After starting life in 1988 as a seller of milk products, Wahaha founder Zong Qinghou made the decision to move into bottled water in 1996, inking a joint-venture with Danone. At the time, the alliance seemed like a good idea —despite the numerous failed JVs that littered the corporate China landscape during the ’90s.
That the partnership has un-ravelled so dramatically has surprised many observers, particularly given its significant growth over the past 10 years. Zong is now the 14th richest person in China, while the operation now ranks as one of Danone’s most profitable global ventures. Like many a marriage, though, the cracks have been starting to show for a while. Zong has been unhappy for some time with the structure of the deal, particulary his minority stake, and the requirement that he needs approval before using the Wahaha name.
Matters came to a spectacular head recently when Zong compared Danone to a colonial invader. Danone responded by alleging that Zong has established an ‘illegal’ operation which manufactures and sells the same products as the JV — and makes around the same in terms of profits.
The dispute escalated when Zong resigned from the JV, shortly after Danone filed a lawsuit against Wahaha in a US court.
While Danone’s 51 per cent stake gives it something of an upper hand, it will find the public relations battle considerably more difficult to win, given the cultural overtones implied by the battle.
In particular, Zong has sought to define the battle amid an atmosphere of growing MNC clout on the mainland and has accused Danone of disrespecting China. Wahaha employees have come out in support of Zong, and Danone’s other JVs look in peril.
Unsurprisingly, it appears that the chortling baby may yet have the last laugh.
Fact Box
Via its Wahaha joint-venture, Danone claimed 23 per cent of China’s bottled water market last year.
Danone claims that Wahaha founder Zong Qinghou has cut it out of US$100 million in revenue through a competing operation.
The Wahaha JV accounted for more than five per cent of Danone’s global profits last year.
Esmond Quek, chief executive, Hill & Knowlton China
The feud between Danone and Wahaha is an example of one of many risks associated with partnerships in China. How the two position themselves and their brands as events unfold will have significant impact not only on their business operations, but also on the viability of the joint-venture model for business expansion.
Wahaha chairman Zong Qinghou has tried to position this dispute as a David and Goliath tale. In an effort to tap into public sympathy and nationalistic pride, he has portrayed himself as the victim of foreign predators. Danone, on the other hand, has instead focused on the legal issues at play. The French giant seems to believe that once the smoke clears, and Zong’s actions are found to have violated the terms of their contract, the Danone brand will rebound and all will return to business as usual.
But the Chinese Government has been encouraging the development of national brands and rightfully so. Wahaha and the Chinese media have been quick to align Zong’s claims with these aspirations; therefore, Zong’s messages have found a receptive audience.
Danone will need to appeal not just to the court of law, but to the court of public opinion if it wants to win this battle.
Warren Wang, general manager, FutureBrand Beijing
The actual situation for Danone is that it is only well-known for its biscuit and former yogurt products. Wahaha and Robust are both historical local beverage brands with huge market shares, and local consumers rarely connect them with the legal master brand — Danone.
The battle between Danone and Wahaha or even Robust, has already had a negative impact on Danone’s brand in China. Emotionally, it could potentially destroy the relationship with local consumers, who have a stronger emotional link with national brands.
Also, it is a dilution of existing brand value. It would be much more sustainable and applicable if the foreign brand could evaluate and leverage brand assets among its portfolio brands so as to maximise the communication touch points with target audiences instead of just owning these assets.
Defining the relationship between the foreign and local brand always spells caution for a JV at start-up.
Danone should clearly define how to effectively communicate with local consumers, instead of exposing itself widely on the issue of brand ownership rights, which could potentially damage its intangible value.
