Danone/Wahaha: Learning From Crisis (Part 9)

Danone LogoWahaha LogoFrom all outward appearances, the Danone/Wahaha affair, one of the most spectacular and visible disputes between a prominent foreign company and its Chinese partner, is speeding to a resolution as quickly as it seemed to spiral out of control in the middle of 2007.

In the latest announcement, Emmanuel Faber, one of the key persons in the dispute, has resigned his positions in the China joint ventures due to his recent appointment as Chief Operating Officer of Paris-based Danone.

This move saves face all around, and promises to pave the way for constructive discussions between the two parties. Mr. Faber has obviously been given a huge promotion by the parent company, so no negative aspersions can be cast on his move back to Paris. Yet, his departure creates more negotiating room for both sides. His successor as point person in the negotiations on behalf of Danone is now free to reconsider the company’s various positions and modify or adjust without fear of losing face, something that is as important to non-Chinese as it is to their Chinese counterparts. Likewise, the representatives from Wahaha, with a new person sitting across from them at the negotiating table, will have more freedom to step back from lines that they may have drawn in the sand previously. Difficult and tedious negotiations remain ahead, but the conditions for further discussion have never been better.

Why the sudden progress after months of stalemate? In my opinion, the key lies in Danone’s abandonment of the typically Western, legalistic approach which it first took to try and resolve its dispute with Wahaha, in favor of one that is more Chinese. In the West, filing a lawsuit often sets the stage for settlement discussions. In China, it works just the opposite. Legal action signals an end to discussion and negotiation. Rather than being an integral part of the dispute resolution strategy, the best legal strategy in China is, more often than not, not to have one.

Winning a lawsuit in China is difficult and time consuming for a foreign company, as Danone and others have found. While the prospects for obtaining a favorable judgment in arbitration are much better, any damages awarded have to be enforced through the Chinese courts—a classic Catch-22 which I had the dubious pleasure of discovering for myself. Filing lawsuits outside China, as Danone did, may hold out the promise of asset recovery, but it cannot by definition address the core issues in China.

As painful, as frustrating and as tiresome as it may be, negotiation and maintaining communication with your partner in China is always the preferred way to go. That, I believe, is the advice that President Hu Jintao of China gave President Sarkozy of France when the latter brought up the Danone issue at their November dinner. It was no surprise that Danone began abandoning its legal strategy immediately afterwards. With all legal action stopped or suspended, and both parties agreeing to refrain from further hostile comments, the stage for constructive dialogue was set. By stepping out of the picture, Mr. Faber and Danone have now expanded the area for compromise.

And, “compromise” will be the operative word from here on in. Neither party can expect to get all that they want from the negotiations. Given the deep differences which have arisen and which the dispute has highlighted, it is unlikely that the relationship can go back to the way it was. At best, Danone and Wahaha will be able to come to some agreement that enables each to pursue its own destiny in China and abroad in some mutually beneficial manner.

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