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Danone may face resistance from Chinese partners
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14:02, August 13, 2008

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When the Danone-Wahaha partnership seemed ideal in 1996 and both sides shared a promising vision for a better future, no one suspected that one day the two would be in such a heavy dispute now, suing each other in court, and even tearing each other down. Neither party had expected such an outcome.

Decades ago, when multinational companies first entered the Chinese market, they had to throw out the "technical and fund for market" strategy, so as to "marry" native national enterprises as a shortcut into the field. National enterprises, after undergoing the first round of rapid development resulting from reform and opening up, were facing a "financial and technical" bottleneck before the second venture. As a result, the two sides instantly formed intimate relationships. Danone and Wahaha were one of those relationships. However, marriage established solely on interest but without an "emotional foundation" created landmines in future development.

As an international food giant, Danone secured its global position by means of mergers and acquisitions. Entering the Chinese market, Danone played the same hand, quickly occupying the Chinese market by successively holding Wahaha, Aquarius and Robust; and purchasing shares of Mengniu, Bright Dairy, Huiyuan juice, Shenzhen Yili and other Chinese milk, beverage, dairy product enterprises.

According to industry statistics, Danone almost succeeded in China. It holds more than 60% of the market share in China's current beverage, dairy product and drinking water industry. As a multinational enterprise which pursues maximized profits either by holding or by purchasing part of the shares, Danone has made it a goal to "dominate the Chinese market through controlling its joint venture partners and to enhance its right to speak within the industry, so as to obtain maximized profits."

Frankly, beverages, dairy products, and drinking water are not technology-intensive industries. Danone was only trading "money for market" with Wahaha at the beginning. Wahaha, short of capital and planning expansion at that time, treated Danone as a "son-in-law" and was willing to pay anything to get it in.

However, as China's economy and national enterprises accumulated more strength through development, when capital was no longer a bottleneck constraining business development and expansion, and when multinational companies made considerable investments only to find that they were still far away from the center of the market, conflicts began to emerge. If a leader of enterprises is moderate, he may compromise under the strength and coercion of multinational enterprises. However, when facing Zong Qinghou, the dauntless and unyielding President of Wahaha, Danone had to turn to the law.

The battle between Danone and Wahaha has been going on for a year in China. Frankly, for all parties involved, the lawsuit is costly. However, the war is not over. On the contrary, the flames simply spread overseas. So far, Danone has not won any single lawsuit in domestic courts, which was probably the reason Danone wanted to expand the war to an international court. But to our surprise, Danone failed to steal any points in international court. Not long ago Danone's appeal was dismissed by Sweden's Stockholm Commercial Arbitration Court. And on August 4, the Hangzhou Intermediate People's Court in final appeal confirmed that Hangzhou Wahaha trademarks are the property of Wahaha Group. This finally put an end to the dispute of Wahaha trademark ownership, an issue of significant importance.

The law is an incarnation of "fairness and justice." A series of failures in lawsuits brought a heavy blow to Danone and seconds for Wahaha to celebrate. But industry experts believe that the most serious strike on Danone is not the loss of the lawsuit itself, but a series of problems triggered thereupon.

As a matter of fact, Danone cooperated in the same way with enterprises such as Aquarius, Robust, Mengniu, Bright Dairy, Huiyuan Juice and Yili mineral water for the same purpose. All these partners were closely following the result of the lawsuit between Wahaha and Danone. The final victory of Wahaha undoubtedly has greatly encouraged these enterprises. For them, it is always a better solution to follow Wahaha's example to sue the "hegemonic" Danone before they are finally swallowed up by Danone.

If so, Danone will probably face joint resistance from its Chinese partners, which might come as a fatal blow. Additionally, since Chinese consumers look down on French companies, experts believe that, without partners' support, Danone could possibly collapse and withdraw from the Chinese market.

Some senior managers cooperating in joint ventures with Danone voiced out that they have resented Danone's "hegemony" for a long time. However, given the contract liability, they have to keep silent. Wahaha's victory revealed the possibility for these differing partners to defend their own rights and interests through legal means.

Perhaps it was Zong Qinghou who opened Pandora's Box for Danone. Without the record of a joint venture, Danone's performance in the Chinese market has been awkward. Therefore, if the joint ventures all rise against it, Danone will be in really big trouble.

The lawsuit between the two in the first half of this year alone cost RMB 570 million; and involved a large number of financial and material resources. If other partners in the joint venture take similar action, Danone will certainly tire from running around. Its competitors will be at an advantage, which will throw Danone into a true quagmire.

By reporter for People's Daily Online Zeng Gaofei

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