1. business and industrial
2. company
3. joint venture

International Business: Research, Teaching and Practice
2010 4(1)
FRENCH DANONE AND CHINESE WAHAHA:
YET ANOTHER EXAMPLE OF AN UNSUCCESSFUL
INTERNATIONAL JOINT VENTURE
Pingying Zhang
Coggin College of Business
University of North Florida, FL USA
Cheryl Van Deusen
Coggin College of Business
University of North Florida, FL USA
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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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.
In China, an IJV is defined as an establishment between one or more
foreign, individuals, companies, enterprises or other economic organizations, and
one or more Chinese companies, enterprises or other economic organizations, in
accordance with the Law of the People‟s Republic of China on Chinese-Foreign
Equity Joint Ventures (Li, Zhang and Jing, 2008). The parent firms jointly exploit
their combined resources to identify and create capabilities and core competences
to capture market opportunities primarily inside the Chinese market. Chinese
firms provide knowledge about government laws and customs, along with
networking relationships, while foreign firms provide financial resources and
technological and management expertise.
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, pseudomedicinal 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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2010 (4)1
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.
SATURATED DOMESTIC MARKETS COUPLED WITH AN INSATIABLE GROWTH
STRATEGY
Establishing IJVs is a common mechanism for firms from developed
countries such as the US to enter emerging economies such as China. Doing so
enables firms from developed countries to seek growth outside their saturated
home markets, and firms from emerging economies to obtain global
competitiveness through gaining access to current technology, processes and
capital infusions (Pearce and Branyiczki, 1997). As a result, the Chinese
government approved 405,180 joint ventures with a total capital of $419.8 billion
between 1979 and 2002 (Li et al., 2008). Managing IJVs, however, has never
been an easy task with high costs of entry and exit (Kogut, 1988), especially in
emerging economies such as China (Luo, 2007; Steensma and Lyles, 2000).
Today‟s Danone, or Groupe Danone as it is officially known, is a
multinational food products enterprise headquartered in Paris (Zhoudong, 2007).
It is the world‟s leading producer of dairy products such as Danone brand
yoghurts and Evian bottled water. The company was founded in 1919 as a small
factory producing yoghurt, and grew through acquisitions and mergers after
World War II under the leadership of Antoine Riboud, who transformed the
company into one of Europe's food giants. The name, Groupe Danone, was
officially adopted in 1994 after Danone became a well known international brand
name. Frank Riboud, the son of Antoine Riboud, succeeded him as the CEO
and chairman in 1996 and continued to focus on the core markets of dairy,
beverage and cereal while diversifying into other products. In 2006, 56 percent
of its net sales derived from dairy, 28 percent from beverages, and 16 percent
from biscuits (known in the US as cookies; Zhoudong, 2007).
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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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).
China is important for Danone‟s strategic position outside its domestic
market. Yimou Fan, the president of the Asian Market of the Groupe Danone,
in an interview in 2007, commented on the importance of Wahaha for Danone
(Qui, 2007), saying that no companies other than Danone had such a focus on
the Chinese market, and that China was already the largest market for Danone‟s
international businesses. Wahaha contributed 10 percent of the total revenue of
the Groupe Danone.
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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2010 (4)1
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).
SAME BED, DIFFERENT DREAMS
The capital investment from Danone seemed to solve Wahaha‟s need for
cash for growth. Since 1996, Wahaha had been number one in the dairy market
in terms of firm assets, annual production, sales, revenues, profits and taxes. In
2003, Wahaha‟s revenue reached $1.25 billion with profits over $125 million. In
2006, the revenue almost doubled to $ 2.3 billion. Danone expatriated 51 percent
of the profits from the IJV, leaving 49 percent for Wahaha (Bai, 2008; Liu, 2007).
By 2007, the IJV had 44 subsidiaries, and Zong owned and operated another 40
non-joint venture companies at the same time (Bai, 2008).
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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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.
LESSONS LEARNED: COLLABORATION OR COMPETITION?
At an Annual Drink Association event held in China, Zong argued
ferociously against opening the Chinese drink market to foreign companies.
Zong portrayed Danone as a large foreign multinational firm seeking to take
advantage of Chinese companies and consumers, raising nationalistic sentiments
in the citizens. Xinli Zhu, the president of Huiyuan group in the soft drink
industry commented that Zong seldom tried to cover his dissatisfaction with
Danone. Zong resented the fact that Danone was cooperating with other
competitors in the nutritional drink market through other IJVs even though
Wahaha was not behaving as a trustworthy partner (Bai, 2008).
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.
Although Wahaha was not directly involved in the competitive rivalry
between Bright Dairy and Mengniu, the change from a collaborator to a
competitor worried Zong. One year later, the joint venture between Danone and
Mengniu broke, further establishing the reputation of Danone as an opportunistic
multinational enterprise which took advantage of Chinese firms through IJV
partnerships.
When goal incongruence happens in IJVs, conflicts occur which may be
followed by the dissolution of the IJV. A proper management of different goals
in the IJV thus facilitates the success of international strategy of global firms such
as Danone (Hartsfield, Johansen and Knight, 2008). Particularly when a foreign
market such as China is characterized with high complexity, foreign partners‟
willingness to learn from their Chinese counterparts to solve potential conflicts
becomes critical to a successful cooperation (Zhang, Dolan and Vidal, 2008).
When the market for soft and nutritional drinks was booming from 2000 to 2006,
Wahaha and Danone avoided discussions of their differences because they each
were accomplishing progress towards their independent goals. Zong was
dissatisfied with Danone‟s slow decisions for developing new products, and he
was also concerned about Danone‟s role in cooperating with competitors from
the same industry. Danone was not satisfied with Zong either, since the IJV‟s
profit generated under the brand name Wahaha was shared by Zong‟s non-joint
venture companies that were selling the same products with the same trademarks.
When the profit of the IJV started to erode, it was too late to solve their
differences. Danone started to negotiate purchasing all non-joint venture
companies but both sides could not agree upon a price. The bitter verbal attacks
in the press by both parents made it impossible to continue the IJV.
TECHNOLOGY AND PROCESS TRANSFERS
One anonymous technical supervisor of the Wahaha Group (she would
not reveal her name in an interview) expressed concern about Danone‟s level of
technical support for the venture (Bai, 2008). According to her, Danone failed to
provide timely technical support based on the agreement, and support that
Danone provided was not state of the art for product quality development either.
Local partners of IJVs want to learn the core technical competencies from the
parent firms. For example, Danone achieved top quality research in its bottled
water division with its Evian brand, but there was no quality difference between
the IJV‟s bottled water and other brands in China. The fact that Danone did not
improve the quality was very disappointing to the managers of Wahaha. It seems
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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).
Media, however, portrayed a different interpretation of Zong‟s complaints
about Danone‟s technology transfer. For example, the economic commentator
Wu offered his views in the Chinese version of the Financial Times on April 10,
2007. According to Wu, Danone had provided techniques to the IJV to a certain
degree. The vitamin bottled water had benefited from the technology transfer
from Danone. What to transfer in terms of techniques and knowledge seems to
be a grey area that can create conflicts between parent firms. The inconsistent
technology transfer may intensify problems between parent firms who have
different goals.
OWNERSHIP AND NATIONALISM
Danone‟s Chinese strategy could be summarized as “using capital
investment to enter the market” (Wang, 2008; Bai, 2008). The CEO of Bright
Dairy, Jiafeng Wang, once sharply pointed out, “From the first day French
Danone started the cooperation with Bright Dairy in 1994, it had hoped to own
Bright Dairy in the end” (Liu, 2010). Danone used this strategy in most of its
IJVs in China, such as Baisi Cola, Mengniu, Bright Dairy and Wahaha. The
paradigm for companies from western-managed countries is that ownership is
necessary for control. Although they may initially own a small percentage of a
firm or an IJV, their ultimate goal is usually to buy out the local partner. If this is
not possible, they will exit from the partnership. However, the success of an IJV
is still doubtful when implementing managerial practices rooted in the west such
as ownership control in a culturally distant country such as China (Williamson
and Fadil, 2009), or countries with different religions (Williamson, Mueller, Van
Deusen and Perryman, 2007).
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.
Peng Qin (a director of the IJV, representing Danone) could not
understand why some Chinese enterprises were afraid of being controlled by
other firms. “We should not be afraid of being acquired by others. There is no
right or wrong in business intertwined with nationalism, and we do not comment
on that. However, the world is becoming smaller, and the firms are more
interdependent of each other. What accounts in today‟s business environment is
identifying a partner to create value together. We should not resent French
Danone as a foreign company acquiring Chinese business after its 20 years‟
operating in this country” (Bai, 2008). If Chinese enterprises are more afraid of
being acquired by foreign enterprises than by Chinese enterprises, Peng Qin‟s
comments could shed some light on the effect of nationalism in IJVs. Zong
aroused nationalistic sentiments to create a positive image for Wahaha in its bitter
battle in the press against the French company Danone (Russell, 2007). Zong‟s
manipulation of nationalism was criticized by the economic commentator Wu; he
pointed out the rationality that seizing control of the IJV was behind this
nationalistic sentiment (Wu, 2007). The perception of an international brand
name may not be linked to any specific country; nevertheless, most Chinese still
associate GE with America and Danone with France. Others disagree and argue
that when PepsiCo wanted to acquire Danone in 2005 for 30 billion Euros,
French president Nicolas Sarkozy announced that the government would protect
France‟s interests and ensure Danone would stay in French hands (Deen, 2005).
Nationalism is raised in most countries when foreign firms attempt hostile
takeovers and acquisitions.
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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had ownership control while Wahaha had managerial control of day-to-day
operations and decision-making.
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).
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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.
Zhoudong (2007) "Danone‟s quick expansion in China", ChinaDaily, June 15,
[http://www.chinadaily.com.cn/bizchina/200706/15/content_895462.htm, accessed June 2, 2010]
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APPENDIX
DANONE’S EXPANSION IN CHINA
1. In 1987, Guangzhou Danone Yoghurt Company was established.
2. In 1994, Danone and Bright Dairy jointly launched two yoghurt companies in
Shanghai; Danone owned 45.2 percent of these projects.
3. In 1996, Danone acquired 54.2 percent of Wuhan Dongxihu Beer (Group)
Co. Ltd., and established the IJV with Wahaha Group; Danone held 25.5 percent
of the IJV and the Hong Kong-based company Bai Fuqin held 25.5 percent.
During the financial crisis in Asia, Danone acquired the shares of Bai Fuqin and
became the largest shareholder of the IJV, holding 51 percent. In 1996, Danone
also bought 54.2 percent of Shenzhen Health Food Co Ltd.
4. In 2000, Danone bought 92 percent of Guangdong Robust Group.
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.
7. In July, 2006, Danone became the second-largest shareholder of Huiyuan
Group. In February 2009, Danone increased its stake in the company to 24.32
percent.
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.
Note: The above information is from Qiu, 2007,
[http://news.xinhuanet.com/fortune/2007-06/20/content_6266258.htm,
accessed June 2, 2010]
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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:
1.
Determining the goals and objectives of the two parent firms
in establishing an IJV.
2.
Assessing the conflicts of interests of ownership issues before
and during the establishment of the IJV.
3.
Discussing the cultural impacts of managerial styles that could
foster or endanger the results as well as the ultimate survival of
the IJV.
4.
Evaluating exit strategies from the IJV for both parent firms.
SUGGESTED CLASSROOM EXERCISE
Depending on the size of the class, divide the class into a variety of
stakeholders that are involved in this case. Each stakeholder group should
prepare for class discussion by utilizing additional sources to better understand
their assigned stakeholder group and be prepared to defend their positions.
Stakeholder groups include:
1.
Wahaha‟s top management group including Zong Qinghou
2.
Danone‟s top management group
3.
Wahaha‟s IJV senior managers
4.
Danone‟s IJV senior managers
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5.
Chinese Government, as owner of a State Owned Enterprise
6.
Chinese Labor Unions and Workers
7.
Stockholders of Danone
8.
Zong‟s wife and daughter who controlled competing IJVs; and,
9.
Other Chinese partners in IJVs with Danone to include Bright
Dairy & Mengniu.
a.
b.
Bright Dairy
Mengniu
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?
GOALS AND OBJECTIVES
One way to start the discussion is to ask students to identify goals and
objectives of Danone, Wahaha and the IJV. The instructor should compare the
goals and objectives identified by the students. Some examples are presented in
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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.
TEACHING NOTE EXHIBIT 1
Danone
Wahaha
1.
Goals and Objectives
Searching for new growth opportunities outside the saturated
domestic market in France. For example, Danone expanded
into 120 countries, including emerging markets such as India,
Pakistan and China where Danone had about 70 factories.
2.
Expanding their market share in China. Danone started its
China expansion in 1987. Its expansion was based upon
establishing several IJVs with different companies in the same
industry. Danone became a well-recognized brand name in
China as a result.
3.
Strengthening Group Danone‟s total revenue. According to
Yimou Fan, the president of Asian Market of Danone, the
IJV with Wahaha contributed 10 percent of the total revenue
of Danone, and China was already the largest market for
Danone‟s international businesses.
1.
Searching for capital. The earlier product diversification
strategy of Wahaha failed to attract customers and
consequently generated great financial loss. In order to
launch other products into profitable business areas, Wahaha
needed extra capital. At this critical time, Danone offered
cash of $450 million to partner with Wahaha through
establishing an IJV.
2.
Investing in technology. In order to differentiate from
competitors in the Chinese market, Wahaha needed advanced
technology to enhance its product quality. By partnering with
Danone, Wahaha was hoping to gain advanced technology
information. However, according to Wahaha, Danone failed
to provide the IJV technical support in a timely fashion.
3.
Gaining back the market leadership position. By partnering
with Danone, Wahaha aimed to grow stronger in the dairy
market. However, the IJV only focused on two product areas,
bottled water and dairy products, which could not satisfy
Zong‟s overall growth ambition.
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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 goalrelated. 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.
TEACHING NOTE EXHIBIT 2
1.
Conflicts of Interests
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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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.
TEACHING NOTE EXHIBIT 3
Cultural Impacts
Organizational
Level
Seeking ownership control is a distinctive organizational
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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Interpretation of “losing control” is different between the
western society and China. In the western society, losing
control may not be treated at a personal level, whereas in
China, losing control is often associated with “losing face”,
a deep rooted cultural influence in business. Losing face in
this case means losing the freedom of making decisions,
which would put Zong in a disrespectful situation with his
peers. Wahaha thus insisted in running the daily operations,
so that it was able to keep its “face” and gain respect from
peers. Wahaha may have also perceived it was “losing face”
when Danone established other IJVs with their competitors.
It is not surprising that Wahaha was less motivated to solve
conflicts between the two partners. It is important for
partners to communicate about cultural issues such as
“losing face” before and during the establishment of an IJV.
It would help to build consensus in managing the IJV.
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.
TEACHING NOTE EXHIBIT 4
1.
2.
3.
Examples of Exit Strategies
Selling one firm‟s ownership stake to another partner at a previously agreed
upon price, and thus changing the IJV to a wholly owned firm by one
partner.
Inviting another party to join the IJV in order to reconcile existing conflicts
among partners.
Dissolving the IJV through planned legal procedures.
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