JIANGYONG LU
ZHIGANG TAO
SHANGJIN WEI
DANONE V WAHAHA (A): WHO IS HAVING THE
LAST LAUGH?
Headquartered in Hangzhou, China, Hangzhou Wahaha Group (杭州娃哈哈集团) (“the
Group”) 1 was the country’s leading beverage manufacturer. Over the years, it had gradually
expanded into various product lines that included juices, bottled water, dairy and carbonated
drinks, enjoying huge success in each by riding on market opportunities. On the other side of
the globe in Paris, France was Groupe Danone (“Danone”), a multinational food and beverage
producer selling a wide variety of products, such as biscuits and baby food. It was also a
global market leader in fresh dairy products and one of the most rapidly growing fast-moving
consumer goods2 companies in the world. Together, the two companies had signed a joint
venture (“JV”) agreement in 1996, with Danone ultimately holding 51% of the equity shares
and the Group owning the remaining 49%. Gradually within the next decade, a total of 39 JV
entities were set up [see Exhibit 1 for the ownership structure]. The JVs3 produced beverage
and food products under the “Wahaha” trademark.
In April 2007, Zong Qinghou, founder and chairman of the Group and chairman of all
Danone-Wahaha JVs, divulged details about his French partner’s plan to buy a 51% interest
in the Group’s remaining subsidiaries and related entities that were not formed under the JV
agreement and were owned or managed by Zong’s family interests [see Exhibit 1]. The
disclosure of what was supposed to be a trade secret sparked a series of public accusations,
followed by lawsuits by each partner against the other. On the one hand, Danone indignantly
retorted that its takeover plan was a result of a breach of its contractual interest by Zong.
Danone alleged that Zong had been making many of the same products as the JVs had under
the same “Wahaha” trademark through a parallel network of production facilities that he or
his family owned or managed. Additionally, they claimed that he had used the JVs’
distribution channels for selling them. On the other hand, Zong argued that the “Wahaha”
1
Only the Group’s food and beverage-related business is covered in this case.
Fast-moving consumer goods (or FMCG for short) were products with a quick turnover and relatively low cost of production,
such as cereals, confectionery, dairy items, personal care products and household cleaning products.
3
The case uses the plural form to refer to the joint venture agreement between Danone and Hangzhou Wahaha Group because
the agreement comprised a total of 39 companies. There was no overriding parent company that oversaw all the 39 entities.
2
Isabella Chan prepared this case under the supervision of Dr Jiangyong Lu, Prof Zhigang Tao and Prof Shangjin Wei for class
discussion. This case is not intended to show effective or ineffective handling of decision or business processes.
© 2008 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be reproduced or
transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise (including the
internet)—without the permission of The University of Hong Kong.
Ref. 08/385C
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Danone V Wahaha (A): Who Is Having The Last Laugh?
trademark was never officially transferred to the JVs and complained of Danone’s lack of
effort throughout. He also accused Danone of attempting to monopolise China’s beverage
market by driving out national brands like Wahaha, which were part of China’s cultural
heritage and thus were the heart and soul of Chinese people. As a way of protest, Zong
resigned from his post as chairman at the JVs. Danone then appointed Emmanuel Faber,
chairman of Danone Asia Pacific, as the new chairman, but the legitimacy of this appointment
was denied by the Group. Could this dispute have been avoided? What implications would it
have for Danone’s business in China in particular and foreign investors doing business with
Chinese companies in general?
China’s Economic Reform
Led by China’s late premier Deng Xiaoping and guided by his philosophy that capitalist
techniques could be put to good use in a socialist economy, China began economic reform in
1978.4 From a centrally planned economy, it gradually became increasingly market oriented.5
The overall goal was to “generate sufficient surplus value to finance the modernisation of the
Chinese economy”.6
A key component of the reform was the adoption of the Open Door Policy. In order to attract
foreign investments, encourage the transfer of technological know-how to the country and
promote exports of Chinese-made products,7 preferential regulations and policies, such as tax
incentives, were implemented in certain parts of China [see Exhibit 2 for examples of
preferential income tax policies]. The Open Door Policy was begun with the establishment of
four Special Economic Zones (“SEZs”)—Shenzhen, Zhuhai, Shantou and Xiamen [see
Exhibit 3]—in the 1980s that acted as laboratories to test the reform initiatives. This was
followed by the opening of certain coastal cities to foreign trade and investments in 1984 [see
Exhibit 4]. Later, the policy was gradually extended to areas bordering the coastal cities and
into inland areas. Additional SEZs were also added—Hainan Island in 1988 and Pudong New
Area in Shanghai in 1990—while earlier ones were enlarged [see Exhibit 3].
In order to further boost economic development in large- and medium-sized cities, China
established 15 free-trade zones, 32 state-level economic and technological development zones
and 53 state-level new- and high-tech industrial development zones, all of which enjoyed
preferential policies. Together, they served to develop an economic system oriented towards
foreign trade and investments. They also helped generate foreign exchange by exporting
products made in China, importing advanced technologies from developed nations and
accelerating economic development in the inland areas of the country.
The result of China’s economic reform was a significant reduction in poverty, with the
proportion of the Chinese population living in poverty falling from 53% in 1981 to only 8%
in 2001, according to World Bank estimates.8 Per-capita gross domestic product (“GDP”) had
4
China’s economic reform was based on the “Four Modernisations” (四个现代化) model, which aimed to modernise the
country’s agricultural, industrial, defence, and science and technology sectors by slowly moving away from central planning.
Therefore, China’s market-oriented reform had always been pragmatic, rather than ideological, in nature.
5
The Chinese Communist Party referred to China’s unique economic system as a “socialist market economy with Chinese
characteristics” (中国特色的社会主义市场经济).
6
Hu, V. (May 2005) “The Chinese Economic Reform and Chinese Entrepreneurship”, X Jornada d’Economia de Caixa Manresa,
http://unpan1.un.org/intradoc/groups/public/documents/apcity/unpan023535.pdf (accessed 5 December 2007).
7
Jaggi, G. et al. (1996) “China’s Economic Reforms: Chronology and Statistics”, Institute for International Economics Working
Paper 96-5, http://www.iie.com/publications/wp/96-5.pdf (accessed 6 December 2007).
8
World Bank (Date Unknown) “Fighting Poverty: Findings and Lessons from China’s Success”,
http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTRESEARCH/0,,contentMDK:20634060~pagePK:64165401
~piPK:64165026~theSitePK:469382,00.html (accessed 6 December 2007).
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Danone V Wahaha (A): Who Is Having The Last Laugh?
increased from Rmb 4929 to Rmb 8,622 during the same period. By 2005, China’s GDP had
grown to Rmb 18,308.5 billion, compared to only Rmb 48.9 billion in 1981; 10 this was
equivalent to an average annual growth rate of 9.5%11 [see Exhibit 5–7].
Chinese Enterprises
Along with the Open Door Policy, China also reformed its urban industries that were then
dominated by inefficient state-owned enterprises (“SOEs”). In order to provide incentives for
managers of SOEs to run their organisations more efficiently, the “dual pricing system” (双重
定价体系) and “enterprise contract management responsibility system” (企业承包责任制)
were introduced in 1984 and 1986, respectively. By the late 1980s, the business scene in
China had become more heterogeneous and characterised by a mix of co-existing ownership
structures. On one side were remnants of SOEs that had existed since before the economic
reform. On the other were privately-owned enterprises12 [see Exhibit 8]. The decrease in the
role of SOEs was evident [see Exhibit 9]. By 2004, privately-owned enterprises, whether in
full or in part, contributed to over 80% of China’s GDP, compared to less than 1% in 1980.13
The Open Door Policy had also given birth to enterprises funded by investors in Hong Kong,
Macau, Taiwan and other countries [see Exhibit 8]. The number of such enterprises had been
increasing throughout the years, reaching 106,165 and contributing to 30.2% of the gross
industrial output in 2004. Of these, 38,165 were JVs, which accounted for 13.4% of GDP.14
China’s Beverage Industry15
The growth of China’s economy and subsequent consumer spending also benefited its
beverage industry. China was the most populous country in the world. In 2006, its population
was estimated to be around 1.3 billion, constituting 21% of the world’s population.
Economists also predicted that China would experience the fastest income growth from 2006
to 2016, with at least 100 million households earning an annual income of above Rmb
79,300.16 This would naturally result in a parallel increase in food and beverage spending.
Between 1999 and 2004, beverage production grew at a phenomenal rate of 19.7% per year
from 11.86 million tons to 29.12 million tons. Sales also increased from Rmb 37.1 billion to
Rmb 87.8 billion—equivalent to an annual growth rate of 18.8%.17According to Zhao Yali,
executive vice-president and secretary-general of the Chinese Beverage Industry Association,
the overall production and sales of beverages would continue to expand in China. 18 A study
by Morgan Stanley, a global financial services firm and investment bank, forecasted that from
9
US$1 = Rmb 8.27 based on exchange rate in 2001.
Both GDP and per-capita GDP are given in nominal terms. This gives the latest figures available. Source: National Bureau of
Statistics of China, http://www.stats.gov.cn/english/statisticaldata/yearlydata/ (accessed 18 December 2007).
11
Chow, G. (8 September 2000) “China’s Economic Reform and Policies at the Beginning of the 21st Century”, Speech
delivered at the Fourth International Investment Forum, http://www.oycf.org/perspectives/7_083100/china.htm (accessed 7
December 2007).
12
In this case study, “privately-owned enterprise” refers to any enterprise that is not fully owned by the state. This should be
distinguished from “private enterprises”, which are privately-owned enterprises that are owned by an individual or a
partnership. Other examples of privately-owned enterprises are collective-owned enterprises (sometimes owned partly by the
state), co-operative enterprises and foreign-funded enterprises.
13
Some of them also had foreign ownerships. Source: National Bureau of Statistics of China, http://www.stats.gov.cn/, (accessed
18 December 2007).
14
National Bureau of Statistics of China, http://www.stats.gov.cn/, (accessed 18 December 2007).
15
This section is adapted from Gao, G.Y. et al. (2008) “Wang’s Fortune Tea from China: Competition for a New Arena of the
Beverage Market (A)”, Case published by Asia Case Research Centre, University of Hong Kong.
16
US$1 = Rmb 7.93 in 2006. Source: Gao, G.Y. et al. (2008) op cit.
17
US$1 = Rmb 8.28 from 31 December 1999 to 30 June 2005. Source: Chinese Food News (19 August 2005) “China’s
Beverage Industry Continues its Rapid Growth” (中国饮料行业持续快速增长), http://www.cnfood.cn (accessed 7 August
2007).
18
Chinese Food News (19 August 2005) op cit.
10
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Danone V Wahaha (A): Who Is Having The Last Laugh?
2006 to 2010, the Chinese beverage industry would contribute to around one-fourth of the
industry’s total growth worldwide.19
Hangzhou Wahaha Group
Company Background and Development
In 1978, Zong Qinghou, who would later become the founder of the leading beverage maker
in China—Hangzhou Wahaha Group (杭州娃 哈哈集團)—returned to his hometown in
Shangcheng district, Hangzhou. Upon his mother’s retirement, he filled her vacancy by taking
up a sales position at the school-run enterprise in the primary school where she worked, 20
selling popsicles and other products. He was promoted to sales manager in 1987 and became
responsible for running the sales department of the school-run enterprise. Realising that this
might be his last chance to make it big, he took a loan of around Rmb 140,00021 from the
Education Bureau in Shangcheng and set up his own business at the school. Hiring two retired
teachers, he started by selling popsicles, soft drinks and stationery.22
In 1988, Zong began to produce oral liquid supplements for other companies. At that time,
there were more than 38 producers of nutritional supplements across China, but none of their
products was designed specifically for children.23 In the meantime, Zong noticed that China’s
Family Planning Policy24 had given birth to a generation being raised in one-child households
where they were considered the centre of the world; their parents and grandparents would
spoil them and satisfy their every whim. These children were fussy eaters and only ate what
they liked, which consisted mostly of unhealthy snacks. Too much snacking had dampened
their appetite for regular meals. Having heard about a children’s oral supplement recently
developed by a professor, he decided to produce his own brand of children’s supplement.
After several personal visits, Zong successfully convinced the professor to give him the
formula.
In 1989, Zong established Hangzhou Wahaha Nutrition Food Factory (杭州娃哈哈营养食品
厂) and launched Wahaha Nutritional Tonic for Children (娃哈哈儿童营养口服液) [see
Exhibit 10]. In order to raise consumers’ awareness of the product, Zong advertised heavily
through various channels, including local newspapers and television. He incorporated
findings from a research he had conducted earlier into his marketing campaign that had found
nearly 45% of the 3,000 children studied did not consume the recommended amount of
vitamins and minerals.25 This was coupled with the famous slogan, “Food Tastes Great with
Wahaha” (喝了娃哈哈，吃饭就是香). The goal was to convince consumers that Wahaha
19
Ward, A. (21 September 2005) “Coke wakes up to waning thirst for cola”, Financial Times,
http://us.ft.com/ftgateway/superpage.ft?news_id=fto092120051853420403 (accessed 30 October 2007).
Because of insufficient government funding, school-run enterprises, which were exempted from taxes, were established as a
means of auxiliary income for schools.
21
US$1 = Rmb 3.72 in 1981.
22
For details, see Hangzhou Wahaha Group’s corporate website: http://en.wahaha.com.cn/aboutus/history/.
23
Yang, J. (7 December 2004) “‘Wahaha’s’ New Fairytale” (“娃哈哈”的新童話), People.com.cn,
http://unn.people.com.cn/BIG5/41495/41500/3037676.html (accessed 18 December 2007).
24
The Family Planning Policy had been implemented since 1972 with an aim to control China’s ever-increasing population. The
policy was commonly known in the West as the “one child policy”. However, according to Zhao Baige, director-general of the
National Population and Family Planning Commission, China’s family planning policy was a multi-faceted policy that
involved different measures according to actual economic, and environmental and cultural situations. While urban residents
were allowed to have one child per household, rural residents were allowed two. In western regions populated by minority
ethnic groups, such as Tibet, there were no restriction on the number of children each household could have.
25
The research was conducted before launching the nutritional tonic. Source: Sull, D.N. and Wang, Y. (2005) Made in China:
What Western Managers Can Learn from Trailblazing Chinese Entrepreneurs, Harvard Business School Press: USA.
20
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Danone V Wahaha (A): Who Is Having The Last Laugh?
would be a solution to children’s eating problems. Zong’s strategy proved to be a success; by
1991, sales of the nutritional tonic had reached Rmb 100 million.26
As orders continued to increase, a larger production plant was needed to accommodate the
growing volume of orders. In the meantime, the Hangzhou government had been watching the
success of Hangzhou Wahaha Nutrition Food Factory closely. In 1991, encouraged by the
Hangzhou government, the company bought shares in a large, 30-year-old SOE nearby,
Hangzhou Canned Food Factory (杭州罐头食品工厂), for the price of Rmb 80 million and
formed Hangzhou Wahaha Group, which became a collective-owned enterprise27 [see Exhibit
8 for more details]. Not only did the move successfully turn a once-losing SOE around, but it
had since contributed around Rmb 2.7 million annually to Shangcheng district to help fund its
education system—more than the budget it received from the Hangzhou government each
year.28
In 1994, the Group began to expand across western China and other parts of the country. By
2007, it had set up more than 50 subsidiaries across the country [see Exhibit 1]. Not only did
these subsidiaries help boost local economies, but they also made the Group China’s leading
beverage company.29 In addition, the product range of the Group had expanded into a variety
of dairy products (eg, milk, flavoured milk and yoghurt drinks), juices, carbonated drinks (eg,
Future Cola30 and other Future series soft drinks), bottled water and food products (eg, snacks
and instant noodles) [see Exhibit 10].
Expansion Strategies
As early as 1992, Hangzhou Wahaha Group had formed its first foreign JV, Hangzhou
Wahaha Hyonong Canned Food (杭州娃哈哈孝农罐头食品) with a South Korea-based
company, Hyonong. 31 Both had injected nearly Rmb 90,000 32 into the JV with a 50-50
ownership. While the chairman’s post was filled by the Korean partner, Zong was appointed
vice-chairman. In 1994, in order to compete in the market and to expand production capacity,
the Group increased its stake to 65.8% by investing a total of Rmb 9.7 million, making it the
majority owner. 33 Nevertheless, the chairman of the JV continued to be appointed by the
Korean partner while Zong remained its vice-chairman34 [see Exhibit 1 for an overview of the
changes in the ownership structure in Hangzhou Wahaha Hyonong Canned Food and other
entities related to the Group, Zong and his family members].
Danone
Headquartered in Paris, France, Groupe Danone was a global food and beverage company
founded in 1966, originally as a glass and packaging manufacturer. It was a market leader in
fresh dairy products in the global market and produced a wide variety of other products,
including bottled water, biscuits, cereal snacks, baby food and clinical nutrition products. It
26
US$1 = Rmb 4.75 in 1991. For details, see Hangzhou Wahaha Group’s corporate website:
http://en.wahaha.com.cn/aboutus/history/.
27
For details, see Hangzhou Wahaha Group’s corporate website: http://en.wahaha.com.cn/aboutus/history/.
28
Zhao, H.J. (13 June 2007) “Zong Fuli’s Line of Wahaha Non-Joint Venture Companies Will Become Super-Profit Engine in 2
Years” (宗馥莉系娃哈哈非合资公司 2 年内成超级利润机器), CBN,
http://finance.sina.com.cn/chanjing/b/20070613/03303685976.shtml (accessed 28 December 2007).
29
There are some discrepancies between the Group’s Chinese and English websites. This case is based on its Chinese version.
For details, see Hangzhou Wahaha Group’s corporate website: http://en.wahaha.com.cn/aboutus/history/.
30
Future Cola was launched in 1998 to compete with Coca-Cola and Pepsi. It was marketed as “Chinese people’s cola”.
31
The company name is transliterated by the author.
32
US$1 = Rmb 5.51 in 1992.
33
US$1 = Rmb 5.75 in 1994. Source: Zhao, H.J. (13 June 2007) op cit.
34
Ibid.
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Danone V Wahaha (A): Who Is Having The Last Laugh?
also owned internationally famous brands such as Danone and Evian. Unlike larger food and
beverage companies like Kraft and Coca-Cola, Danone lacked the resources necessary for
greenfield start-ups in their market entry strategies. Therefore, it had been forming JVs with
local companies in their host countries based on close-to-equal terms. By 2006, Danone’s
total sales had reached Rmb 140.7 billion35 and had expanded across more than 120 countries
around the world.36
Like many other global companies, Danone had set its sights on the Chinese market since the
country began its economic reform in the late 1970s. The country’s immense population,
which was the largest in the world, was another drawing factor. In the late 1980s, Danone
began investing in production facilities and developing its business in China extensively by
building factories there. It had also sought to increase its market presence in the country by
forming JVs with local companies like Hangzhou Wahaha Group and Mengniu (蒙牛), or by
buying stakes in them, as it did with Robust (乐百氏), Aquarius (正广和), Bright (光明) and
Huiyuan (汇源), all of which were among the most popular indigenous Chinese brands [see
Exhibit 11 and 12]. Some of the products produced were also exported overseas, such as
Mengniu milk and Wahaha bottled water.37
Danone-Wahaha Joint Ventures
In 1995, Hong Kong-based Peregrine Investments Holdings, once dubbed “the only indigenous
investment bank in Asia”, 38 facilitated the collaboration between Zong and Danone. A JV
partnership was formed between Danone and Hangzhou Wahaha Group in 1996. 39 As a
vehicle to form this partnership, Danone had formed another JV entity, Jinjia Investments,
with Peregrine.40 While Danone and Peregrine owned a total of 51% in the JVs, the Group
owned the remaining 49%. Peregrine’s shares were later sold to Danone in 1997 following the
Asian Financial Crisis, which had led to Peregrine’s insolvency, making Danone a majority
shareholder in the JVs [see Exhibit 1].
Under the Danone-Wahaha JVs, Danone and the Group produced beverage and food products
bearing the “Wahaha” brand name, such as bottled water, milk and yoghurt drinks, juices,
carbonated drinks, and Chinese porridges; they shared profits almost equally. 41 To start off,
Danone and the Group formed four subsidiaries in 1996:
• Hangzhou Wahaha Baili Foods (杭州娃哈哈百立食品有限公司)
• Hangzhou Wahaha Health Foods (杭州娃哈哈保健食品有限公司)
• Hangzhou Wahaha Beverages (杭州娃哈哈饮料有限公司)
• Hangzhou Wahaha Quick Frozen Foods (杭州娃哈哈速冻食品有限公司).
In the same year, South Korea-based Hyonong sold all its shares in Hangzhou Wahaha
Hyonong Canned Food to Danone. The company was then renamed Hangzhou Wahaha Foods
35
€1 = Rmb 10.05 in 2006.
For details, see Groupe Danone’s corporate website: http://www.danone.com/en/company/history.html.
37
For details, see Danone China’s recruitment website: http://danonechina.51job.com/.
38
Enright, M.J. and Mak, V. (2001) “The Peregrine Debacle”, Case published by the Asia Case Research Centre, University of
Hong Kong, Ref.: 01/124C.
39
The Chinese partners were Hangzhou Wahaha Group and the then Hangzhou Wahaha Food City (杭州娃哈哈美食城股份有
限公司), which was restructured in 2001 and renamed as Zhejiang Wahaha Industries Joint-stock Co. (浙江娃哈哈实业股份
有限公司). Both were entities related to the Group [see Exhibit 1].
40
Jinjia Investments was a Singapore-based company. The present case makes reference to Danone, rather than Jinjia, when
discussing the Danone-Wahaha joint ventures.
41
Sina Finance (8 April 2007) “Zong Qinghou Disclosed Inside Story Behind Danone’s Hostile Takeover: Interview with Zong”
(宗庆后做客新浪披露达能强购事件内幕) http://finance.sina.com.cn/chanjing/b/20070408/17483482198.shtml (accessed
29 November 2007).
36
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(杭州娃哈哈食品). At the same time, both Hangzhou Wahaha Group and Danone injected
more funds into Hangzhou Wahaha Foods, bringing its registered capital up to Rmb 24.3
billion.42 The ownership structure of Hangzhou Wahaha Foods was similar to the other four
Danone-Wahaha JV entities, as well as the 35 companies subsequently established between
1997 and 2007, in which Danone held 51% shares and the Group owned the rest [see Exhibit
1].43 After the ownership restructure of Hangzhou Wahaha Foods, Zong became chairman for
the Danone-Wahaha JVs.44
Some analysts commented that through its JV partnership with Danone, the Group had
successfully transferred that part of its assets that had originally belonged to the government
out of state control. By 2000, the majority of the shares held by the government had been
transferred into private hands. From a collective-owned enterprise, Hangzhou Wahaha Group
had been transformed into a joint-stocks company [see Exhibit 8].45 The JVs also gave the
Group access to Danone’s production technology and foreign capital, helping it rise to a
prominent position in the markets of bottled water, milk and yoghurt drinks, juices and soft
drinks in China.46 By mid-2006, the Group had become the fifth-largest beverage producer
worldwide, with annual sales of Rmb 11.1 billion [see Exhibit 13]. 47 Almost half of the
Group’s profits could be attributable to the JVs.48
Similarly, the JVs had benefited Danone, accounting for 5–6% of Danone’s global profits.49
Moreover, Wahaha was among the top four brands under Danone. 50 While Danone had
invested around Rmb 1.5 billion in the JVs from 1996 to 2007, it was able to take out a total
of Rmb 3.8 billion.51 During the same period, the value of the JVs had risen by 51%.52
Zong Qinghou
“He operates in a very entrepreneurial way, making a lot of decisions on his
own.”
- Emmanuel Faber, chairman of Danone Asia Pacific
Between 1996 and 2007, Zong had been the chairman for all the JV companies; he also had
executive power over them. On the other hand, Danone had not been able to appoint a single
executive to sit as senior management; whoever was sent by Danone was driven away by
Zong. Indeed, Zong had always been the only person running the operations, with no vicechairman underneath him. All subsidiaries, including both the Danone-Wahaha JVs and the
non-JV entities, were managed directly by him. While Zong acted as the sole decision maker,
everyone else was the executor of his orders.53
42
US$1 = Rmb 8.33–8.35 in 1996.
China Daily (1 September 2007) “Trademark Body Sued in Latest Wahaha-Danone Twist”,
http://www.china.org.cn/english/business/222807.htm (accessed 2 January 2008).
44
Zhao, H.J. (13 June 2007) op cit.
45
Ibid.
46
Kwok, V.W.Y. (26 June 2007) “Wahaha Threatens To Sue Danone For 5 Billion Euros”, Forbes.
47
US$1 = Rmb 7.93 in 2006. Source: Flannery, R. (27 November 2006) “Child’s Play No More”, Forbes,
http://www.forbes.com/business/global/2006/1127/024a.html (accessed 5 December 2007).
48
Dyer, G. (7 June 2007) “Danone win in Wahaha tussle”, Financial Times.
49
Ibid.
50
Dow Jones International News (31 July 2007) “The Skeptic: Woe Ho Ho At Danone”.
51
Currency exchange between US$ and Rmb was based on the exchange rate in 2006, US$1 = Rmb 7.93.
52
Anonymous (12 April 2007) “China stresses fair play in foreign acquisition of domestic firms”, Industry Updates.
53
CNSTP (13 April 2007) “Wahaha Takes on Duty to Protect ‘National Brand’” (“娃哈哈”：扛起保护民族品牌的大旗),
http://www.cnstp.com/news/view.asp?id=7413 (accessed 29 November 2007).
43
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In terms of his relationships with the distributors, Zong had adopted a similarly heavy-handed
approach. He had complete control of all the second-tier distributors. He had also
implemented the “joint sales and distribution system” (联销体) that had served to win him
distributors’ respect by sharing profits together, as evidenced by the public statement of
support for Zong and the Group after the dispute erupted:
“Chairman Zong has given us lots of advice and guidance exactly when we
needed it, teaching us how best to run our businesses and helping us get back
on track […] We each began with only a few hundred yuan, but have since
accumulated assets that are worth hundreds of millions yuan. This was
possible due to our joint efforts with Wahaha over the past 10 years. In a
drinks market where competitions are very intense and the cost of raw
materials are rising continuously, we are doing better and better each day by
selling Wahaha. And we enjoy increasing profits each year.”
“From our personal standpoint, we strongly oppose the French company
Danone’s low-cost acquisition plan.”
- Distributors for Hangzhou Wahaha Group across China54
Right of Use of the “Wahaha” Trademark
In April 1996 and again in September 1997, Hangzhou Wahaha Group had applied for a
transfer of over 200 trademarks from the Group to Hangzhou Wahaha Foods—one of the first
JV companies set up by Danone and Hangzhou Wahaha Group. However, the Trademark
Office had rejected both applications based on the Provisions for the Regulations of
Trademark for Enterprises.55 Therefore, Danone and the Group made amendments to their JV
contract, stipulating that the Group must observe “non-competition obligations” that included
refraining from producing and selling products that were in direct competition with the JVs.
The new contract also stated that the Group must seek approval if it were to engage in
activities in competition with the JVs.56
However, according to Professor Tang Guangliang, a legal expert from the Intellectual
Property Rights Center at the Chinese Academy of Social Sciences, the Trademark Law of
China defined “trademark” as a “civil right” or “private right” in which an administrative
body like the Trademark Office had no authority to intervene. Therefore, the Trademark
Office could not have overruled the Group’s applications for a transfer of trademark.57
54
CNSTP (13 April 2007) op cit.; Sina Finance (10 April 2007) “Wahaha’s Distributors across China Released Public
Statements on Three Views” (娃哈哈全国经销商代表声明发表三点看法),
http://finance.sina.com.cn/g/20070410/16233488629.shtml (accessed 28 December 2007).
55
Chinanews.com (2 September 2007) “Trademark Office Sued for Disapproving Transfer of ‘Wahaha’ Brand” (不准”娃哈哈”
商标转让 国家商标局在京成被告), http://www.cnstp.com/news/view.asp?id=7711 (accessed 29 November 2007).
56
China Economic Review (September 2007) “Fact Sheet--the Dispute with Mr Zong Qinghou: Danone responds to our article”,
http://www.chinaeconomicreview.com/cer/2007_09/Fact_Sheet_-_the_Dispute_with_Mr_Zong_Qinghou.html (accessed 28
December 2007); Merrett, N. (10 April 2007) “Wahaha Rebuffs Danone’s Advances”, Beveragedaily.com,
http://www.beveragedaily.com/news/ng.asp?n=75594-danone-wahaha-beverage-joint-ventures (accessed 5 December 2007).
57
CNSTP (5 September 2007) “Wahaha Implied Danone Forged its Name: Court Case against Trademark Office” (娃哈哈暗指
达能冒其名诉商标局), http://www.cnstp.com/news/view.asp?id=7718 (accessed 29 November 2007).
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The Danone V Wahaha Dispute
“[Hangzhou Wahaha Group] is not against the opening-up policy of China,
or cooperation with others, or cooperation with foreign investors. However,
we want the cooperation to be equal, mutually beneficial, complementary,
mutually respectful with equal interest…”
- Zong Qinghou chairman of Hangzhou Wahaha Group58
On 5 April 2007, Zong revealed that for the price of Rmb 4 billion, Danone had threatened,
with legal actions, to take a 51% interest in 40 subsidiaries 59 of the Group or companies
owned by Zong’s family interests,60 all of which were established outside the JV partnership
without Danone’s knowledge [see Exhibit 1]. Allegedly, these non-JV entities had been
producing identical products bearing the “Wahaha” trademark and selling them through the
JVs’ distribution channels. Danone also claimed that the Group had been falsifying
documents in order to secure business licences for its non-JV subsidiaries producing these
products.61 The French partner saw the Group’s actions as a breach of the “non-competition
clause” stipulated in the JV contract, thereby violating its interests [see Exhibit 14].62
Zong had made it clear that he would not budge. He claimed that some of the non-JV entities
owned by the Group had existed even before the JV partnership was formed in 1996. This
therefore implied Danone’s “silent acknowledgement” of the legitimacy of the products they
produced, which Danone had denied, reiterating that such non-JV companies should not have
existed in the first place.63,64
Zong also argued that the price of Rmb 4 billion proposed by Danone was a gross
underestimate of the true value of the non-JV companies. According to Zong, the total assets
were estimated to be worth Rmb 5.6 billion in 2005, with profits of around Rmb 1 billion.65
To this, Danone replied that the price it offered had already been agreed to by Zong when
both parties had reached a compromise in December 2006. The final price of Rmb 4 billion
was based on an evaluation of the amount needed for such expenses as the purchase and
replacement of equipment and the use of land.66
Contrary to what Danone had claimed, Zong insisted that the “Wahaha” trademark was never
transferred to the JVs. Therefore, the Group was the only legal owner of the trademark.
According to Zong, the JVs were the only authorised users of the trademark. Hence,
58
Sina Finance (8 April 2007) op cit.
Nanfang Daily (29 September 2007) “Wahaha’s Road to Privatization Comes Clear?” (娃哈哈私有化路径浮出水面？),
http://www.cnstp.com/news/view.asp?id=7766 (accessed 29 November 2007).
60
Chen, X.Y. (12 April 2007) “Why did Danone Insist on buying Wahaha’s 61 non-JV companies?” (达能为什么非要买娃哈
哈的 61 家“非合资企业”？) http://www.zj.xinhua.org/tail/2007-04/12/content_9767660.htm (accessed 28 December 2007).
61
China Knowledge Press (20 July 2007) “Danone hits back at Wahaha for alleged interest breach”.
62
Indeed, as early as 2006, Danone had approached Hangzhou Wahaha Group to resolve this matter. Some sources claimed that
the Group had agreed to allow Danone to take a controlling stake in its non-joint venture subsidiaries. However, the deal never
materialised. Zong even denied that he had ever agreed on this since the price Danone offered was too little. Source: Shanghai
Daily (12 April 2007) “Danone Warns of Legal Suit”.
63
Chen, X.Y. (12 April 2007) op cit.
64
Sina Finance (11 April 2007) “Wahaha Trademark Belongs to JVs: Danone’s Conference” (达能发布会实录 称娃哈哈品牌
属于合资公司) (accessed 29 November 2007).
65
Latest figures available at the time of publication. Source: Chen, S.C.J. (11 April 2007) “No Laughing Matter For Danone”,
Forbes, http://www.forbes.com/2007/04/11/wahaha-danone-china-markets-cx_jc_0411markets1.html (accessed 28 December
2007).
66
Sina Finance (11 April 2007) op cit.
59
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Hangzhou Wahaha Group had the right to use the “Wahaha” trademark without the need to
seek prior approval from the JVs. Moreover, he considered the non-competition clause in the
JV contract to be a “malicious trap” set by Danone in order to take full control of the
“Wahaha” trademark.
Zong also considered the non-competition obligations that the Group had to observe to be
unfair since such obligations did not apply to Danone equally. He argued that Danone had
been acquiring domestic beverage companies that were direct competitors to the Group, such
as Robust and Aquarius in the bottled water market; a few of Danone’s senior executives also
held concurrent posts in these companies.67 Zong claimed that Danone had violated China’s
corporate laws and filed lawsuits against the company [see Exhibit 15]. He also accused
Danone of attempting to monopolise China’s beverage market by buying out a number of
popular indigenous Chinese beverage brands, such as Robust, Mengniu, Bright, Huiyuan and
Aquarius.68 All of these, coupled with Wahaha, were part of China’s cultural heritage and thus
were the heart and soul of Chinese people. He saw Danone’s action as an affront to the
national culture of Chinese people at large. However, Danone explained that its brands only
constituted 15% of China’s total beverage market and that the company was facing intense
competition from global market leaders such as Coca-Cola, Pepsi and Nestlé, as well as
regional ones like Uni-President (统一) and Master Kang (康师傅). 69
Another accusation made by Zong in support of his use of the “Wahaha” trademark on
products produced by its non-JV entities was the relatively little contribution that Danone had
made towards the JVs compared to the Group’s contributions. While Danone had only
contributed a total of Rmb 1.5 billion to the JVs between 1996 and 2007, it had snapped up
around Rmb 3.8 million in profits in the same period.70 Zong also claimed that Danone had
been too risk-averse in terms of investing in and developing new products. He criticised
Danone for its lack of understanding of Chinese culture and the Chinese market. For instance,
Danone had initially disapproved of the Group’s Future Cola proposal. Nevertheless,
Hangzhou Wahaha Group proceeded with its plan and successfully made profit margins of up
to 40–50% while Danone was able to share in the profits from Future Cola.71 Meanwhile,
Danone insisted that the company had never refused to invest in new beverage products
proposed by the JVs. Nor was Danone ever invited to participate in projects carried out by the
non-JV entities controlled by Zong and his family interests.72
Consequences
Danone had originally intended to resolve the dispute in private. Zong’s disclosure to the
media therefore came as a surprise. What followed was a series of public accusations between
the two parties and lawsuits against each other [see Exhibit 15]. Zong resigned from his post
as chairman at the JVs in June 2007 out of humiliation supposedly caused by Danone’s
accusations. Danone had since appointed Emmanuel Faber, chairman of Danone Asia Pacific,
to replace Zong; however, his Chinese partner refused to acknowledge Faber’s legitimacy.
While Danone seemed to be fighting the battle on its own, the Group had received support not
only from the general public, but also from various government departments, distributors and
67
Asia Pulse (4 July 2007) “China’s Wahaha to Sue Three Joint Venture Directors From Danone”.
Sina Finance (8 April 2007) op cit
69
Yang, H. (8 April 2007) “Danone Denied Malicious Trap. Any Change Is Possible” (达能否认恶意圈套：任何变化都有可
能), Nanfang Daily, http://finance.sina.com.cn/chanjing/b/20070408/10243482012.shtml (accessed 28 December 2007).
70
Sina Finance (8 April 2007) op cit
71
Sina Finance (8 April 2007) op cit.
72
Sina Finance (11 April 2007) op cit.
68
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Danone V Wahaha (A): Who is Having the Last Laugh?
EXHIBIT 1: THE WAHAHA NETWORK
Note: Only percentages of ownership available from public sources are listed. Not all subsidiaries (joint venture or non-joint venture) are listed.
Source: Asia Pulse (4 July 2007) “China’s Wahaha to Sue Three Joint Venture Directors From Danone”; China Economic Information Service (11 July 2007) “Wahaha
sues Danone executive as feud flares”; Chen, X.Y. (12 April 2007) “Why did Danone Insist on Buying Wahaha’s 61 Non-JV Companies?” (达能为什么非要买娃哈哈的
61 家”非合资企业”？), Nanfang Daily, http://www.zj.xinhua.org/tail/2007-04/12/content_9767660.htm (accessed 28 December 2007); Zhao, H.J. (13 June 2007) “Zong
Fuli’s Line of Wahaha Non-Joint Venture Companies Will Become Super-Profit Engine in Two Years” (宗馥莉系娃哈哈非合资公司 2 年内成超级利润机器), CBN,
http://finance.sina.com.cn/chanjing/b/20070613/03303685976.shtml (accessed 28 December 2007).
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Danone V Wahaha (A): Who is Having the Last Laugh?
EXHIBIT 2: PREFERENTIAL INCOME TAX POLICIES FOR FOREIGN-INVESTED
ENTERPRISES, FOREIGN ENTERPRISES AND FOREIGN INVESTORS IN CHINA
Income Tax for Foreign-Invested Enterprises75
Preferential Rates:
1. 33% is levied in general.
2. 24% is levied on production enterprises located in:
• SEZs
• Coastal cities opened up to foreign trade and investments [see Exhibit 4]
• Old urban parts of the cities where economic and technological development are
located.
3. 15% is levied on enterprises located in:
• SEZs
• State-level new- and hi-tech industrial development zones
• State-level economic and technological development zones.
4. 15% is also levied on enterprises in energy, transportation, ports and docks industries, or
in industries or projects encouraged by the State Council.
Exemptions and Reductions:
1. Production enterprises which have been in operations for over 10 years:
a. Initial preferential tax period:
• Exempted for two years beginning in the year they begin to make profits
• Granted a 50% reduction for the subsequent three years.
b. Extension of preferential tax period can be applied to the State Bureau of Taxation for
enterprises in (a) above and in the following categories upon expiration of their initial
preferential tax period. Once approved, they will be granted a 15–30% reduction for
another 10 years.
• Engaging in agriculture, forestry and animal husbandry industries
• Located in remote and underdeveloped areas.
c. Extension of preferential tax period will be granted to enterprises in (a) above that
also fall under the following categories upon expiration of their initial preferential tax
period. A 15% reduction will be given.
• Located in mid-western regions of China
• Engaging in projects encouraged by the government.
2. Enterprises producing for exports:
a. Initial preferential tax period:
• Exempted for two years beginning in the year they begin to make profits
• Granted a 50% reduction for the subsequent three years.
b. Extension of preferential tax period will be granted upon expiration of the initial
preferential tax period for enterprises as long as their annual exports account for 70%
or more of their sales volumes. A 50% reduction will be given.
3. Enterprises adopting advanced technology:
Initial preferential tax period:
• Exempted for the first two years
• Granted a 50% reduction for the subsequent six years.
75
For a brief description of foreign-invested and other types of enterprises in China, please refer to Exhibit 8.
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Personal Income Tax for Individual Foreign Investors
For individual foreign investors in enterprises with foreign investments, 40% refunds will be
granted for personal income tax on the dividends they receive from these enterprises, given
the following conditions:
• They are approved by the State Bureau of Taxation. Application must be filed by
individual investors.
• Dividends are re-invested.
• Re-invested funds cannot be withdrawn within five years.
Source: Adapted from Jiangsu Provincial Office of SAT (1991) “Income Tax Law of the People’s Republic
of China for Enterprises with Foreign Investment and Foreign Enterprises” (中华人民共和国外商投资企业
和外国企业所得税法), http://www.jsgs.gov.cn/Page/StatuteDetail.aspx?StatuteID=2385 (accessed 28
December 2007).
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EXHIBIT 3: SPECIAL ECONOMIC ZONES IN CHINA
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EXHIBIT 4: COASTAL CITIES OPENED UP TO FOREIGN INVESTMENTS
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EXHIBIT 5: PERCENTAGE OF CHINESE POPULATION BELOW POVERTY LINE
(1981–2001)
60
50
40
30
20
10
0
1980
1985
1990
1995
2000
Source: Ravallion, M. and Chen, S.H. (Date Unknown) “Fighting Poverty: Findings and
Lessons from China’s Success”,
http://econ.worldbank.org/wbsite/external/extdec/extresearch/0,,contentmdk:20634060~pagepk
:64165401~pipk:64165026~thesitepk:469382,00.html (accessed 6 December 2007).
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EXHIBIT 6: NOMINAL GDP AND PER-CAPITA GDP IN CHINA (1978–2005)
(Rmb Billions)
200,000
(Rmb)
15,000
14,000
180,000
13,000
160,000
12,000
11,000
140,000
10,000
120,000
9,000
8,000
100,000
7,000
80,000
6,000
5,000
60,000
4,000
40,000
20,000
3,000
GDP
Per-capita GDP
2,000
1,000
0
0
1978
1983
1988
1993
Source: National Bureau of Statistics of China.
18
1998
2003
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EXHIBIT 7: ANNUAL GDP GROWTH IN CHINA (1980–2005)
%
20
15
10
5
0
1980
1985
World
1990
1995
Developing Countries
Source: EarthTrends/World Bank.
19
2000
India
2005
China
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EXHIBIT 8: TYPES OF ENTERPRISES IN CHINA
Ownership Structure
Source of Funds
Domestic-Funded Enterprises
Enterprises with Investments from
Hong Kong, Macau and Taiwan
Foreign-Funded Enterprises
State-Owned Enterprises
Collective-Owned Enterprises
Joint Ownership Enterprises
Private Enterprises
Other Domestic-Funded Enterprises76
Joint Venture Enterprises
Sole (Exclusive) Investments Enterprises
Co-operative Enterprises
Limited Liability Corporations
Joint Stock/Shareholding Corporations
Note: Shaded areas denote “not applicable”.
In addition to the above, there are government agencies, institutions and social organisations which are not required by law to register at the industrial and
commercial administration agencies across China. These are classified mainly by:
• Source of funds
• Way of management.
76
“Other domestic-funded enterprises” refers to domestic-funded economic units other than those mentioned above.
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State-Owned Enterprises (“SOEs”)
Also known as state-run enterprises, these are non-corporation economic units in which the
entire assets are owned by the state. They are registered in accordance with the Regulation of
the People’s Republic of China on the Management of Registration of Corporate Enterprises.
They have the same legal status as people and are responsible for their own profits and losses.
The state or government appoints a management team to run and manage an SOE. Excluded
from this category are limited liability corporations solely funded by the state.
Collective-Owned or Collectively Run Enterprises
These are economic units with assets owned collectively. Ownership belongs to a defined
group of people who constitute “the collective”, although no quantitative number of people is
defined. There are different scopes of “collective”, including township collectively owned
enterprises (owned by a town) and unit collectively owned enterprises (owned by a particular
unit or group of people). Such enterprises are registered in accordance with the Regulation of
the People’s Republic of China on the Management of Registration of Corporate Enterprises.
Co-Operative Enterprises
This refers to a form of collective economic units with capital coming mainly from their
employees. A certain proportion of the capital also comes from the outside. Such enterprises
are operated and managed independently. Profit earnings are distributed according to the
proportion of contribution towards the capital.
Joint Ownership Enterprises
This refers to economic units established by two or more enterprises or institutions that are of
the same or different ownership structures.
Limited Liability Corporations
This refers to economic units established by 2–50 investors and are registered in accordance
with the Regulation of the People’s Republic of China on the Management of Registration of
Corporations. Each investor bears a limited liability to the corporation according to the
proportion of investment into the corporations. The corporations themselves have limited
liabilities up to the maximum value of their total assets.
Joint-Stock or Shareholding Corporations
These are limited liability corporations registered in accordance with the Regulation of the
People’s Republic of China on the Management of Registration of Corporations. Their
ownership structure is defined in terms of transferable shares of stock. Capital is raised
through the issuance of stocks. Any legal entities or individuals may invest in the company in
exchange for a proportional amount of shares. Each investor bears a limited liability to the
corporation depending on the amount of shares held. Such corporations also bear limited
liabilities up to the maximum value of their total assets.
Private Enterprises
This refers to profit-making economic units invested and established by one natural person
(ie, sole proprietor) or controlled by natural persons using employed labour in accordance
with the Corporation Law, Partnership Enterprises Law and Interim Regulations on Private
Enterprises. They include both sole proprietorship and partnership companies. Each entity
itself and all its assets are owned by the investor or proprietor who has an unlimited liability.
Included in this category are sole private enterprises, joint private enterprises and partnership
enterprises, private limited liability corporations and private shareholding corporations.
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Co-Operative Enterprises with Funds from Hong Kong, Macau and Taiwan
These are established by investors from Hong Kong, Macau and Taiwan in accordance with
the Law of the People’s Republic of China on Sino-Foreign Co-operative Enterprises and
other relevant laws.
Enterprises with Sole (Exclusive) Investments from Hong Kong, Macau and Taiwan
This refers to enterprises with exclusive investments from Hong Kong-, Macau- and Taiwanbased investors under the Law of the People’s Republic of China on Foreign-Funded
Enterprises and other relevant laws.
Shareholding Corporations with Investments from Hong Kong, Macau and Taiwan
These are corporations established with 25% or more of their total registered capital coming
from Hong Kong-, Macau- and Taiwan-based investors; those with less than 25% are
classified as domestic-funded. Their establishment must be approved by the Ministry of
Foreign Trade and Economic Relations in line with relevant state regulations.
Foreign-Funded Joint Venture Enterprises
This refers to enterprises jointly established by foreign enterprises or foreigners, other than
those from Hong Kong, Macau or Taiwan, with enterprises in China in accordance with
the Law of the People’s Republic of China on Sino-Foreign Joint Venture Enterprises and
other relevant laws. Investments, provision of facilities, and the share of profits and risks are
stipulated in a JV contract. Included in this category are Sino-foreign joint ventures, which
are formed with joint capital from both foreign and domestic investors with a set term of
operations.
Foreign-Funded Co-Operative Enterprises
These are enterprises jointly established by foreign enterprises or foreigners, other than those
from Hong Kong, Macau or Taiwan, with enterprises in the mainland of China in accordance
with the Law of the People’s Republic of China on Sino-Foreign Co-operative Enterprises
and other relevant laws. Investments, provision of facilities, and the share of profits and risks
are stipulated in a co-operative contract. Included in this category are Sino-foreign cooperative enterprises, which are formed with joint capital from both foreign and domestic
investors with a set term of co-operation.
Wholly-Owned Foreign-Funded Enterprises
This refers to enterprises established in accordance with the Law of the People’s Republic of
China on Foreign-Funded Enterprises and other relevant laws, with investments coming
solely from foreign investors, other than those from Hong Kong, Macau or Taiwan. They are
often limited liability companies.
Foreign-Funded Shareholding Corporations
These are established with 25% or more of their total registered capital coming from foreign
investors, other than those from Hong Kong, Macau or Taiwan; those with less than 25% are
classified as domestic funded. Their establishment must be approved by the Ministry of
Foreign Trade and Economic Relations in line with relevant state regulations.
Source: Adapted from Hunan Provincial Bureau of Statistics,
http://www.hntj.gov.cn/english/literacy/200408180033.htm (accessed 28 December 2007); China Detail,
http://www.chinadetail.com/Business/InvestmentChinaCompanyOwnership.php (accessed 28 December
2007).
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EXHIBIT 9: CONTRIBUTION OF DIFFERENT ENTERPRISES IN CHINA BY
PERCENTAGE (1978–1998)
80
70
60
50
40
30
20
10
0
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
SOE
COE
OOE
PE
Note: SOE = State-Owned Enterprises; COE = Collectively-Owned Enterprises; PE = Private Enterprises; OOE = Enterprises of
other ownership structures, predominantly joint ventures but also include other forms of ownership.
Source: Anderson, A.R. et al. (2003) “The Increasing Role of Small Business in the Chinese Economy”,
Journal of Small Business Management, 41 (3), pp. 310–316.
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Danone V Wahaha: Who is Having the Last Laugh?
EXHIBIT 10: WAHAHA PRODUCTS
Nutritional Supplement Series
Bottled Water Series
Future Series Soft Drinks
Nutritional Tonic for Children
New Packaging
Old Packaging
Other
24
Dairy Products
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Juices
Chinese Congee Series
(八宝粥)
Other Beverage Products
Other Food Products
Source: Images from Hangzhou Wahaha Group’s corporate website: http://www.wahaha.com.cn/; Tom Online: http://news.tom.com/2007-10-09/OJRI/28287225.html.
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Danone V Wahaha: Who is Having the Last Laugh?
EXHIBIT 11: TIMELINE FOR DANONE’S CHINA EXPANSION
Year
Strategy
1987
Joint Venture
1996
Joint Venture
Hangzhou Wahaha Group
Bought stakes in
(54.2%)
Bought stakes in
(92%)
Bought stakes in
(20–22%77)*
Bought stakes in
(50%)
Bought stakes in
(24.32%)*
Joint Venture
(49%)
Wuhan Dongxihu Beer
(武汉东西湖啤酒)
Robust
(乐百氏)
Bright
(光明乳业)
Aquarius
(正广和)
Huiyuan
(汇源)
Mengniu
(蒙牛)
1996
2000
2001,
2006
2004
2006,
2007
2006
Partner/Collaborator
Guangzhou Milk
(广州市牛奶公司)
Resultant Entity
Guangzhou Danone Yoghurt
(广州达能酸乳酪)
Initially five subsidiaries;
expanded to 39 by 2007. See
Exhibit 1 for more details.
Wuhan Dongxihu Beer
(武汉东西湖啤酒集团)
Robust
(乐百氏)
Bright
(光明乳业)
Aquarius
(正广和)
Huiyuan
(汇源)
Mengniu
(蒙牛)
* Percentages denote latest stakes held by Danone.
Note: The above list is not exhaustive.
Source: Shangqiu Newspapers (11 June 2007) “Song Qinghou Resigned from Wahaha’s Chairman Post”
(宗庆后辞去娃哈哈董事长一职), http://www.sqrb.com.cn/gb/misc/2007-06/11/content_770533.htm (accessed
2 January 2008); Shangguan Zhoudong (15 June 2007) “Danone’s Quick Expansion In China”,
Chinadaily.com.cn, http://www.chinadaily.net/bizchina/2007-06/15/content_895462.htm (accessed 2 January
2008).
77
There is a discrepancy in public sources as to the exact percentage of ownership held by Danone in Bright Dairy & Food (光明
乳业).
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EXHIBIT 12: CHINESE BRANDS OWNED BY DANONE
Wahaha (娃哈哈)
Huiyuan (汇源)
Mengniu (蒙牛)
Robust (乐百氏)
Bright (光明)
Aquarius (正广和)
Source: Images from the respective companies’ corporate websites.
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EXHIBIT 13: SALES OF WAHAHA PRODUCTS (2001–2005)
Other
(Rmb 15
Billions)
Ready-to-drink
tea
12
Fruit/vegetable
juice
Drinking milk
products
9
6
Bottled
water
3
0
2001
2002
2003
2004
Note: US$1 = Rmb 7.63
Source: Euromonitor International.
28
2005
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EXHIBIT 14: EXCERPT FROM DANONE-WAHAHA JOINT VENTURE CONTRACT
Chapter
Terms and Conditions
19
Obligations of Chinese partners—Hangzhou Wahaha Group and
Zhejiang Wahaha Industries:
• “Must not engage in any activities that are in competition
with the businesses of the JV entities, including: production
or distribution/sales” (“不从事任何与合营公司的业务产生
竞争的生产或经营活动”).
26
Articles 1 and 2 stipulate that in the case of disputes that cannot
be resolved by the JV parties themselves:
• Resolution should be made in an arbitration court
• Court of choice should be International Chamber of
Commerce (ICC) International Court of Arbitration in
Stockholm, Sweden.
Note: Translation provided by the author.
Source: Chen, X.Y. (12 April 2007) “Why did Danone Insisted on Buying Wahaha’s 61 Non-JV
Companies?” (达能为什么非要买娃哈哈的 61 家”非合资企业”？), Nanfang Daily,
http://www.zj.xinhua.org/tail/2007-04/12/content_9767660.htm (accessed 28 December 2007)
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Danone V Wahaha (A): Who is Having the Last Laugh?
EXHIBIT 15: CHRONOLOGY OF DANONE V WAHAHA LAWSUITS
Date*
1.
2.
29 May
29 May
Applicant(s)
Danone’s
Singapore-based
fully owned
subsidiaries:
• Jinjia
Investments
• Myen
• Novalc
Danone’s
Singapore-based
fully owned
subsidiaries:
• Jinjia
Investments
• Myen
• Novalc
Defendant(s)
Hangzhou Wahaha Group and nonJV subsidiaries:
• Hangzhou Wahaha Group
• Zhejiang Wahaha Industries
• Hangzhou Xiaoshan Shunfa
Packaging
• Hangzhou Wahaha
Guangsheng Investments
Zong Qinghou
Court
International Chamber
of Commerce (ICC)
International Court of
Arbitration
(Stockholm, Sweden)
International Chamber
of Commerce (ICC)
International Court of
Arbitration
(Stockholm, Sweden)
* Year 2007.
30
Case/Purpose of Application
Seven applications related to breach of non-competition
clause as stipulated in the JV contract and the violation of
trademark right thus caused.
One application related to breach of non-competition and
confidentiality clauses as stipulated in the “Service
Agreement”. Zong, legal representative of Hangzhou
Wahaha Group, Zhejiang Wahaha Industries, Hangzhou
Xiaoshan Shunfa Packaging and Hangzhou Wahaha
Guangsheng Investments, had caused or induced these
companies to engage in activities that were in competition
with the JV entities, thereby violating the interests of the
JVs.
Excerpt of Relevant Clauses in the Agreement:
“To be faithful to your duties. Must not behave in
ways that put you in a position of conflict of interests”
(“忠於职守，不使自己置於职责与利益相互冲突的
境地”)
• “Must not be involved in any commercial
organisations or participate in activities in competition
with the JV entities” (“不与在业务上与合资企业竞
争的其他经济组织发生任何关系”).
•
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Danone V Wahaha (A): Who is Having the Last Laugh?
•
•
3.
4 June
Danone
•
•
4.
5.
78
79
14 June
10 July
Wahaha
Shenyang
Lingdong Industrial
Development79
Ever Maple Trading78
Hangzhou Hongsheng
Beverage
Zong Fuli, Kelly (宗馥莉)—
Zongs’s daughter
Shi Youzen (施幼珍)—Zong’s
wife
Danone
•
•
Qin Peng:
Director of Shenyang Wahaha
Beverages
China director for Danone
Asia
Supreme Court of
California
(Los Angeles branch,
California, USA)
To prevent defendants from concurring to illegitimately
interfere in the JVs’ customer relations and violate the
JVs’ commercial interests/prospects.
• Sought compensation of over Rmb 755 million.
Hangzhou Arbitration
Commission
Sought to secure ownership of the “Wahaha” trademark.
Requested to terminate the JV contract signed in 1996
since the Trademark Office had overruled the trademark
transfer applications.
Intermediate People’s
Court of Shenyang
(Shenyang, Liaoning
Province, China)
Defendant held concurrent posts as director/board
chairman in more than 20 companies (eg, Robust and
Aquarius) in direct competition with the Group:
• Breach of China’s corporate laws
• Damaged Shenyang Wahaha’s interests
• Requested court order to bar defendant from acting
as director/chairman of Shenyang Wahaha Beverage
and competitors
• Requested court order to turn over earnings from
competitors (Rmb 3 million in total) to Shenyang
Wahaha Beverage
• Sought compensation of Rmb 1 million for itself
• Sought compensation of Rmb 1 million for
Shenyang Wahaha Beverage.
Ever Maple Trading, registered in the British Virgin Islands, is the controlling shareholder of Hangzhou Hongsheng Beverage—the parent company of Wahaha Food & Beverage Sales [see Exhibit 1].
The company held a 5% stake in Shenyang Wahaha Beverages [see Exhibit 1].
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Danone V Wahaha (A): Who is Having the Last Laugh?
July
Hangzhou
Wahaha Group
6.
7.
12
July
Danone
Three Danone directors:
• Emmanuel Faber (chairman
of Danone Asia Pacific,
deputy chairman of DanoneWahaha JVs after Zong’s
resignation)
• Qin Peng (China director of
Danone Asia)
• François Caquelin (financial
director)
Hangzhou Wahaha Group
Guilin Intermediate
People’s Court,
(Guilin, Guangxi
Zhuang Autonomous
Region)
Hangzhou Arbitration
Commission
32
The Group claimed that three directors were hired by
more than 20 firms engaging in activities that were in
direct competition with the JVs:
• Violated China’s corporate laws
• Damaged the interests of JVs and the Group’s
shareholders
• Sought compensation of Rmb 1 million.
A counterclaim in response to case three above: The
Group had failed to transfer the “Wahaha” trademark to
the JVs as stipulated in the contract signed in 1996.
08/385C
8.
Danone V Wahaha (A): Who is Having the Last Laugh?
Unknown
Jinjia Investments
Zong Qinghou
Intermediate People’s
Court of No. 8 Unit of
Xinjiang Production and
Construction Army,
(Shihezi Economic and
Technological
Development Zone,
Xinjiang Uygur
Autonomous Region)
Violation of the interests of the JVs by setting up
Xinjiang Shihezi Wahaha Food (新疆石河子市娃哈哈
食品有限公司) which was a potential competitor of the
JVs.
Source: Sina Finance (5 June 2007) “Danone Sues Companies Owned by Zong Qinghou’s Daughter: US”, (达能在美国对宗庆后之女旗下公司提起法律诉讼),
http://finance.sina.com.cn/chanjing/b/20070605/11563662484.shtml (accessed 29 November 2007); Asia Pulse (4 July 2007) “China’s Wahaha to Sue Three Joint Venture
Directors from Danone”; Xinhua’s China Economic Information Service (11 July 2007) “Wahaha sues Danone executive as feud flares”; China Economic Review (13 July
2007) “Danone seeks Wahaha trademarks”, Daily Briefings; Asia Pulse (20 July 2007) “Danone Threatens China’s Wahaha with Another Lawsuit”; Chen, X.Y. (12
April 2007) “Why did Danone Insist on Buying Wahaha’s 61 Non-JV Companies?” (达能为什么非要买娃哈哈的 61 家”非合资企业”？), Nanfang Daily,
http://www.zj.xinhua.org/tail/2007-04/12/content_9767660.htm (accessed 28 December 2007; Qiu, L.H. (11 December 2007) “Hangzhou Arbitration Ruled on Dispute in
Trademark Transfer: Danone vs. Wahaha” (达能娃哈哈商标转让纠纷杭州仲裁作出裁决), Zhejiang Xinhua Net (新华网浙江频道),
http://www.zj.xinhuanet.com/newscenter/2007-12/11/content_11914229.htm (accessed 4 January 2008); Xinhua News Agency (22 December 2007) “Wahaha Wins 3rd
Lawsuit against Danone in China”, Chinadaily.com, http://www.chinadaily.com.cn/bizchina/2007-12/22/content_6341271.htm (accessed 28 December 2007).
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Danone V Wahaha: Who is Having the Last Laugh?
EXHIBIT 16: PUBLIC STATEMENTS RELEASED BY GOVERNMENT DEPARTMENTS
ACROSS CHINA WHO RELEASED STATEMENTS IN SUPPORT OF HANGZHOU
WAHAHA GROUP
Administration Committee, Guiyang Baiyun Economic Development Zone,
Guizhou Province
People’s Government of Jian Municipality,
Jiangxi Province
Administration Committee, Shihezi Economic and Technological Development Zone,
Xinjiang Uygur Autonomous Region
People’s Government of Shangcheng Municipality,
Zhejiang Province
Fuling District Government, Chongqing Municipality,
Sichuan Province
Yiling District Government of Yichang Municipality,
Hubei Province
Hongan County Government,
Hubei Province
Administration Committee, Chengdu Cross-Straits Technological Industry Park,
Sichuan Province
Administration Office, Minying Economic Park of Chaohu Municipality,
Anhui Province
People’s Government of Xinxiang,
Hebei Province
Source: Sina Finance (13 April 2007) “Government Departments across China to Support Wahaha” (各
地政府、政府机构声援娃哈哈), http://finance.sina.com.cn/chanjing/b/20070413/11373500071.shtml
(accessed 28 December 2007).
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Danone V Wahaha: Who is Having the Last Laugh?
EXHIBIT 17: PUBLIC STATEMENT OF SUPPORT FROM SHANGCHENG GOVERNMENT
Source: Shangcheng Government’s public statement of support for Hangzhou Wahaha Group, http://finance.sina.com.cn/chanjing/b/20070413/18553501010.shtml.
35