What were the factors that triggered the demise of once solid partnership between Dannone and Wahaha companies?
The factors that triggered the demise between the companies include:
- The disagreement over the way the created joint venture should be controlled. This problem was accounted for by different visions. Since China is a communist country, Wahaha believed that the difference between 50/50 and 51/49 distribution was insignificant, which turned out to be wrong.
- Change of ownership. The director appointed by Peregrine had been replaced by a Danone representative before the Chinese were informed that Peregrine’s interest in Jinjia had been bought out by Danone to acquire 51% ownership.
- Setting up independent companies. Danone was unaware of the fact that Wahaha set up firms in the same industry for Zong and his family to sell products that would compete with those manufactured by the JV.
- Illegal use of the joint trademark. Besides opening independent companies, Wahaha used its trademark for developing new brands. This violated the contract rules since the trademark belonged to the JV according to the initial agreement.
- Ineffective communication. While Danone agreed to all Zong’s conditions, its managers failed to establish effective communication with their partners concerning the ways to acquire the market share of the Chinese without violation of the initial conditions.
- Technology patent. Danone manufacturing technology was transferred to the JV to improve performance. Later, the secret formula (that was supposed to be used only to the benefit of the JV) was applied in non-JV firms without Danone’s authorization.
- Cultural differences. The lack of shared corporate ideologies led to mutual frustration and culture clashes as Zong was dissatisfied with his partners’ conservative approach to business. Danone, in its turn, counteracted ambitious and aggressive expansion.
What course of action would you recommend if you were leading the Danone side? Wahaha side?
Recommendations for Danone:
- to start litigation immediately when the problem with parallel firms and the use of the trademark and the technology formula was discovered;
- not to acquire these companies’ majority stake to gain profits from violation of their conditions thereby confirming that there was no concealment on Zong’s behalf;
- to discuss openly the matter of Peregrine acquisition before the decision was made;
- not to interfere with Zong’s family issues since this only aggravated hostility between the two parties;
- to concentrate on localization strategies and study the market instead of trying to operate as a subsidiary controlled from headquarters;
- to show more resolution in decisions instead of giving Zong the power of control.
Recommendations for Wahaha:
- to study Western business practices as per the importance of the controlling interest;
- to restrain from involving family members into the business;
- to get authorization from the partners to use the trademark for non-JV firms;
- to share profits from non-JV firms with Danone as the owner of the technology formula;
- to reinforce risk-management practices.
What core lessons would you distill from the experience regarding designing and executing joint ventures? Any specific lessons about JVs in emerging markets? Chinese JVs?
The core lessons to be learnt from the experience of designing and executing joint ventures:
- Cultural differences may play a bad trick if they are not taken into account before a JV is formed.
- Management practices must be negotiated in advance to avoid collision of approaches.
- A JV is supposed to share not only profits but also risks.
- The speed and direction of growth must be agreed upon.
- The initial contract should specify all legal controversies that may arise between the partners.
- Concealing business solutions related to the use of technology, brand name, or expansion lead to legal proceedings.
In the emerging markets and in China:
- It is important to take into consideration the power of the regime.
- Public opinion is very strong due to nationalism and can mar the reputation of the foreign company.
- Intellectual labor is not considered to be a property and can be easily used without authorization.
- When doing business, it should be remembered that the Chinese want to control the process regardless of their share.
- The Chinese market should be carefully studied.
- More rules are implied than outlined in contracts.