information. He said,
“We do not mean that French Danone gives us all their products‟ information;
however, as a family, French Danone should brief us on the development of new
products and new techniques so we could improve” (Bai, 2008).
In the case of Wahaha, upon the formation of the IJV, Danone owned
25.5 percent, Bai Fuqin owned another 25.5 percent and Danone owned 49
percent. This structure perhaps led to a misunderstanding in that Wahaha felt
“tricked” by Danone when Danone purchased the Bai Fuqin shares at the time
that Bai Fuqin pulled out of the IJV. Wahaha was never given a chance to bid for
the shares as Danone negotiated the purchase without their knowledge when Bai
Fuqin needed to exit the venture. Thus Danone became the major stockholder,
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which frustrated Wahaha who had always intended to become the largest
shareholder itself. Danone assumed that the majority ownership provided for
ultimate control in decision-making, but the strong differences in national culture
prevented Danone‟s ability to control through ownership.
Zong of the Wahaha Group, the CEO Jiafeng Wang of Bright Dairy, and
the CEO WenJun Yang of Mengniu all shared a similar fate: losing control in
decision-making processes to Danone. Their goals were not to become a
subsidiary of internationally well known Danone, but to conquer the Chinese
market through utilization of Danone‟s resources.
MANAGERIAL CONTROL
Danone‟s business philosophy, which attempts to use ownership to gain
control, failed in China where 51 percent ownership does not equate to 51
percent of control in an IJV. If Danone‟s ultimate goal was to have a profitable
IJV, 51 percent ownership control is not an effective way to manage IJVs. The
Chinese may not see a fundamental difference between 51/49 and 50/50 joint
ventures (Dickinson, 2007). It indicates that ownership control and managerial
control are equally important in the governance of an IJV. In this case, Danone
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Zhang & Van Deusen Danone and Wahaha: Unsuccessful IJV
Danone injected capital which Wahaha and other Chinese firms needed;
however, it didn‟t operate the IJVs, whose daily operations were in the hands of
Zong and the other CEOs. Perhaps Danone should not have entered the IJVs
without managerial involvement at the operational level. As analysts pointed out,
leaving operations to Chinese parent firms created inevitable weaknesses for
Danone. First, the Chinese felt it was unfair that they were doing all the work
while they had to share the profit with Danone, and second, it was easier for the
Chinese side to manipulate the IJV when active supervision was not in place
(Dickinson, 2007).
REFERENCES
Areddy, J. T. (2009) "Danone pulls out of disputed China venture", Wall Street
Journal: October 1: B1.
David, R. (2007) "Danone‟s Indian Cookie JV set to snap", Forbes, June 25,
[http://www.forbes.com/2007/06/25/danone-brittania-wadia-markets-
equity-cx_rd_0625markets1.html, accessed June 2, 2010]
Deen, Mark (2005) "Danone, Seeking to Avert Takeover, May Buy Partners",
Bloomberg, July 20,
[http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a5oWD
dmZ7zU4&refer=europe-redirectoldpage, accessed June 7, 2010]
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Kogut, B. (1988) "A study of the life cycle of joint ventures", in J. P. Contractor J
F (Ed.), Cooperative Strategies in International Business: 169–186. San Francisco,
CA: New Lexington Press.
Li, M., Zhang, Y. & Jing, R. (2008) "Does ownership and culture matter to joint
venture success?", International Management Review, 4(1).
Luo, Y. (2007) "Are joint venture partners more opportunistic in a more volatile
environment?" Strategy Management Journal, 28: 39–60.
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Williamson, S., Mueller, C. B., Van Deusen, C. A. & Perryman, A. A. (2007) "The
influence of national religious consciousness on entrepreneurial behavior",
International Business: Research, Teaching and Practice, 1(1), 53–75.
Zhang, Y., Dolan, S. & Vidal E. S. "Learning from subsidiaries: The case of
Spanish firms in China", International Business: Research, Teaching and Practice,
2(1), 85–99.
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APPENDIX
2. In 1994, Danone and Bright Dairy jointly launched two yoghurt companies in
Shanghai; Danone owned 45.2 percent of these projects.
5. In 2001, Danone Asia Pte Ltd purchased a 5 percent stake in Bright Dairy.
6. In April 2006, Danone Asia Pte increased its stake in Bright Dairy and became
the third-largest shareholder of the company. By the end of April, 2006, Danone
raised its ownership of Bright Dairy to 20.01 percent. Bright Dairy ended the IJV
later that year.
8. In December 2006, Danone formed an IJV with the Chinese firm Mengniu
Dairy Co, in which it held a 49 percent stake. This IJV ended badly before the
end of 2007.
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Zhang & Van Deusen Danone and Wahaha: Unsuccessful IJV
TEACHING NOTE
SUBSTANTIVE ISSUES
The case explores the complexity of an international joint venture (IJV)
based on cross-cultural disputes and goal incongruencies that occurred in the IJV
between the Chinese firm Wahaha and the French multinational enterprise
Danone. It provides information about both parent firms‟ goals and intentions in
establishing the IJV, the difficulties in handling the conflict of interests between
two parent firms, and the misunderstanding of cultural issues that accelerated the
problems leading to the demise of the IJV after almost 12 years. The case is
versatile in that it can be assigned to graduate students when coupled with
additional research requirements but is also straightforward enough to use in its
present form by undergraduate students.
PEDAGOGICAL OPPORTUNITIES
The primary objective of this case is to develop understanding of the
potential problems facing international joint ventures, and possible tactics and
strategies both parent firms should evaluate to enhance the IJV‟s results. The case
analysis includes:
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SUGGESTED QUESTIONS
1. What were the goals and objectives of Danone in seeking to
establish an IJV in China with a local partner? Include time
frames for achieving these goals and objectives.
2. What were the goals and objectives of Wahaha in seeking to
establish an IJV in China with a foreign partner? Include time
frames for achieving these goals and objectives.
3. Identify and discuss three areas of conflict of interest as perceived
by Danone.
4. Identify and discuss three areas of conflict of interest as perceived
by Wahaha.
5. Provide three specific examples of cultural conflict as perceived by
Danone. What could have been done to prevent these issues?
6. Provide three specific examples of cultural conflict as perceived by
Wahaha. What could have been done to prevent these issues?
7. What would have been a planned effective exit strategy for
Danone? Once things had deteriorated too much to continue the
IJV, what was a preferred exit strategy?
8. What would have been a planned effective exit strategy for
Wahaha? Once things had deteriorated too much to continue the
IJV, what was a preferred exit strategy?
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Zhang & Van Deusen Danone and Wahaha: Unsuccessful IJV
Teaching Note Exhibit 1. The examples are focused on the goals and objectives
of Danone and Wahaha, and the instructor could challenge the students to
explore the goals and objectives of the IJV at the same time.
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CONFLICTS OF INTERESTS
The analysis of the goals and objectives in the above section can bridge to
further discussion of conflicts of interests among the partners that are goal-
related. However, there are some conflicts of interests that are less obviously
related to the goals and objectives, and thus students may need the instructor‟s
guidance. Instructors could start the discussion of this topic by asking students
to identify and discuss at least two areas of conflicts of interest as perceived by
Danone and Wahaha. Some examples are provided in Teaching Note Exhibit 2.
When discussing conflicts of interests, it is important to distinguish between two
situations: conflicts that are perceived by both partners, and conflicts that are
perceived by only one partner.
Conflicts of Interests
1. Understanding the control system. Danone tried using the mechanism of
ownership control to ensure its management control but was overcome by
the top management team of Wahaha. Wahaha refused to relinquish its
management power to Danone even when Danone obtained 51 percent of
ownership of the IJV. Danone was not in charge of the IJV on the daily
operational basis.
2. Understanding the intention of intellectual property (IP) protection. In this
case, the IP issue concerns the use of the brand name Wahaha, and both
partners disagreed on who had the right to use the brand name. The transfer
of the brand name from Wahaha to the IJV was never legally settled, which
perhaps resulted in different interpretations by Danone and Wahaha that
suited their corresponding interests at a given time. For Danone, it was not
acceptable for Zong to market his non-joint venture products using the
brand name, and meanwhile for Zong, it was not acceptable to give away its
premier brand only to produce a few products under the IJV. Also, it was
not acceptable for Zong to sell his non-joint venture businesses to Danone
without a premium.
3. Collaboration or competition. Wahaha was suspicious of Danone‟s sincerity
in the collaboration in the IJV, while Danone at the same time partnered
with Wahaha‟s competitors. For example, Zong never disguised his
dissatisfaction with the joint venture between Danone and Bright Dairy.
4. Initial objectives. Wahaha‟s initial objective was to secure funding and
maintain its management control of the business. Danone‟s initial objective
was to control the business operation through ownership, which Wahaha
interpreted as a “trap”.
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Zhang & Van Deusen Danone and Wahaha: Unsuccessful IJV
CULTURAL IMPACTS
By definition, IJVs involve cross cultural management. The instructor
should introduce two types of culture differences in this case: 1) cultural
differences at organizational level and 2) cultural differences at country level
(Hofstede, 1980). Organizational culture involves how things are managed in a
specific firm regardless of the nationality of the people who manage the firm.
Country culture refers to unique behaviors that are specific to geographical areas.
Therefore, the instructor should guide students to discuss potential differences of
organizational behavior at the management level, and challenge students to
explore cultural differences at the country level. To start the discussion, the
instructor may ask: “What could have been done to prevent negative impacts on
the IJV through managing cultural differences in the IJV?” The instructor could
explore other cultural issues, such as the impact of nationalism on managing
conflicts in the IJV. Some suggestions of cultural impacts are provided in
Teaching Note Exhibit 3.
Cultural Impacts
Organizational Seeking ownership control is a distinctive organizational
Level culture of Danone. Danone consistently used the
mechanism of ownership control to secure management
control in most of its IJVs. Danone assumed Wahaha
would also follow the same mechanism of ownership
control. However, the case indicates that hands-on
management was more important in decision making than
ownership control. Although Wahaha understood the
importance of ownership control, it seems that Wahaha
cared more about daily operational control, and Zong had
made it clear from the beginning that in practice he was in
charge of the IJV‟s daily business. Therefore, without
ensuring that Wahaha understood the mechanism of
ownership control, Danone created managerial problems
when conflicts arose. Decisions by the largest shareholder,
Danone, were unlikely to be implemented. It is thereby
important for a foreign partner in an IJV with a Chinese
partner to clarify the expectation of ownership control.
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EXIT STRATEGIES
Planning for an exit strategy reflects realistic expectations of parent firms
that at some time the relationship will run its natural course and one or both
partners is no longer benefitting from the relationship or the IJV is not working
well and at least one of the partners wants to dissolve the relationship.
Frequently when collaborations fail, a planned exit strategy may help to reduce
financial losses resulting from the separation. Instructors could ask, for example,
“What was a preferred exit strategy?” “What would have been a planned
effective exit strategy for Danone or Wahaha once things had deteriorated too
much to continue the IJV?” The students can discuss this within their groups,
and then compare results across groups. There are different benefits and
drawbacks related to the exit strategies. The instructor can encourage students to
elaborate the benefits and drawbacks related to them. Some examples are
provided in Teaching Note Exhibit 4.
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