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Danone trapped in appeal case amid tax dodging scandals
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13:41, September 22, 2008

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Danone Group has been hit by a series of scandals since it started operation in China 20 years ago, from previous acquisition and tax dodging to the current controversial appeal case. We can gain a clear understanding of Danone’s strategy in China through these scandals. Looking at Danone’s tactics, we find that whatever the company does is for its own benefits and interests. To maximize its interests, it could ignore common value and human caring. Putting aside Danone’s dispute with Hangzhou Wahaha Group, let’s review its response to the Evian issue. The Paris-based company insisted on that Evian-branded mineral water is harmless to human being even after Chinese authorities found excessive bacteria in imported Evian water. Now, please turn your attention to the unreasonable requirements of Danone China executives including Chairman Qin Peng on Wahaha. In their best interests, they initially wanted to acquire non-joint ventures of Wahaha at a very low price and bought over Wahaha Chairman Zong Qinghou in secret, in a move to impair the interests of Wahaha employees in the dark. They took into consideration only their own benefits and interests and the motivation was the key point in the feud between Danone and Zong. Zong’s fight was a reflection of Wahaha as a whole’s fight as well as an outstanding brand’s fight against pursuit of private interests.

If we view Danone’s acquisition as a commercial strategy, then tax dodging and appeal scandals are a result of Danone executives’ extreme pursuit of their own benefits and interests. Tax evasion from Danone executives is a significant challenge to China’s tax laws. During the early stage of the Danone-Wahaha cooperation, Qin Peng said publicly that his salaries were paid by Danone from outside China mainland, as individual income tax rate is lower in overseas markets such as Hong Kong than in mainland. Danone was involved in malicious collusions with Robust’s President, He Boquan, and tax evasion during its acquisition of the leading Chinese soft drinks maker. The appeal issue is the latest of a series of Danone’s scandals.

Danone has used all possible means to take control over China’s domestic enterprise Wahaha, including the launching of personal attacks against Zong by its PR agency, Ogilvy Public Relations,
knowing that Zong is the soul of the Wahaha trademark. Acquiring the trademark without cooperation from Zong will be useless. In addition, Danone hoped to continue to benefit from Wahaha, while keeping Zong under control. After failure in attacking Zong and his families, Emmanuel Faber, Executive Vice President of Asia-Pacific of Danone, said the company would get Zong behind bars for the rest of his life. Danone later lodged eight international arbitration applications with the Arbitration Institute of the Stockholm Chamber of Commerce (SCC), while Wahaha lodged an arbitration application with Hangzhou Arbitration Commission for the transfer agreement concerning the trademark.

Danone lost the lawsuits. In December 2007, Hangzhou Arbitration Commission ruled in favor of Wahaha in its trademark dispute with Danone. The French group appealed to the Hangzhou Intermediate People's Court in June 2008, asking for reversing the ruling against it. However, its appeal was rejected, meaning the ruling in favor of Wahaha is valid and the Wahaha trademark is owned by Hangzhou Wahaha Group. Danone decided to appeal to a higher court. However, in such a case, no further appeal is allowed in accordance with Chinese laws.

A just cause enjoys abundant support while an unjust cause finds little support. Danone seems on the verge of a cliff. The company does not have a leg to stand on, despite its series of appeals. Unreasonable terms in the transfer agreement bring huge risks to Danone, whose own behaviors are doubtful. Shocking secrets will be uncovered, if someone keeps a close eye on personal problems of Qin Peng and Emmanuel Faber. If we say that Danone’s unsuccessful joint venture with Robust was a thing of the past, then Danone’s performance in recent years are being questioned. Furthermore, losing control over those hard-working Chinese entrepreneurs will lead to failure for the multinational company, which is good at mergers and acquisitions rather than brand management. Danone is doomed to failure in the Chinese market, just like Napoleon’s defeat at Waterloo.

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