Below is an official response from Danone, received in October 2007, to Steven Dickinson's article in China Economic Review's September 2007 issue, titled 'Danone v. Wahaha', analyzing the Danone-Wahaha joint venture. The response is published in its original, unedited form.
The establishment and development of joint venture companies
In 1996, Danone formed the Wahaha Joint Venture and signed an agreement to provide 51% of the shares to foreign shareholders. Danone's majority shareholding status was part of the initial agreement from the very beginning. With the contract, the joint venture companies enjoy exclusive rights in the production, distribution, and selling of food and beverage products under the Wahaha brand name. Also, the agreement stipulated that Mr. Zong and the Chinese parties involved would observe non-competing obligations with the joint venture companies. Danone appointed Mr. Zong as the board chairman of the JV to manage the company's day-to-day business. Danone supervised the JV through the board of directors.
Since its establishment in 1996, the Danone/Wahaha joint venture companies have witnessed substantial growth. In terms of business scales, the number of joint venture companies have increased from 5 to 39, and annual sales have risen to RMB18 billion from just a few hundred million RMB. Danone/Wahaha joint venture companies have become one of the largest food and beverage companies in China.
Such achievements of the joint venture company are due to the contributions of both partners. According to incomplete statistics, Danone's accumulated industrial investment in the Danone/Wahaha joint venture business has exceeded RMB2.5 billion. Mr. Zong Qinghou and the management team have made noteworthy contributions to the business, and have received significant financial returns.
Wahaha Non Joint Venture Companies
When Danone formed the JV with Mr. Zong Qinghou, the well-known entrepreneur signed a clause stating that he would not form other JVs to compete against Danone/Wahaha JV.
Danone had discovered that Mr. Zong and his family members violated the terms of the agreement. They consolidated companies in the same industry and their products that compete directly with the products of the joint venture companies; used the Wahaha brand and formula owned by the joint venture companies without proper authorization. The majority of the non-JVs founded by Mr. Zong and his family members are controlled by those companies that were registered in foreign countries. Since 1998, with his daughter's and other's names, Mr. Zong registered ten off-shore companies to invest in non-JVs. 28 out of the 39 non-JVs received investment from off-shore companies, and 15 of them were controlled by off-shore companies. The most important non-JVs are fully controlled by Mr. Zong and his family.
Meanwhile, there are an amount of state-owned and employee-owned shares in JVs. However in the 39 non-JVs, there is only one company that has few state-owned shares, and 16 having no more than 25% employee-owned shares. The other 22 companies have no state/employee-owned shares.
According to Mr Zong, in 2006, the total assets of the non-JVs was RMB5.6 billion, and the annual profits reached RMB1.04 billion, most of which were taken by Mr. Zong and his family, the actual controllers of the non-JVs.
Danone's Efforts to Solve the Non JV Issue
From Danone's viewpoint, Mr. Zong Qinghou breached the contract by setting up non-JVs. Taking into consideration the long term development of Wahaha, the 27,000 employees, as well as the tax contribution to local governments, Danone did not take immediate legal actions, but looked to solve the issue through negotiations. On December 9th, 2006, after more than six months of negotiations, Mr. Franck Riboud, Board Chairman of Groupe Danone, arrived in Hangzhou and signed a legal agreement with Mr. Zong Qinghou, that allowed the non-JVs to integrate into JV's system. Taking the loss of JV's into consideration, this agreement was a great compromise made by Danone to its Chinese partner.
However, sometime later, Mr. Zong Qinghou again breached the contract and sent a letter to Danone rejecting the terms of the agreement. In the same month, Ms. Kelly Zong, Mr. Zong's daughter registered a sales company of non-JVs in Hangzhou, called the Hangzhou Wahaha Food and Beverage Marketing Ltd.
Mr. Zong shared with the media that the reason for rejecting the agreement was disapproval from other shareholders in non-JVs, and that he was forced by Danone to sign the agreement. Danone disputes these facts and claims that Mr. Zong free-willingly signed the agreement and then refused to implement it. It is absurd to think that a successful entrepreneur could be "forced" to sign such an agreement. Furthermore, during the half-year long negotiations, Mr. Zong never expressed that he could not make decisions on behalf of the non-JVs. Another question one might ask is who are the actual shareholders of these non-JVs? According to the documents from Chinese authorities, most of the non-JVs are controlled by offshore companies which are owned by Mr. Zong and his family.
The First Case of Mr. Zong Publicizing the Dispute and using the Media to Sensationalize the Issue
In order to mislead the public and cover-up the fact that he was pursuing his own personal interests by breaching the contract, Mr. Zong shared with the media that it was compulsorily for Danone to acquire Wahaha, and accused Danone of forming a monopoly with their own interests in mind.
Later, Mr. Zong proactively resigned as the board chairman of Wahaha's JVs. After the resignation, Mr. Zong sent a number of harsh-worded letters to Danone and its directors and voiced his opinions of the company by using uninformed employees and distributors to arouse sympathy in China.
Consequently, Mr. Zong's connection of a pure business dispute with nationalism resulted in the international business community questioning China's investment environment and the credibility of China's entrepreneurs. This has seriously damaged China and their enterprises' image.
For months, the accusations initiated by Mr. Zong to Danone have not only damaged the image of Wahaha and Danone brands, but also has confused Wahaha consumers, employees, business partners, and the public.
Danone was forced to Launch Legal Action
When the dispute arose, Mr. Zong remained loyal to his personal interests and refused to solve the dispute with rational and lawful means, and instead added fire to the dispute by getting China's public involved. The negotiations proposed by Danone did not make any progress. Under such conditions, Danone was forced to proceed with legal action.
On May 9th, 2007, Danone filed an arbitration lawsuit containing eight claims with the Stockholm Arbitration Committee. The most important claim involves the breach of the non- competition clause.
On June 4th, 2007, Groupe Danone filed a complaint with the Superior Court of the State of California for the County of Los Angeles, USA, against Ever Maple Trading Ltd, a British Virgin Islands International Business Company, Hangzhou Hongsheng Beverage Co Ltd, and two individuals. The parties involved included Ms. Kelly Zong (US citizen or US green card holder) who is related to these companies. The purpose of this legal activity is to stop the defendants' collective scheme to wrongfully interfere with its customer relationships and business prospects.
Later, in order to mislead the public, Mr. Zong launched a so-called "legal war" against Danone.
On June 14th, 2007, Mr. Zong filed arbitration in Hangzhou on behalf of Wahaha Group, claiming to terminate the trademark transfer of Wahaha. So far, three hearings have been held.
Since July 10th, Mr. Zong has instructed the local Wahaha companies in Shenyang, Jilin, and Shanxi to file lawsuits against Danone directors, claiming that Danone directors have breached China's company laws by assuming director positions in the boards of different food & beverage companies.
Danone still Hopes to Solve the Dispute through a Peaceful Resolution
From the beginning, when Danone uncovered the existence of non-JVs to the following disputes, Danone has always hoped to solve the dispute through a peaceful resolution. Danone has actively communicated with Hangzhou and Zhejiang government officials, as well as the officials of the central government and Ministry of Commerce, hoping that the dispute can be solved with the guidance of government.
Danone appreciates the neutral stance of China's government that is important to Danone's position in France, where the French government maintains close communications with China's related departments.
The Impact of Danone / Mr. Zong dispute in international community
Mr. Zong leveraged national emotion to pursue his personal interest and exaggerated a pure business dispute to "invasion" and "cabal". These actions have resulted in questions from the international business community on China's investment environment and the China entrepreneur's credibility, which has seriously damaged both images.
In several mainstream international media articles, including Financial Times and the Wall Street Journal Asia, common questions have been raised in headlines such as: "Dispute between his company and France's Danone highlights the potential troubles foreign companies face here"; "Is China's economy developed enough, so that foreign capital is no longer needed?"
Mr. Zong's Accusation that Danone Tries to Monopolize Chinese Food & Beverage Industry
Danone believes only in one matter, which is sustainable capitalism in the sense of creating business and social value. We believe monopoly is the enemy of any free markets and the enemy of the consumers. We support government policies to ensure that business is conducted in a fair manner. We do this in every country and there is no reason China will be an exception.
In China's beverage market, the combined market share and brands which Danone controls or operates is about 15%. With strong competitors like Kangshifu, Pepsi, Coke, Nestle, one can hardly imagine Danone creating a monopoly in the China market. As a result, the comment that Danone has monopolized the China market is unfounded.
Whether or not the company is in monopoly position of the market will be judged by the government and related organizations with laws and regulations. Individuals should not make such judgments.
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