Cheryl Van Deusen - AIBSE. · PDF fileCheryl Van Deusen Coggin College of ... and that China was already the largest market for Danone‟s international businesses. Wahaha contributed

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International Business: Research, Teaching and Practice 2010 4(1)

FRENCH DANONE AND CHINESE WAHAHA: YET ANOTHER EXAMPLE OF AN UNSUCCESSFUL

INTERNATIONAL JOINT VENTURE

Pingying Zhang

Coggin College of Business University of North Florida, FL USA

Cheryl Van Deusen Coggin College of Business

University of North Florida, FL USA

During a five-day visit to Taiwan on November 26, 2009, Zong Qinghou, Managing Director of the Chinese firm Wahaha, was impressed by the quality of Guangquan Corporation’s dairy products. An opportunity for another international joint venture (IJV) arose in Zong’s mind. It was too attractive to ignore in that it might give Wahaha a competitive edge in establishing a quality image after the scandal involving contaminated milk formulas by the Sanlu Group in 2008 had greatly shaken consumers’ faith in Chinese brands. However, the bitter dispute with the French multinational enterprise Danone, Wahaha’s first IJV partner, caused Zong to reconsider whether to take advantage of this opportunity. Danone finally pulled out of the IJV on September 30, 2009 after years of fighting, ending the almost 12 year relationship with Wahaha. Because this relationship had not worked out, Zong was thinking about what went wrong during the previously unsuccessful IJV. He was deep in thought (Lucy, 2009).

Email: [email protected]

Zhang & Van Deusen Danone and Wahaha: Unsuccessful IJV

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SPOTTING OPPORTUNITIES

Zong Qinghou was born in 1945 in Hongzhou during a turbulent period in China (Yang, 2004). Zong did not receive much formal education, thus he had various menial low paying jobs from 1963 to 1982, including jobs at the Zhoushang Salt Farm, the Luxing Farm, and a small paper carton factory. Like millions of other Chinese workers without many opportunities to earn a decent living, Zong dreamed of starting his own business. The opportunity came in 1986 after Zong returned to Hongzhou to take care of his mother who was sick. Zong got a job selling milk in a mini-grocery in a local school in the Shangchen District where his mother worked as a teacher. From this job, he identified opportunities. It was an era when the one child policy had just started. The only child became the apple of the entire family. Their parents and grandparents would generously spend more to make these small “kings” and “queens” healthy instead of spending on themselves. However, what they could buy in the market was rather limited. Zong saw the opportunity to produce milk drinks which were not common in China but were deemed as healthy, particularly for kids. Using the campus as his first testing ground, he started a business with two retired teachers and borrowed 140 000 Yuan (about $17,000 at that time; Yang, 2004). In 1989, Zong created Hangzhou Wahaha Nutritional Foods Factory, partnering with the local government to formally enter the niche market of nutritional drinks for children (Liu, 2007). Since private ownership was not allowed by law, Zong partnered with the municipal government in Hongzhou. In 1991, Wahaha Nutritional Foods Factory changed its name to the Wahaha Group. It was a state owned enterprise and Zong was the Managing Director. The Wahaha Group was later converted into a private corporation during the IJV formation with the French company Danone. In China, an IJV is defined as an establishment between one or more foreign, individuals, companies, enterprises or other economic organizations, and one or more Chinese companies, enterprises or other economic organizations, in accordance with the Law of the People‟s Republic of China on Chinese-Foreign Equity Joint Ventures (Li, Zhang and Jing, 2008). The parent firms jointly exploit their combined resources to identify and create capabilities and core competences to capture market opportunities primarily inside the Chinese market. Chinese firms provide knowledge about government laws and customs, along with networking relationships, while foreign firms provide financial resources and technological and management expertise. Between 1992 and 1995, after the success in selling nutritional drinks for children, Zong started to explore other product markets in addition to healthy drinks. These products included sour plum drinks, alcoholic beverages, pseudo-medicinal potions, and even Peilin pickles from Sichuan (Wu, 2007). The sales, however, were disappointing. Also in May 1992, Wahaha Group raised additional capital of 236 million Yuan ($30 Million) internally to build the Hangzhou

International Business: Research, Teaching and Practice 2010 (4)1

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Wahaha Food City Co. Ltd. and to finance the construction of Wahaha Food City in Hongzhou (Wu, 2007). Poor revenues from non-healthy beverages, inexperience in project management, and delayed construction all started to jeopardize the survival of the Wahaha Group. Zong needed cash to save his falling empire and started exploring options. SATURATED DOMESTIC MARKETS COUPLED WITH AN INSATIABLE GROWTH

STRATEGY

Establishing IJVs is a common mechanism for firms from developed countries such as the US to enter emerging economies such as China. Doing so enables firms from developed countries to seek growth outside their saturated home markets, and firms from emerging economies to obtain global competitiveness through gaining access to current technology, processes and capital infusions (Pearce and Branyiczki, 1997). As a result, the Chinese government approved 405,180 joint ventures with a total capital of $419.8 billion between 1979 and 2002 (Li et al., 2008). Managing IJVs, however, has never been an easy task with high costs of entry and exit (Kogut, 1988), especially in emerging economies such as China (Luo, 2007; Steensma and Lyles, 2000). Today‟s Danone, or Groupe Danone as it is officially known, is a multinational food products enterprise headquartered in Paris (Zhoudong, 2007). It is the world‟s leading producer of dairy products such as Danone brand yoghurts and Evian bottled water. The company was founded in 1919 as a small factory producing yoghurt, and grew through acquisitions and mergers after World War II under the leadership of Antoine Riboud, who transformed the company into one of Europe's food giants. The name, Groupe Danone, was officially adopted in 1994 after Danone became a well known international brand name. Frank Riboud, the son of Antoine Riboud, succeeded him as the CEO and chairman in 1996 and continued to focus on the core markets of dairy, beverage and cereal while diversifying into other products. In 2006, 56 percent of its net sales derived from dairy, 28 percent from beverages, and 16 percent from biscuits (known in the US as cookies; Zhoudong, 2007). Over the past decade, Danone‟s growth strategy has been to establish international joint ventures, particularly in fast-growing emerging economies like China, India and Pakistan. For example, Danone acquired a 49.5 percent share in Pakistan‟s Continental Biscuits Limited in 1984 and formed an IJV with Britannia Biscuits in India in 1995 (David, 2007). In these IJVs, Danone exported management skills, new product development capabilities, growth capital, and current technologies and processes that its local partners desired. The huge and largely untapped markets satisfied Danone‟s yearning for growth that would keep their stockholders happy, since their domestic market was saturated and maturing. The IJVs also allowed Danone to gain experience with the very different cultures of emerging economies and communistic societies. In addition,


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prior to China joining WTO (World Trade Organization) in 2001, local partners were required by Chinese law. Thus, each partner entered the IJV with distinct goals and objectives. Prior to establishing the IJV with Wahaha in 1996, Danone already was an active player in the Chinese market. In 1987, Danone established Guangzhou Danone Yoghurt Company, and in 1994, Danone and Bright Dairy launched two projects to establish yoghurt businesses in Shanghai, in which Danone owned 45.2 percent of the IJV. In 1996, Danone acquired 54.2 percent of Wuhan Dongxihu Beer (Group) Co. Ltd., and in the same year, Danone also bought 54.2 percent of Shenzhen Health Food Co. Ltd. (Qiu, 2007). China is important for Danone‟s strategic position outside its domestic market. Yimou Fan, the president of the Asian Market of the Groupe Danone, in an interview in 2007, commented on the importance of Wahaha for Danone (Qui, 2007), saying that no companies other than Danone had such a focus on the Chinese market, and that China was already the largest market for Danone‟s international businesses. Wahaha contributed 10 percent of the total revenue of the Groupe Danone. THE BEGINNING

The IJV between Danone and Wahaha was orchestrated by a Hong Kong based firm Bai Fuqin. Danone and Bai Fuqin first formed Jin Jia Investment as an IJV. Danone approached Wahaha through this IJV. Danone‟s proposal of $450 million cash was accepted by Zong (Bai, 2008), though he publically rejected the „rumor‟ that Wahaha Group could not survive without the fresh cash infusion from Danone. Instead, Zong reiterated the fact that the Wahaha Group had revenue of $125 million and net profit of $25 million in 1996 (Qiu, 2007). He stated that there was no “emergency” driving the formation of the IJV with Danone. The vice section chief, Hongbin Zhang, from the Foreign Trade Cooperation Office in Zhejiang pointed out, “Wahaha‟s problem is not in the management, but the lack of funding” (Qiu, 2007) in that cash for growth was not available (Wu, 2007). According to Zhang, Wahaha started as a factory type of enterprise, thus, fund raising for growth had always been a problem. This ultimately limited Wahaha‟s growth potential and a foreign partner in an IJV was one way to remedy this issue. Also, during the early 1990s, the financial market in China was weak, and many banks had high levels of bad debt from companies. This environment pushed the regulators to tighten up on lending to corporations, and thousands of firms went bankrupt (Bai, 2008). Danone‟s generous capital injection came at the right time for the survival and growth of Wahaha. The IJV was formed by three companies with various levels of ownership: Wahaha Group (owned by Hangzhou municipal government with Zong as the managing director) owned 49 percent of the joint venture, while Bai Fuqin and


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Danone had 25.5 percent each (Dickinson, 2007). Initially, only the five best performing subsidiaries of Wahaha Group were in the IJV. By 2007, the original five IJVs had grown into 39 ventures (Liu, 2007). The media had a positive view of the IJV during this time. The local newspaper Hangzhou Daily named the venture as “a profitable matching, gaining competitive edge in the competition” on March 29, 1996, and praised Danone‟s deep pockets that greatly strengthened Wahaha‟s financial position in the turbulent dairy market (Qiu, 2007). SAME BED, DIFFERENT DREAMS

The capital investment from Danone seemed to solve Wahaha‟s need for cash for growth. Since 1996, Wahaha had been number one in the dairy market in terms of firm assets, annual production, sales, revenues, profits and taxes. In 2003, Wahaha‟s revenue reached $1.25 billion with profits over $125 million. In 2006, the revenue almost doubled to $ 2.3 billion. Danone expatriated 51 percent of the profits from the IJV, leaving 49 percent for Wahaha (Bai, 2008; Liu, 2007). By 2007, the IJV had 44 subsidiaries, and Zong owned and operated another 40 non-joint venture companies at the same time (Bai, 2008). Zong later explained that the formation of the IJV focused on two areas: bottled waters and dairy products (Qiu, 2007). Danone had the control over the bottled water division, and the production line was not allowed to manufacture other nutritional drinks, which were considered attractive by Zong. This drove Zong to compete with the IJV through his independent ventures. The marketing director of Wahaha, Xiuling Zhang, commented that any new product line had to be decided by the board of directors; however, Danone did not seem to have time to consider any new business lines or products because it was busily occupied by other mergers and acquisitions it had in China (Qiu, 2007). This was very frustrating to Zong and other Wahaha managers. During the 12 years of the IJV with Wahaha, Danone had initiated several IJVs with other partners, expanding its market share in the industry but also creating control problems (See Appendix 1; Areddy, 2009; Qiu, 2007). After first investing in Bright Dairy in 1994, in 2000 Danone increased its ownership to 20.01 percent, to become the third largest shareholder. Danone‟s ownership control threatened Bright Dairy‟s independent operation strategy, and Bright Dairy decided to end the 15-year relationship. Soon afterwards, at the end of 2006, Danone started another IJV with Mengniu, a direct competitor of Bright Dairy. This IJV ended in dismay at the end of 2007. Also, in 2000, Danone bought 92 percent of Guangdong Robust Group, which has suffered continuing losses since Danone took over. During the early years of the Danone Wahaha IJV, performance was solid but growth was slow. Dissatisfied with the growth rate, in 2000 Zong started to create a series of non-joint venture companies through the Wahaha Group that


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sold the same products under the same Wahaha trademark. These non-joint venture companies were partly owned by Zong, and partly owned by an offshore British Virgin Islands company controlled by Zong‟s daughter and wife. The creation of non-joint venture companies violated both the trademark license and the IJV agreement (Dickinson, 2007). However, this was not an issue until 2005, when Danone learned of this direct competition with the IJV and insisted on controlling 51 percent of the non-joint venture companies. Zong refused the request. Bitter verbal attacks started, and on May 9, 2007, Danone filed for arbitration in Stockholm, accusing that Zong, through his non-joint venture companies, had violated the trademark license and the IJV agreement. On June 4, 2007, Danone also filed suit in California state court, alleging that Zong and his family‟s control of non-joint venture companies violated the trademark license, and asked the court to stop the non-joint venture companies from using the Wahaha brand. Wahaha fought back and on June 13, 2007, the Wahaha Group applied for an arbitration hearing by the Hangzhou Arbitration commission, declaring that the trademark license was illegal at the time it was granted because it was intended to avoid the requirement of brand name transfer by Chinese law. Finally, on July 2, 2007, Wahaha Group threatened to remove three board directors appointed by Danone, accusing that these directors had violated Chinese corporate law by serving on the boards of companies that were competing with the IJV. The bitter quarrel continued until September 30, 2009 when Danone withdrew from the IJV for a monetary settlement that both sides had agreed upon.

LESSONS LEARNED: COLLABORATION OR COMPETITION?

At an Annual Drink Association event held in China, Zong argued ferociously against opening the Chinese drink market to foreign companies. Zong portrayed Danone as a large foreign multinational firm seeking to take advantage of Chinese companies and consumers, raising nationalistic sentiments in the citizens. Xinli Zhu, the president of Huiyuan group in the soft drink industry commented that Zong seldom tried to cover his dissatisfaction with Danone. Zong resented the fact that Danone was cooperating with other competitors in the nutritional drink market through other IJVs even though Wahaha was not behaving as a trustworthy partner (Bai, 2008). In early 2000, Bright Dairy started selling Danone brand yoghurt using Bright Dairy‟s extensive distribution networks. Over the next few years, Danone yoghurt became popular in the middle-eastern and the middle-southern part of China with market share of about 15 percent in 2006. Jiafeng Wang, the CEO of Bright Dairy, was proud of their success. In fact, it was the Bright Dairy relationship that turned around nine years of losses for Danone yoghurt in China. For reciprocity, Danone authorized Bright Dairy to sell other Danone brands which benefited Bright Dairy‟s total sales by $225 million between 2002 and 2006, ultimately building to $75 million in 2006 (Ye, 2007). Yet Danone was


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looking for another alternative that could boost its 15 percent market share. Mengniu became the next partner for Danone. Danone separated from Bright Dairy as a prerequisite to establishment of the IJV with Mengniu in December 2006. Thus in 2007, Danone halted sales of Biyou yoghurt by Bright Dairy and authorized Mengniu to sell the yoghurt instead. Although Wahaha was not directly involved in the competitive rivalry between Bright Dairy and Mengniu, the change from a collaborator to a competitor worried Zong. One year later, the joint venture between Danone and Mengniu broke, further establishing the reputation of Danone as an opportunistic multinational enterprise which took advantage of Chinese firms through IJV partnerships. When goal incongruence happens in IJVs, conflicts occur which may be followed by the dissolution of the IJV. A proper management of different goals in the IJV thus facilitates the success of international strategy of global firms such as Danone (Hartsfield, Johansen and Knight, 2008). Particularly when a foreign market such as China is characterized with high complexity, foreign partners‟ willingness to learn from their Chinese counterparts to solve potential conflicts becomes critical to a successful cooperation (Zhang, Dolan and Vidal, 2008). When the market for soft and nutritional drinks was booming from 2000 to 2006, Wahaha and Danone avoided discussions of their differences because they each were accomplishing progress towards their independent goals. Zong was dissatisfied with Danone‟s slow decisions for developing new products, and he was also concerned about Danone‟s role in cooperating with competitors from the same industry. Danone was not satisfied with Zong either, since the IJV‟s profit generated under the brand name Wahaha was shared by Zong‟s non-joint venture companies that were selling the same products with the same trademarks. When the profit of the IJV started to erode, it was too late to solve their differences. Danone started to negotiate purchasing all non-joint venture companies but both sides could not agree upon a price. The bitter verbal attacks in the press by both parents made it impossible to continue the IJV. TECHNOLOGY AND PROCESS TRANSFERS

One anonymous technical supervisor of the Wahaha Group (she would not reveal her name in an interview) expressed concern about Danone‟s level of technical support for the venture (Bai, 2008). According to her, Danone failed to provide timely technical support based on the agreement, and support that Danone provided was not state of the art for product quality development either. Local partners of IJVs want to learn the core technical competencies from the parent firms. For example, Danone achieved top quality research in its bottled water division with its Evian brand, but there was no quality difference between the IJV‟s bottled water and other brands in China. The fact that Danone did not improve the quality was very disappointing to the managers of Wahaha. It seems


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that Danone prevented the Chinese (e.g. local) brand disappearing from the market, but Danone did not help the IJV to improve the brand either. Like many multinationals, Danone wanted to enter the Chinese market and learn about the culture without transferring technology to the local partner, fearing Wahaha would become too strong to control. Zong was also dissatisfied that Danone did not share with Wahaha its new product information. He said, “We do not mean that French Danone gives us all their products‟ information; however, as a family, French Danone should brief us on the development of new products and new techniques so we could improve” (Bai, 2008). Media, however, portrayed a different interpretation of Zong‟s complaints about Danone‟s technology transfer. For example, the economic commentator Wu offered his views in the Chinese version of the Financial Times on April 10, 2007. According to Wu, Danone had provided techniques to the IJV to a certain degree. The vitamin bottled water had benefited from the technology transfer from Danone. What to transfer in terms of techniques and knowledge seems to be a grey area that can create conflicts between parent firms. The inconsistent technology transfer may intensify problems between parent firms who have different goals. OWNERSHIP AND NATIONALISM

Danone‟s Chinese strategy could be summarized as “using capital investment to enter the market” (Wang, 2008; Bai, 2008). The CEO of Bright Dairy, Jiafeng Wang, once sharply pointed out, “From the first day French Danone started the cooperation with Bright Dairy in 1994, it had hoped to own Bright Dairy in the end” (Liu, 2010). Danone used this strategy in most of its IJVs in China, such as Baisi Cola, Mengniu, Bright Dairy and Wahaha. The paradigm for companies from western-managed countries is that ownership is necessary for control. Although they may initially own a small percentage of a firm or an IJV, their ultimate goal is usually to buy out the local partner. If this is not possible, they will exit from the partnership. However, the success of an IJV is still doubtful when implementing managerial practices rooted in the west such as ownership control in a culturally distant country such as China (Williamson and Fadil, 2009), or countries with different religions (Williamson, Mueller, Van Deusen and Perryman, 2007). In the case of Wahaha, upon the formation of the IJV, Danone owned 25.5 percent, Bai Fuqin owned another 25.5 percent and Danone owned 49 percent. This structure perhaps led to a misunderstanding in that Wahaha felt “tricked” by Danone when Danone purchased the Bai Fuqin shares at the time that Bai Fuqin pulled out of the IJV. Wahaha was never given a chance to bid for the shares as Danone negotiated the purchase without their knowledge when Bai Fuqin needed to exit the venture. Thus Danone became the major stockholder,


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which frustrated Wahaha who had always intended to become the largest shareholder itself. Danone assumed that the majority ownership provided for ultimate control in decision-making, but the strong differences in national culture prevented Danone‟s ability to control through ownership. Peng Qin (a director of the IJV, representing Danone) could not understand why some Chinese enterprises were afraid of being controlled by other firms. “We should not be afraid of being acquired by others. There is no right or wrong in business intertwined with nationalism, and we do not comment on that. However, the world is becoming smaller, and the firms are more interdependent of each other. What accounts in today‟s business environment is identifying a partner to create value together. We should not resent French Danone as a foreign company acquiring Chinese business after its 20 years‟ operating in this country” (Bai, 2008). If Chinese enterprises are more afraid of being acquired by foreign enterprises than by Chinese enterprises, Peng Qin‟s comments could shed some light on the effect of nationalism in IJVs. Zong aroused nationalistic sentiments to create a positive image for Wahaha in its bitter battle in the press against the French company Danone (Russell, 2007). Zong‟s manipulation of nationalism was criticized by the economic commentator Wu; he pointed out the rationality that seizing control of the IJV was behind this nationalistic sentiment (Wu, 2007). The perception of an international brand name may not be linked to any specific country; nevertheless, most Chinese still associate GE with America and Danone with France. Others disagree and argue that when PepsiCo wanted to acquire Danone in 2005 for 30 billion Euros, French president Nicolas Sarkozy announced that the government would protect France‟s interests and ensure Danone would stay in French hands (Deen, 2005). Nationalism is raised in most countries when foreign firms attempt hostile takeovers and acquisitions. Zong of the Wahaha Group, the CEO Jiafeng Wang of Bright Dairy, and the CEO WenJun Yang of Mengniu all shared a similar fate: losing control in decision-making processes to Danone. Their goals were not to become a subsidiary of internationally well known Danone, but to conquer the Chinese market through utilization of Danone‟s resources. MANAGERIAL CONTROL

Danone‟s business philosophy, which attempts to use ownership to gain control, failed in China where 51 percent ownership does not equate to 51 percent of control in an IJV. If Danone‟s ultimate goal was to have a profitable IJV, 51 percent ownership control is not an effective way to manage IJVs. The Chinese may not see a fundamental difference between 51/49 and 50/50 joint ventures (Dickinson, 2007). It indicates that ownership control and managerial control are equally important in the governance of an IJV. In this case, Danone


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had ownership control while Wahaha had managerial control of day-to-day operations and decision-making. Danone injected capital which Wahaha and other Chinese firms needed; however, it didn‟t operate the IJVs, whose daily operations were in the hands of Zong and the other CEOs. Perhaps Danone should not have entered the IJVs without managerial involvement at the operational level. As analysts pointed out, leaving operations to Chinese parent firms created inevitable weaknesses for Danone. First, the Chinese felt it was unfair that they were doing all the work while they had to share the profit with Danone, and second, it was easier for the Chinese side to manipulate the IJV when active supervision was not in place (Dickinson, 2007).

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APPENDIX

DANONE’S EXPANSION IN CHINA

1. In 1987, Guangzhou Danone Yoghurt Company was established. 2. In 1994, Danone and Bright Dairy jointly launched two yoghurt companies in Shanghai; Danone owned 45.2 percent of these projects. 3. In 1996, Danone acquired 54.2 percent of Wuhan Dongxihu Beer (Group) Co. Ltd., and established the IJV with Wahaha Group; Danone held 25.5 percent of the IJV and the Hong Kong-based company Bai Fuqin held 25.5 percent. During the financial crisis in Asia, Danone acquired the shares of Bai Fuqin and became the largest shareholder of the IJV, holding 51 percent. In 1996, Danone also bought 54.2 percent of Shenzhen Health Food Co Ltd. 4. In 2000, Danone bought 92 percent of Guangdong Robust Group. 5. In 2001, Danone Asia Pte Ltd purchased a 5 percent stake in Bright Dairy. 6. In April 2006, Danone Asia Pte increased its stake in Bright Dairy and became the third-largest shareholder of the company. By the end of April, 2006, Danone raised its ownership of Bright Dairy to 20.01 percent. Bright Dairy ended the IJV later that year. 7. In July, 2006, Danone became the second-largest shareholder of Huiyuan Group. In February 2009, Danone increased its stake in the company to 24.32 percent. 8. In December 2006, Danone formed an IJV with the Chinese firm Mengniu Dairy Co, in which it held a 49 percent stake. This IJV ended badly before the end of 2007.

Note: The above information is from Qiu, 2007, [http://news.xinhuanet.com/fortune/2007-06/20/content_6266258.htm, accessed June 2, 2010]


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TEACHING NOTE

SUBSTANTIVE ISSUES

The case explores the complexity of an international joint venture (IJV) based on cross-cultural disputes and goal incongruencies that occurred in the IJV between the Chinese firm Wahaha and the French multinational enterprise Danone. It provides information about both parent firms‟ goals and intentions in establishing the IJV, the difficulties in handling the conflict of interests between two parent firms, and the misunderstanding of cultural issues that accelerated the problems leading to the demise of the IJV after almost 12 years. The case is versatile in that it can be assigned to graduate students when coupled with additional research requirements but is also straightforward enough to use in its present form by undergraduate students. PEDAGOGICAL OPPORTUNITIES

The primary objective of this case is to develop understanding of the potential problems facing international joint ventures, and possible tactics and strategies both parent firms should evaluate to enhance the IJV‟s results. The case analysis includes:

1. Determining the goals and objectives of the two parent firms in establishing an IJV.

2. Assessing the conflicts of interests of ownership issues before and during the establishment of the IJV.

3. Discussing the cultural impacts of managerial styles that could foster or endanger the results as well as the ultimate survival of the IJV.

4. Evaluating exit strategies from the IJV for both parent firms.

SUGGESTED CLASSROOM EXERCISE

Depending on the size of the class, divide the class into a variety of stakeholders that are involved in this case. Each stakeholder group should prepare for class discussion by utilizing additional sources to better understand their assigned stakeholder group and be prepared to defend their positions. Stakeholder groups include:

1. Wahaha‟s top management group including Zong Qinghou

2. Danone‟s top management group

3. Wahaha‟s IJV senior managers

4. Danone‟s IJV senior managers


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5. Chinese Government, as owner of a State Owned Enterprise

6. Chinese Labor Unions and Workers

7. Stockholders of Danone

8. Zong‟s wife and daughter who controlled competing IJVs; and,

9. Other Chinese partners in IJVs with Danone to include Bright Dairy & Mengniu.

a. Bright Dairy

b. Mengniu SUGGESTED QUESTIONS

1. What were the goals and objectives of Danone in seeking to establish an IJV in China with a local partner? Include time frames for achieving these goals and objectives.

2. What were the goals and objectives of Wahaha in seeking to establish an IJV in China with a foreign partner? Include time frames for achieving these goals and objectives.

3. Identify and discuss three areas of conflict of interest as perceived by Danone.

4. Identify and discuss three areas of conflict of interest as perceived by Wahaha.

5. Provide three specific examples of cultural conflict as perceived by Danone. What could have been done to prevent these issues?

6. Provide three specific examples of cultural conflict as perceived by Wahaha. What could have been done to prevent these issues?

7. What would have been a planned effective exit strategy for Danone? Once things had deteriorated too much to continue the IJV, what was a preferred exit strategy?

8. What would have been a planned effective exit strategy for Wahaha? Once things had deteriorated too much to continue the IJV, what was a preferred exit strategy?

GOALS AND OBJECTIVES

One way to start the discussion is to ask students to identify goals and objectives of Danone, Wahaha and the IJV. The instructor should compare the goals and objectives identified by the students. Some examples are presented in


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Teaching Note Exhibit 1. The examples are focused on the goals and objectives of Danone and Wahaha, and the instructor could challenge the students to explore the goals and objectives of the IJV at the same time.

TEACHING NOTE EXHIBIT 1

Goals and Objectives

Danone 1. Searching for new growth opportunities outside the saturated domestic market in France. For example, Danone expanded into 120 countries, including emerging markets such as India, Pakistan and China where Danone had about 70 factories.

2. Expanding their market share in China. Danone started its China expansion in 1987. Its expansion was based upon establishing several IJVs with different companies in the same industry. Danone became a well-recognized brand name in China as a result.

3. Strengthening Group Danone‟s total revenue. According to Yimou Fan, the president of Asian Market of Danone, the IJV with Wahaha contributed 10 percent of the total revenue of Danone, and China was already the largest market for Danone‟s international businesses.

Wahaha 1. Searching for capital. The earlier product diversification strategy of Wahaha failed to attract customers and consequently generated great financial loss. In order to launch other products into profitable business areas, Wahaha needed extra capital. At this critical time, Danone offered cash of $450 million to partner with Wahaha through establishing an IJV.

2. Investing in technology. In order to differentiate from competitors in the Chinese market, Wahaha needed advanced technology to enhance its product quality. By partnering with Danone, Wahaha was hoping to gain advanced technology information. However, according to Wahaha, Danone failed to provide the IJV technical support in a timely fashion.

3. Gaining back the market leadership position. By partnering with Danone, Wahaha aimed to grow stronger in the dairy market. However, the IJV only focused on two product areas, bottled water and dairy products, which could not satisfy Zong‟s overall growth ambition.


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CONFLICTS OF INTERESTS

The analysis of the goals and objectives in the above section can bridge to further discussion of conflicts of interests among the partners that are goal-related. However, there are some conflicts of interests that are less obviously related to the goals and objectives, and thus students may need the instructor‟s guidance. Instructors could start the discussion of this topic by asking students to identify and discuss at least two areas of conflicts of interest as perceived by Danone and Wahaha. Some examples are provided in Teaching Note Exhibit 2. When discussing conflicts of interests, it is important to distinguish between two situations: conflicts that are perceived by both partners, and conflicts that are perceived by only one partner.


Conflicts of Interests

1. Understanding the control system. Danone tried using the mechanism of ownership control to ensure its management control but was overcome by the top management team of Wahaha. Wahaha refused to relinquish its management power to Danone even when Danone obtained 51 percent of ownership of the IJV. Danone was not in charge of the IJV on the daily operational basis.

2. Understanding the intention of intellectual property (IP) protection. In this case, the IP issue concerns the use of the brand name Wahaha, and both partners disagreed on who had the right to use the brand name. The transfer of the brand name from Wahaha to the IJV was never legally settled, which perhaps resulted in different interpretations by Danone and Wahaha that suited their corresponding interests at a given time. For Danone, it was not acceptable for Zong to market his non-joint venture products using the brand name, and meanwhile for Zong, it was not acceptable to give away its premier brand only to produce a few products under the IJV. Also, it was not acceptable for Zong to sell his non-joint venture businesses to Danone without a premium.

3. Collaboration or competition. Wahaha was suspicious of Danone‟s sincerity in the collaboration in the IJV, while Danone at the same time partnered with Wahaha‟s competitors. For example, Zong never disguised his dissatisfaction with the joint venture between Danone and Bright Dairy.

4. Initial objectives. Wahaha‟s initial objective was to secure funding and maintain its management control of the business. Danone‟s initial objective was to control the business operation through ownership, which Wahaha interpreted as a “trap”.


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CULTURAL IMPACTS

By definition, IJVs involve cross cultural management. The instructor should introduce two types of culture differences in this case: 1) cultural differences at organizational level and 2) cultural differences at country level (Hofstede, 1980). Organizational culture involves how things are managed in a specific firm regardless of the nationality of the people who manage the firm. Country culture refers to unique behaviors that are specific to geographical areas. Therefore, the instructor should guide students to discuss potential differences of organizational behavior at the management level, and challenge students to explore cultural differences at the country level. To start the discussion, the instructor may ask: “What could have been done to prevent negative impacts on the IJV through managing cultural differences in the IJV?” The instructor could explore other cultural issues, such as the impact of nationalism on managing conflicts in the IJV. Some suggestions of cultural impacts are provided in Teaching Note Exhibit 3.


Cultural Impacts

Organizational Level

Seeking ownership control is a distinctive organizational culture of Danone. Danone consistently used the mechanism of ownership control to secure management control in most of its IJVs. Danone assumed Wahaha would also follow the same mechanism of ownership control. However, the case indicates that hands-on management was more important in decision making than ownership control. Although Wahaha understood the importance of ownership control, it seems that Wahaha cared more about daily operational control, and Zong had made it clear from the beginning that in practice he was in charge of the IJV‟s daily business. Therefore, without ensuring that Wahaha understood the mechanism of ownership control, Danone created managerial problems when conflicts arose. Decisions by the largest shareholder, Danone, were unlikely to be implemented. It is thereby important for a foreign partner in an IJV with a Chinese partner to clarify the expectation of ownership control.


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Country Level Interpretation of “losing control” is different between the western society and China. In the western society, losing control may not be treated at a personal level, whereas in China, losing control is often associated with “losing face”, a deep rooted cultural influence in business. Losing face in this case means losing the freedom of making decisions, which would put Zong in a disrespectful situation with his peers. Wahaha thus insisted in running the daily operations, so that it was able to keep its “face” and gain respect from peers. Wahaha may have also perceived it was “losing face” when Danone established other IJVs with their competitors. It is not surprising that Wahaha was less motivated to solve conflicts between the two partners. It is important for partners to communicate about cultural issues such as “losing face” before and during the establishment of an IJV. It would help to build consensus in managing the IJV.

EXIT STRATEGIES

Planning for an exit strategy reflects realistic expectations of parent firms that at some time the relationship will run its natural course and one or both partners is no longer benefitting from the relationship or the IJV is not working well and at least one of the partners wants to dissolve the relationship. Frequently when collaborations fail, a planned exit strategy may help to reduce financial losses resulting from the separation. Instructors could ask, for example, “What was a preferred exit strategy?” “What would have been a planned effective exit strategy for Danone or Wahaha once things had deteriorated too much to continue the IJV?” The students can discuss this within their groups, and then compare results across groups. There are different benefits and drawbacks related to the exit strategies. The instructor can encourage students to elaborate the benefits and drawbacks related to them. Some examples are provided in Teaching Note Exhibit 4.


Examples of Exit Strategies

1. Selling one firm‟s ownership stake to another partner at a previously agreed upon price, and thus changing the IJV to a wholly owned firm by one partner.

2. Inviting another party to join the IJV in order to reconcile existing conflicts among partners.

3. Dissolving the IJV through planned legal procedures.

Documents

Cheryl Van Deusen - AIBSE. · PDF fileCheryl Van Deusen Coggin College of ... and that China was already the largest market for Danone‟s international businesses. Wahaha contributed