Introduction:
In 1996, Danone, a multinational foreign company entered into a joint-venture contract with a local Chinese beverage company named Wahaha in order to better access to Chinese market. The form of the joint venture was a great success at the beginning stage, with both parties gained substantial benefits from the relationship. However, in 2001, conflict arise when Wahaha Group created a series of Non-joint venture companies that sold the same product as the joint venture and use the Wahaha trademark. Since then, a long time dispute continued around the ownership of the “Wahaha” trademark, the rationality of the existence of non-joint ventures and the non-compete issue. Several lawsuits were carried but all ended in Wahaha’s favor. Eventually, Danone relinquish the claims and secede from the joint venture by selling its 51 percent share to the business’s Chinese partners.
Main body
With a global standing and desire for international expansion, Danone entered the Chinese market in the late 1980s. Compared with many developed countries where markets almost reach saturation, China has a promising market with cheap labor which provide a good opportunity for Danone to further develop. At early stage, Danone entered China through forming a joint venture with the local enterprise Wahaha. There are three main reasons for why Danone use the joint venture mode instead of using other modes to enter China. First, Danone can benefit a lot from Wahaha’s knowledge of local Chinese market and conditions. The premise for successfully conducting business in a foreign country is to have comprehensive understanding of the market and related conditions. As a new comer to China, Danone was unfamiliar with China’s competitive conditions, culture, language, political and business system. The company need to rely on Wahaha in order to have insights about the market so that they can conducting suitable and localized operation. Second, forming a joint venture can to a large extent reduce the costs and risks of exploring a foreign market because both costs and risks are shared among members of the joint venture. Before the joint venture was formed, Wahaha Group was already a famous local brand with high local customer recognition and well established manufacturing and distribution network. Danone can utilize these to reduce the risks and efforts that an unknown foreign brand would have when entering in to the Chinese market. Third, less political barrier will be encountered because of the formation of joint venture. Establishing a wholly owned subsidiaries is not permitted by Chinese government during that time and complex regulations and restrictions impose great entry barriers for foreign companies. Wahaha originally was a state owned company which was supported and aided by state and local government. Forming joint venture with Wahaha Group can help Danone to reduce the political risk and better enter into China. However, this entry mode is not perfect, it has still caused some difficulties for Danone. First, joint venture terms allow Wahaha to retain all managerial and operation rights which means Danone lack of the tight control over day to day business operations. This gives the chance for Zong to establish a family based management and fill the position with employees of the Wahaha Group which ultimately lead to the creation of parallel no-JV companies. Second, conflict will arise over control of the venture’s strategy and goals. Since Wahaha suggest expending the market through adding online new production line, Danone requested Wahaha to outsource for the joint venture. The conflict of strategy lead Wahaha to establish non-JV in order to meet the production needs which later become the direct cause of the dispute. In order to succeed in Chinese market, Danone changed it entry mode overtime because the optimal entry mode varies dynamically with time and by situation. With more experience were gained and more familiar with Chinese situation, Danone possess the some necessary knowledge needed to independently conquer the Chinese market. In addition, with the competition within China became intense and the request for localization, Danone needed to pursue a transnational strategy which directly affected the entry mode to China. At first, Danone use VJ as its main mode, then the company began to create wholly owned subsidiaries through acquisition. Robust were brought by Danone and Danone also brought shares of many famous Chinese beverage company in order better access the Chinese market.
In order to form a JV, every member should make contributions. From Danone’s perspective, the most obvious contribution is the capital. Jin Jia Investment CO. Ltd. (A JV formed by Danone Group and Bai Fu Qin Ltd) contributed RMB500 million to the joint venture. In addition, Danone to some extent helped Wahaha to gain an international attention. Before cooperate with Danone, Wahaha is only a local Chinese brand with little or no international visibility. The relationship with the famous multinational brand Danone enable Wahaha to gain more attention from the international market which help Wahaha attract more than 71million foreign investment. From Wahaha’s perspective, the trademark is the major contribution to the joint venture. The Wahaha group agreed not to use the trademark for any independent business activity or allow it to be used by other entities which means the JV have the absolute control over the trademark. What is more, Wahaha contribute the daily management and human resources. After the formation of the VJ, the day to day operation was managed by Zong. No foreign manager were involved in the business operation and those foreign board of director did not participate in the daily management. Wahaha also contribute the local knowledge of China along with networking relationships which are essential for the success of JV. However, difficulties occurs because of two main reasons. First, there are some confusion regarding the ownership of Wahaha trademark. The primes and basis for the formation of JV was the transfer of Wahaha trademark to the JV. However, the transfer was failed because it was rejected by China’s trademark office. An exclusive licensing rather than transfer were agreed but no JV documents were revise to cope with this change. Danone thought the exclusive license agreement have the same effect with the transfer acknowledgement but actually the ownership of Wahaha trademark still belong to Wahaha Group rather than the JV. As a result, no sound legal basis and official approval of trademark transfer give the chance for Wahaha to conduct opportunistic behavior which leads to the creation of parallel firms. Second, all the management were controlled by Wahaha and Danone did not actively participate in the daily management. Under this circumstance, Chinese side may fell unfair as most work are done by them but profits are shared by Danone. Additionally, without active supervision, chances are given to Wahaha to manipulate the VJ for their own interest. Even after Danone became the majority shareholder of the JV, the managerial rights still delegated entirely to Zong and Danone made no attempt to integrate itself within the JV.
Once successful VJ dismissed, both Danone and Wahaha should be blamed for the difficulties. One of the reason that those difficulties occur is because every party involved in have different objectives and goals. From Danone’s perspective, it is the global standing and internationalization strategy that push Danone to enter Chinese market. Establishing a JV is a common mechanism for MNEs form developed country to enter emerging economics. The JV is just the tool for Danone to better enter the Chinese market and to utilize the cheap labor and explore promising Chinese market in order to increase overall sells and profits. Trough forming the JV, Danone aim to learn more about Chinese situation and aimed ultimately made the JV equivalent to an overseas subsidiary by gaining legal control of the JV. Forming the JV with Wahaha is only one step to explore the Chinese market, Danone also aim to become the dominator of Chinese market and realize location economies and experience effect to further expand and develop the company. However, Wahaha Group have different objective from Danone. Trough forming the JV, Wahaha group aimed to attract foreign investment and introduce advanced technology and production method and ultimately conquer the Chinese market instead of becoming a subsidiary of Danone. After the privatization of the Wahaha Group, the aim was to realize the company’s own interest and take back the control over Wahaha trademark. Danone and Wahaha did not share the same vision and goals and Danone seemed not make efforts to integrate its aim with Wahaha which cause conflicts in terms of communication and management strategy. After the strategic alliance was formed, one major problem between Danone and Wahaha is trust. Mutual trust is an important part in strategic alliance. Without trust, the JV is unlikely to meet goals and achieve success. On the one hand, Danone create a misleading JV structure at the beginning which made Wahaha believe that Danone was deliberately misled them at the very start and aimed to ultimately takeover and control the whole organization. Danone have also brought shares of many other famous Chinese brand and some of which can be regarded as strong competitors for Wahaha. Those lead to trust problem and produced significant resentment on the part of Wahaha group. Wahaha, on the other hand, leverage the trademark puzzle to conduct opportunistic behavior, creating a series parallel non joint venture which intensified the trust problem between the two parties. In addition, Danone acted as a passive investor rather than an active major owner. Danone contribute too little in terms of capital and technology which did not reach the Wahaha’s expectation but gain great profit from the relationship. It is under Zong’s management that the JV could become the largest bottled water and beverage Company. What is more, Zong, as the major manager, explore self-interest through forming non-JV with British Virgin Islands Company which is controlled by his wife and daughter and utilize the resources of JV but Danone did not receive any benefits form the profits of those non-JV. This unethical behavior to some extent damage the interest of Danone which ultimately trigger the dispute. Danone, a foreign investor who after purchase Baifuqin is the major shareholder, regard itself as the absolute controller of the VJ. Danone thought its responsibility is to provide capital and control the boarder strategic issue while the daily operation was delegated to Zong. However, at first, Wahaha thought itself as the majority shareholder and the manager of the JV which means all operation matters should be controlled by them. However, after Danone purchased Baifuqin and gain the legal control over the JV, Wahaha felt got cheated. Wahaha through its responsibility is to manage the daily operation of the company and