Groningen, 15.11.

2009

Introduction International Business

Lecturer: S. Beugelsdijk
Professor of tutorials: H.C. Stek

Case Study: Danones affair in China

(International Business Strategy Alain Verbeke)
Group 12, Team 6

Date of submission: 16.11.2009

S. N. Veldhuizen (1858610)
Thijs Hofland(1942778)

1. What were the intentions of Wahaha Group and Danone when setting
up joint ventures in China?
Danone entered China in 1987 by founding Danone Yogurt Company in Canton.
Not knowing much about the peculiarities of the Chinese market, Danone bought
almost identical French products to the Chinese market. Most of the consumers
had no refrigerators to store fresh dairy products and Danones products were too
expensive for the average Chinese consumer. So Danone decided to capitalize
successful local business rather than build its own businesses from scratch,
resulting in a strong focus on joint ventures and acquisitions. The joint ventures
and acquired firms continued to sell their product under their own brands.
Furthermore, Danone let the former executives run the businesses and didnt get
involved much in daily operations. In fact, Danone functioned more like a capital
investor, linking its joint ventures through capital rather than joint products.
Both Wahaha and Danone expected to gain something from the cooperation.
Wahaha needed cash, and it also hoped to adopt new technology and managerial
techniques from Danone. For Danone, joint ventures with a strong local firm in a
fast-growing emerging market were a perfect opportunity for Danone, especially
considering Danones disastrous 1987 solo efforts in China. Both expected a
cooperation that worked well.
2. How did the relationship between Wahaha Group and Danone change
during the 11 years of cooperation? How did the bargaining power of
both parties change?
In the beginning Both Wahaha and Danone saw a great interest in cooperation.
Wahaha was searching opportunity to gain cash. They wanted to adopt new
technology and managerial techniques from Danone. Danone on the other hand
was searching an opportunity to enter the Chinese market, having the knowledge
to run a business in China. There was the establishment of joint ventures
between Wahaha and Danone.
The Joint Ventures started in 1996. Wahaha would control them for 49 percent,
Danone 41 per cent and Peregrine 10 per cent. Wahaha would be the company
leading these joint ventures. In 2007, one could say that the alliance collapsed.
Danone saw malpractices at Wahaha and vice versa. Wahaha made non joint
ventures compete with the joint venures that were established, furthermore the
Wahaha group has let other companies use the brand name Wahaha on their
products. Danone on the other hand was not really involved in the joint ventures,
they were much more interested on profits that came from these JVs. Zong
argued that Danone had neglected them and that Danone wanted to stop the
development of the Wahaha Group.
The bargaining power changed significantly. It probably starts at the very start of
these joint ventures. The responsibilities and leadership were given to Zong to
run the joint ventures. Danone did not get involved a lot with it. We think that
the trust had vanished over time, as both parties seemed to work against each
other. There were contracts, but these had room for other interpretations, leading
to conflicts. In 2006 Zong agreed to sell a majority share in the non JVs to Danone

however pulled out the offer in 2007. In the end Danone had to make the
conclusion that even when they would win in court, they would have no
knowledge of how to lead this company in China.

3. Did the long-term cooperation between both firms lead to more trust?
Did you observe any problems of bounded reliability with the two firms
cooperation? Was there a vicious cycle of suspicion? Was there a vicious
cycle of increasing dependency on a partner?
The cooperation between Wahaha and Danone started in 1996. Danone and
Peregrine Group set up a Singapore-based firm called Jinja. Jinja and the Wahaha
Group then set up five JVs in 1996. All parties agreed to let the Wahaha Group
take full control of the everyday operations of the JVs. Danone did not have a
single executive in the joint ventures and Zong ran the joint ventures with a high
degree of autonomy. Wahaha was depending on Danone, but in fact Zong was in
charge. The cooperation appeared to work well and the new cash from Jinja
enabled Wahaha to invest in both marketing and advanced production lines.
Wahaha had been Chinas number one domestic, non-alcoholic beverage
producer in both production volume and sales revenue. By 2007, 39 JVs between
the Wahaha Group and Danone had been established.
The disputes between Danone and Wahaha became known to the public on 3
April 2007, when Zong told Chine reporters that Danone wanted to take over the
RMB 5.6 billion assets of the non-JVs for only RMB 4 billion. Another long-time
conflicts between Wahaha and Danone was that Zong accused Danone of
designing a trap in the original JV agreement to win control of both the Wahaha
brands and the JVs. Moreover, the negotiations on the use of Wahaha brands and
the takeover conditions did not lead to a positive outcome. So the long-term
cooperation between both firms did not lead to more trust. The more time
passed, the more complex the disputes became.
I did observe problems of bounded reliability with the two firms cooperation.
Bounded reliability is about imperfect effort towards pre-specified goal
achievement, thereby leading to incomplete fulfilment of promises. One source of
bounded reliability is opportunism and the problem with opportunism lies with
the individuals self-centred desires and effort. A second source of bounded
reliability is benevolent preference reversal, in which an actors initial promise is
made in good faith, but the actors preferences then change over time, although
not in a self-centred way. So Individuals can perform as expected in the shortterm, but such individuals may produce long-term conflicts. Like we see in the
Danone case, the two firms started the cooperation with good intensions, but
later on conflicts aroused.
4. Was there a learning asymmetry in the joint Ventures?
There was definitely a learning asymmetry between Danone and Wahaha. When
the joint venture started, Danone agreed that Wahaha should lead the company.
Zong expected apparently that they would receive technical or managerial

expertise from Danone. Danone on the other hand did not expect Wahaha to
create businesses that would compete against the joint ventures. Furthermore,
Danone was not involved themselves in the Chinese market, they left it up to the
joint ventures. Despite the worsening cooperation, the Wahaha group benefitted
from this alliance, giving them a better position in the market.
5. Has Danone been able to access the location-bound FSAs of the
Wahaha Group? Should Danone have rejected the joint venture entry
mode in the first place?
Even after Danone took the position of majority shareholder in 1998, Danone did
not have a single executive in the joint ventures and Zong ran the joint ventures
with a high degree of autonomy. From Zongs perspective, the Wahaha Group had
not received any technological or managerial expertise from Danone. Moreover,
because of Danones lack of understanding of the Chinese market at the early
stage of the cooperation Danone had even created barriers when Wahaha tried to
expand the JVs business, such as when Wahaha tried to launch Feichang Kele,
tried to expand their production of bottled water and tried to invest in the
western regions of China.
When Danone and Wahaha had not reached any agreement on how to proceed
further, Danone was in a very difficult situation. Because it might win in court and
remain the legal owner of the Wahaha brands, but then be unable to run the JVs
by itself. Danone had never operated the JVs, does not have the management
recourses to control the JVs and does not have much experience in running
successful businesses in China on its own. We can conclude that Danone had not
been able to access the location-bound FSAs of the Wahaha Group. Nevertheless I
think Danone should not have rejected the joint venture entry mode in the first
place. Danone should be more involved in daily operations of the joint ventures
by doing market research, and using their own managers and not just let the
former executives run the businesses.
6. Can you provide an update on the relationship between Danone and
the Wahaha Group, using materials available on the Web?
From July 2007, Danone and Wahaha were involved in over 30 lawsuits about the
use of the name Wahaha. This was because that the Wahaha brand name was
competing against the Wahaha joint ventures. Danone has withdrawn itself from
the joint ventures that they had with Wahaha. They have received 300 million for
their shares from the Chinese business man Zong Qinghou.