Groupe Danone, whose spectacular fallout with key JV partner Wahaha has prompted this nationalist backlash, may - of course - think that it has more pressing problems to consider in China than its image in the local press. Particularly now that Coca-Cola has taken advantage of the French firm’s weakness to make an audacious acquisition bid for Huiyuan, of which Danone owns almost a quarter.
To ignore the crippling brand ramifications, however, would be folly and raises some serious questions about how Danone allowed the imbroglio to reach this point. “It underscores that it has become a political issue,” points out Wolf Group Asia CEO David Wolf.
While Danone’s MNC peers might be permitted a certain degree of schadenfreude - the company’s 39 joint ventures with Wahaha did provide profits and political goodwill at one point - savvier ones will be watching the disintegration of the relationship with a measure of concern.
The lessons for any MNC engaged in brand-building are not difficult to spot. Leaving aside the legal issues, which have dogged the structuring of many a joint venture in China, a key misstep may have been Danone’s insistence on resolving legal disputes at an arbitration panel in Europe. “It has not been able to recognise the PR value of litigating in China,” says Harris & Moure partner Steven Dickinson. “In China, you can still lose and make your case to the public. If you’re doing it on some panel in Europe, you can’t do that.”
Wolf agrees that Danone sacrificed goodwill by “running to its own courts”. He also points to a deeper problem that other MNCs would do well to avoid: the temptation to sling mud in an environment where brand awareness is evolving rapidly. Wahaha founder Zong Qinghou, for example, compared Danone’s tactics to the Western powers that bullied China a century ago. “Danone was baited into a public war of words, but, in retrospect, it won nothing by doing so. It should have portrayed it as a purely legal matter, and focused on its consumers.”
The affair has included one of the more explosive allegations to have emerged from China in recent times; that Wahaha has been producing copycat products outside of the joint ventures. It is the kind of revelation which can strike fear into an MNC brand manager contemplating a mainland entry, even if watertight legal agreements should mitigate most of this risk.
Brands experienced in foreign expansion such as Disney, Coca-Cola and McDonald’s remain well protected in China, although for some others that assertion is arguable. “Brand ownership has to be completely clear,” says Wolf. “In Danone’s case it was left up in the air. Given China’s relatively immature IP regime for protecting brands, you cannot rely on sophisticated legal agreements.”
Where, then, does the collapse leave that most storied of Chinese structures, the joint venture?
Wolf believes they are obsolete. “The strategy should be to build your company from the ground up. The other option is acquisition”. Coca-Cola, presumably, is listening closely.
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