Danone’s entry mode in China
Basically, Danone chose joint venture as their entry mode at the early stage of entering Chinese market. More specifically, in 1996, they began a joint venture with the other two companies: Hangzhou Wahaha Group Corparation (Wahaha Group) and a Hong Kong corporation called Bai Fu Qin (Baifu), and formed five new subsidiaries in China. However, it should be noted that Danone and Baifu did not directly invest in the JV, but established Jin jia Investment, a new corporation in Singapore instead with Danone as their controlling shareholder. In this case, Wahaha Group held 49 percent of the entire shares of JV while Jinjia owned the remaining 51 percent.

The reasons why Danone decided to form a joint venture rather than a wholly owned subsidiary or other formats can generally be associated with the considerable benefits they may gain from it. Firstly, as a French company who has just entered the Chinese market for no more than 10 years since 1980s at that time, Danone’s knowledge about domestic market was still limited and may face a challenge if they run their business solely. Therefore, it is essential for them to learn from their partner in terms of related market knowledges, such as the competitive conditions, culture, political and business systems in China. Secondly, the partnership enabled Danone to share related costs and risks of developing a new product or process, in turn, led to the increase in their profit margin. It can be generally seen that Danone, as a multinational FMCG companies, may adopt global standardization as their international strategy, which places a high pressure on cost reduction. Evian, the global bottled water brand of Danone, can be a good illustration of this, as it enjoyed the same sales channel as Wahaha’s products in terms of the same position on the shelves. All these factors discussed above impel Danone to form a joint venture to facilitate their market access in China.

However, the formation of this JV also generated difficulties in following years. Like many other joint ventures has experienced (Volberda, R. et al.,2011), the large degree of autonomy Danone established in their partnership with Wahaha Group, which allowed the foreign enterprise to retain all their managerial and operating rights along with the brand name Wahaha, has made it more difficult for Danone to directly control subsidiaries. On this occasion, the management power of JV was gradually delegated to Zong Qinghou, who is the founder and owner of Wahaha group, as he appointed the majority of management positions to his own family members and employees from Wahaha. This also underlies subsequent conflicts about control of JV, which would be explained in more detail later. In addition, as their cooperation was constructed based on joint venture rather than wholly acquisition, it left Wahaha group being independent without Danone’s interference in daily management within organizations, and thus, offered them a chance to develop subsidiaries not associated with Danone from the beginning of partnership in 1996, that is, their nonjoint ventures.

Also, as stated by Volberda, R. et al. (2011), the shared ownership arrangement in JVs may trigger conflicts between firms, if they have different opinions about what strategy should be chosen for the JV. For this case, it can be seen that Danone was in pursuit of efficiencies and profits that comply with its global object, while Wahaha intended to improve their technology to a large extent. For example, in order to expand markets and meet increasing production needs, Wahaha proposed to introduce new production lines for its JV via extra investment. This was rejected by Danone, as they insisted Wahaha to keep outsourcing to product processing suppliers considering the relatively lower costs. After that, as Wahaha realized there were still several drawbacks in adopting outside suppliers, they then build up their own nonjoint ventures above-mentioned to improve it, which implied the disputes between the two investing firms later.

However, Danone’s entry mode has changed over time to some extent. They bought all the shares of Baifu owned in Jinjia, then becoming the 100 percent owner of Jinjia and therefore owning 51 percent of shares in JV simultaneously in 1998. This action turned the role of Danone in JV from a minority shareholder into a major one, and helping them acquire legal control over JV due to its right to decide the board of directors. Besides, Danone has also conducted acquisition by purchasing ownership stakes of several other leading Chinese beverage companies during the 10 years cooperation with Wahaha, including 98 percent of Robust Group, 54.2 percent of Shenzhen Yili Mineral Water Company and 50 percent of Shanghai Maling Aquarius Co., Ltd., etc.

Danone & Wahaha’s contributions and related difficulties

Actually, the trademark was Wahaha’s only contribution to the JV, whereas Jinjia (containing Danone and Baifu) contributed RMB500 million in cash. Those investment funds allowed Wahaha to purchase advanced production lines highly in need from all over the world to improve their production efficiency.
However, when it comes to the ownership and use of trademark “Wahaha”, various problems occurred between these two partners. Basically, Danone and Wahaha have signed three agreements related to the brand name “Wahaha”. When he JV was created, they signed a trademark transfer agreement, aiming to wholly transfer the "Wahaha" trademark to the JVs. At that time, Wahaha Group promised not to use this trademark for any independent interests or offer it to any other entity. Nevertheless, this trademark transfer contract eventually did not get the approval from the local trademark office, who claimed that the trademark is a state-owned property, leading to their second attempt to conduct an exclusive licensing contract for trademark. Likewise, Wahaha was still not allowed to use the trademark for their own business, but has the ownership of the Wahaha trademark at this time. It means that Wahaha has never transferred the ownership of the trademark to the JV and therefore did not realize their obligation for capitalization of the JV. However, no further JV’s legal document has been revised clearly for this changed situation until 2005, which indicated the difficulty for Wahaha in their conflicts with Danone concerning the use of “Wahaha” trademark in their nonjoint venture subsidiaries.
More specifically, the Wahaha group continuously established numbers of companies selling the same products as the JV and used the trademark of Wahaha since 2000. Products from both the non-JV firms and the JV were applying identical sales channels which are all actually controlled by Zong. However, it should be noted that those non-JV companies’ right of using Wahaha’s trademark had not been formally granted within the JV, until they signed an amendment agreement to the licensing contract confirming their ownership of the trademark and right to use it for non-JVs. This five-year gap clearly offered Danone a reason to challenge the Wahaha group. Therefore, in 2007, after the request for a 51 percent ownership interest in the non-JVs was rejected by Zong, Danone initiated a series of lawsuits in public, claiming that the existence of Wahaha Group’s non-JVs and their illegal use of "Wahaha" trademark has been severely against the noncompete clause and Danone’s interest. Danone and Wahaha’s roles, responsibilities & objectives

According to Volberda, R. et al. (2011) ，it is clear that the joint venture of Danone and Wahaha group can be considered as an example of strategic alliance, which has been defined as cooperative agreements between independent companies. However, in order to manage this collaboration and make the alliances work, firms need to fulfil their responsibilities in terms of logically structuring the alliances and carefully manage it.
More specifically, with refer to the case in the context of alliance structure, Wahaha should be blamed for not expecting the change circumstances, as they improperly considered themselves as the majority shareholder with absolute control over the JV. Therefore, they became quite passive while losing their majority control over the JV due to Danone’s wholly acquisition of Baifu. In fact, this was supposed to be recognized by Wahaha Group before they decided to form the joint venture, and then the related contractual safeguard may be established in advance to prevent such difficulties. Additionally, the trademark issue mentioned above could also be avoided if Wahaha create related tight legal agreements timely with Danone, right after their strategy changing from original trademark transfer to trademark licensing, rather than directly setting up non-JVs and use the trademark regardless of supporting JV documents.

As for Danone, they failed to build mutual trust with Wahaha during the whole cooperation. As stated by Nair A.S. et al. (1998), trust play an important role in corporate partnership, especially for Chinese companies like Wahaha Group. However, Danone’s acquisition of Baifu in 1998 made themselves became the majority shareholder, but also produce considerable dissatisfaction on Wahaha Group. From them on, this action has seriously damage the trust of Wahaha on Danone, as Wahaha group felt that they were misled from the beginning. Moreover, in 2000, Danone even bought 98% share of Rubust, which was considered as the biggest competitor of Wahaha, regardless their partner’s interests. All these moves adopt by Donone has accelerated the collapse of their partnership, as the trust between two parties has been damaged continuously without remedial efforts.

Volberda, R. et al. (2011): Strategic Management: Competitiveness and Management, Cengage Learning, Hampshire: United Kingdom. ISBN-13: 9781408019184 / ISBN-10:
1408019183.

Ajit S. Nair and Edwin R. Stafford (1998): China Strategic Alliances in China: Negotiating the Barriers