Danone "Pot" calls Wahaha "Kettle" Black

Danone, the French food and drinks group, has initiated legal action against its main joint venture partner in China, raising the stakes in a ferocious dispute that has threatened the future of the lucrative drinks business.

The French group has sent a letter to Zong Qinghou, the chairman of its joint venture partner Wahaha, which says that Danone could begin litigation in 30 days if the two sides cannot reach agreement. Danone has accused Mr Zong of setting up a parallel operation to the joint venture that makes and sells the same products.

The rest of this article is for FT.com subscribers only. Read More

This is a great example of the double edged sword. Joint ventures are currently the favoured method of starting up in China. Whilst joint ventures can minimise many of the initial problems of starting up, they do bring with them other risks, and if the trust breaks down, it might just turn sour. For a more detailed account of the risks foreign companies take on see Dan Harris' excellent article on China Law Blog. Just like Dan I too am hooked on this story and I am sure it will reveal lots of useful information as we watch it unravel.

Danone’s lucrative joint venture in China with Wahaha was plunged into crisis on Monday when the head of China’s largest drinksmaker, launched a blistering attack with nationalistic overtones on the French dairy and drinks group.

In an interview given to Sina, one of China’s leading internet portals, Zong Qinghou, founder and chairman of Wahaha, said Danone did not understand China or Chinese culture.

And if you just scratch the surface, the plot thickens quickly...from China Daily

China's biggest beverage maker is firmly opposed to French food giant Group Danone SA's planned acquisition and may break up their ties, a top company official said.

Hangzhou Wahaha Group, in which Danone has a 51 percent stake, will not agree to the French firm's plan to buy its remaining assets for 4 billion yuan, Zong Qinghou, chairman of the Chinese beverage maker, said in an online broadcast on Sina.com, the country's most popular portal.

"Danone wants to buy our remaining companies that are not included in our joint ventures, and we are not consenting," Zong said.

Danone, the world's largest yogurt maker, set up five joint ventures with Wahaha in 1996 under an agreement that bars Wahaha from making products that compete with those produced by these ventures, or using the Wahaha brand without Danone's consent.

"We consider such provisions unfair, prohibiting us from making goods that are produced by the joint ventures while imposing no restrictions on Danone itself," Zong said.

Danone, according to Zong, has invested 1.5 billion yuan in the ventures with Wahaha and has made a profit of 3.8 billion yuan in them.

Danone was unavailable for comment, but said in a public letter to Sina.com that Zong's comments "are not in line with the facts".

Danone, famous for its aggressive acquisitions in the Chinese market, has so far bought stakes in at least seven leading Chinese food and dairy companies since it entered China in 1987.

It has stakes in Shanghai-based Bright Dairy & Food Co, Shenzhen Health Food Co, Guangdong Robust Group and Shanghai Aquarius Drinking Water Corp.


Danone also owns a 22 percent stake in Beijing-based Huiyuan Juice Holdings Co, the country's largest fruit juices producer, making it the second-biggest shareholder in the Hong Kong-listed firm.

Last December, the French dairy maker formed joint ventures with China Mengniu Dairy Co, the country's biggest liquid milk producer, in which it holds 49 percent of the stake.

But some critics have accused the French firm of trying to create a monopoly in the Chinese beverage market and dumping its home-grown brands at local companies after buying into them.

In an online poll conducted by Sina.com, 91.68 percent of the 25,000-odd participants think Danone's latest move to acquire Wahaha is aimed at creating a monopoly in the Chinese beverage market.

"The government should work out regulations to protect domestic companies from malicious acquisitions," appealed Zong, a teacher turned entrepreneur.

Founded in 1988, Wahaha Group, based in East China's Zhejiang Province, has assets of 8.8 billion yuan and employs about 20,000 people.

The net profit of the company, which manufactures mineral water, tea, fruit juice and baby milk, increased to 2.2 billion yuan in 2006, while pre-tax profit jumped 48 percent to 3.2 billion yuan.

I have just had a flashback to July 2005 when Danone itself was the target of a hostile takeover by Pepsico. The French government didn't like that idea at all, and in fact did all it could to ensure that Danone remained a French national treasure.