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Danone's non-contract spirit may get it routed
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15:37, August 20, 2008

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"In the recent situation, Danone may encounter total failure in both mainland and overseas legal proceedings," commented Zhang Malin, a professor from Southeast University's Law Department.

On May 7, 2007, THE ARBITRATION INSTITUTE OF THE STOCKHOLM CHAMBER OF COMMERCE (SCC) rejected two of the three interim measures proposed by Danone. The only one issued had an additional requirement. The tribunal asked Danone to produce an undertaking in 15 days, stating that if Danone's final arbitration request is rejected and the respondents can prove that they suffered losses during the interim measure, Danone Asia and its subsidiary companies would cover the damages if the tribunal were to make the order.

Danone in its partners' eye

It has been 20 years since Danone entered the Chinese market. The Paris-based company made joint ventures with, merged and acquired more than 10 Chinese enterprises. So, what is Danone like from its partners' perspectives?

In a joint venture with Wahaha for 11 years, Danone has never made any investment in production, technique, sales, management, research and development; neither did it contribute to any of these aspects.
When the joint ventures expanded from 5 companies to 39 companies, none of Danone's directors or executives had ever visited these companies. "Perhaps they do not even know where the company is, whether the joint ventures are formally on production or not." Chinese directors from Wahaha Joint Ventures have always welcomed the arrival of the Danone party. After Zong Qinhou resigned from his position, Chinese directors had requested Danone to fulfill its duty as the biggest shareholder of the Wahaha JVs; and expected Danone to send its managers to oversee production and sales management. But to this day, Danone still has not done so. Chinese directors have lost faith in them completely. Chinese directors believe that Danone's directors are not qualified for the task after seeing Robust's loss in market share and Yili lose the crown in mineral water competition under their management. Their management will only ruin Wahaha's achievements.

Deficits and firing experienced employees have weakened Robust's influence and the urbanization of its products. Robust's employees listed some of Danone's "achievements" when Robust was in its hands: "It is a company with confusing management----without clear market direction, no market strategy."; "They failed to develop any new product for years."; "Managers just sit in their office, spending their money in vain."; "I wondered where that 100 million advertising fund went."

Bright and its Fresh milk

"Danone suddenly changed its mind and replaced all pasteurized milk facilities with Ultra High Temperature milk facilities. This unexpected change was met with tough consequences. For years, the product could not win the market share. A once promising project turned out to be a bottomless bag that ate tens of thousands in investment." wrote Wang Guifen, former director and chairman of Bright, in her autobiography "Fresh: My Fifteen Years with Bright." Danone has strong ambition and holds its ground that "the end justifies the means." Its method to achieve goals may bring trouble in the near future. Wang criticizes Danone's break from the partnership with Bright as unmerciful and unethical. She described Danone's Greater China chairman, Qin Peng, as a "shameless, annoying person who only chases after profit" in business negotiation.

Two Faced Danone

With the help of the media, Danone is a saint in the eyes of the public. In 2006, Danone's CEO Franck Riboud said: "we never do hostile takeovers. " A Danone senior member once said, "Danone has maintained one principle in China: we have been a strong supporter to local Chinese brands, and we will keep this principle now and the future.

However, Danone changes completely behind the limelight.

Between 2003 and 2004, president of Danone Asia Pacific Yi had a meeting with Wang Guifen, and proposed to establish a yogurt joint venture with Bright. He threatened to stop providing mature technology to Bright if Bright refuses to co-operate. Wang refused his proposal without hesitation and called it blackmail.

In 1996, when Danone, Wahaha and Peregrine co-founded joint ventures, Danone hid its relationship with Peregrine from Wahaha. Although Wahaha primarily owned 49% of shares, Danone and Peregrine together owned the other 51%. As a result, Danone soon controlled Wahaha as the biggest shareholder. A few years later, Danone even requested to take over those stable non- joint ventures which did not receive any investment from Danone when established.

In early 2007, before Danone and Wahaha's case went into legal proceedings, Danone staked a claim to acquire at least 50% of Wahaha's non-joint venture profits in negotiation. On the other hand, research reveals that Danone neither put any investment into these non-joint ventures, nor did it put people and other resources into the production, techniques, sales, management, and R&D of non-joint ventures.

"Danone never meant to develop Robust brands." Some Robust employees complained that "Danone rarely mentions Robust's role in Mizone sales promotions. They make it sounds like a Danone brand, instead of a Robust brand. When Mizone was making a profit, Danone never thought of reinvesting the earnings into Robust."

The once famous Wuhan Dongxihu Beer was taken over by Danone. Later, this brand was transferred several times and soon diminished from the Chinese market.

As a matter of fact, Danone does not intend to increase the market of Chinese brands. The French company only focuses on its own brand, "Danone." Danone treats Chinese brands like pawns on a chess board. Regardless of horizontal competition, Danone would trade anything to Sedan for a bigger market share. Therefore, it went JV with Wahaha while merging with Robust; it exclusively invested in Shenzhen Yili; it remained partners with Bright for 6 years; and then built a partnership with the Mengniu group all of sudden.

Danone and its hard working PR

In Danone and Wahaha's dispute, Danone never saw victory on courtroom. However, this did not prevent its public relations company from doing an astonishing job. Utilizing their royal journalists and media publications, Danone possesses overwhelming discourse power over Wahaha.

As one of the largest advertising clients in many mainstream Chinese business print media, it tells the media to differentiate positive and negative information in association with Danone, and filter out the inappropriate ones. The PR company exercises power over the Internet media: contents that blur the image of Danone are deleted; while negative news about Danone's opponents are always highlighted and soon become hot topics.

By manipulating the media, Danone successfully made people believe that all its actions were done in the spirit of the contract and in line with free trade regulations; and the Chinese who supported Wahaha and Zong Qinhou were considered nationalist.

It seems that Danone has forgotten how French people reacted when Danone faced the Pepsi takeover crisis. From president to local consumers, this French national brand received support from all over the country. Furthermore, Danone was said to have used its political influence to achieve its goal. For that reason, French president Sarkozy talked about Danone and Wahaha on many occasions in his China tour; but none of the media reports associated this intended political pressure with nationalism.

It looks like Danone and the media share very similar logic in this situation. On one hand, it cannot be called nationalism, even though the French president traveled thousands miles to put pressure on the Chinese government to help one French company to take over a Chinese company. On the other hand, when Chinese courts decided in favor of Wahaha, it is "nationalism." Meanwhile, the Chinese government maintains a neutral stance.

Chinese citizens, professors, entrepreneurs and senior members in the beverage industry will read information about the Danone and Wahaha dispute through these media; and usually they will believe what they read.

The story about Danone's four failed lawsuits and its pointed declarations afterwards received extraordinary attention. There were two major points in Danone's claim: 1) Chinese law can not be applied to Danone (it is inappropriate to use Chinese law as a way to judge Danone); 2. Chinese courts are biased (all judgments have been made against Danone). The libel that was published by Danone controlled media was intentional. It is in absolute contempt of Chinese courts and law. Unfortunately, a lot of people who knew too little about the dispute believed the reports.

In fact, Danone tried to prevent its three failures in European courts from being revealed to the Chinese public. It was afraid that people might start asking: Don't European laws apply to Danone? Were European courts making unfair judgments as well?

Danone has always criticized Chinese enterprises for having little contract spirit. But the court orders show that Danone's criticism is not accepted by both Chinese and European laws.

While Danone chooses to expand its business in China, it has to accept the regulations under Chinese law. This should be a very fundamental contract. To obey local laws in the place where you stay is common sense to anyone. Does a company like Danone, which views contract spirit as a top priority, not understand this?

It is surprising when you see a company, which labels itself with a "contract spirit," not even obey the rules applicable in that country.

Danone now is in an upward battle: three losses in Europe, four losses in China, "tax evasion," senior executive Qin Peng has been investigated, over 1.21 billion in Robust takeover funds are missing, and the KPMG has been sued by Wahaha non-joint ventures. After the preliminary court decision in December 2007, the Hangzhou intermediate court recently made another decision: "The Wahaha brand belongs to the Hangzhou Wahaha Group." Professor Zhang Malin from the Southeast University Law Department said that the judgment made by the Hangzhou intermediate court will have an impact on the tribunal court result in Sweden. As is customary, the SCC will apply Chinese law. That is to say, Danone has little chance of prevailing in Sweden.

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