Look before you leap,Still waters run deep in dispute at Wahaha

Zong Qinghou, founder of the Wahaha drinks group, is a rare figure among Chinese entrepreneurs. Many have built strong operations in manufacturing and real estate but few have created a consumer brand known and respected across the country. Read original article.

That brand is gaining notoriety for other reasons. The name Wahaha was chosen to sound like a baby laughing but is now at the centre of an increasingly contentious international business dispute.

Danone, the French group that has a joint venture with Wahaha, has launched a $100m lawsuit in the US against two of Mr Zong’s family and a subsidiary company over allegedly illegal sales of Wahaha drinks, while Mr Zong has accused Danone of trying to "frame" him and not understanding the Chinese market.

The dispute could lead to the joint venture, one of the most successful in China, falling apart.

In the process, it has put the spotlight back on whether multinationals should invest in China through such partnerships.

Mr Zong, 62, blends many of the strengths and weaknesses of his generation of hard-driving entrepreneurs. He spends 200 days a year travelling the country, visiting markets and testing competitors’ products to get a sense of what consumers want. While most rivals spent the 1990s focusing on big cities, he concentrated on smaller towns and rural areas to build broader support for the brand.

Wahaha remains a personality-driven company, with operations overly dependent on Mr Zong – who is often referred to as "Chairman Zong".

He has flirted with eccentric diversification plans. Last year, he talked about going into the defence industry and mining.

For the past decade, Danone has benefited richly from Mr Zong’s entrepreneurial energy. When Wa-haha wanted to launch its own bottled water in 1996, it entered a joint venture with the French company that provided capital for the operation in return for a 51 per cent stake. The bottled water is now the market leader.

In retrospect, however, the business was an accident waiting to happen. Executives familiar with the joint venture say Danone has little influence on day-to-day operations. Yet, if Mr Zong wanted to use the Wahaha name on other products, he needed permission from the joint venture board – in other words Danone.

"In the successful joint ventures, the two companies have skills that complement each other, but in this case they are also competitors," says Paul French, a retail industry consultant in Shanghai.

According to Danone, Mr Zong’s response was conflict. He set up a parallel sales company to market and distribute water and other joint venture drinks products.

With a slew of lawsuits pending, Danone won the first stage of the battle last week when Mr Zong resigned as chairman of the joint venture company, to be replaced by Danone’s Asia boss Emmanuel Faber.

However, the depth of the task facing Danone as it tries to assert control was underlined on Friday when Wahaha employees issued public statements denouncing the French company.

A letter claiming to be from the Wahaha sales team stated: "We formally warn Danone and the traitors they hire, we will punish your sins. We only want Chairman Zong… Please get out of Wahaha!"

Danone did not comment publicly on the letter.

The danger for Danone is that Wahaha’s extensive sales and distribution network, which deals with both the joint venture’s drinks and Wahaha’s own products, will undermine the joint venture.

A consultant who asked not to be named said: "From Danone’s point of view, it had become impossible to work with Zong, but it might also be impossible to run the company without him."

However, Lu Jinyong at the Foreign Economic and Trade University in Beijing, says Danone should be able to stabilise the business. "There have been disagreements for some time so I assume Danone planned for the worst-case scenario," he said.

In his battle with Danone, Mr Zong has tried to use his political contacts. He chose the National People’s Congress in March to go public with his attacks on Danone.

However, there are signs that the heavy nationalist language used by Mr Zong has not gone down well in Beijing.

State media reported that Beijing has tried not to take sides in the dispute.

If Mr Zong is to squeeze Danone out of control of the Wahaha brand, he will need to rely on his own energies.