Danone/Wahaha: A Breakdown in Mutual Trust (Part 2)

It may seem like a trite statement, but establishing mutual trust in a joint venture in China is absolutely critical to long term success. In a culture where personal relationships, “face” and mutual respect are so highly valued, seemingly small slights can undermine even the most compelling business proposition. Apart from the legal claims being bandied about, the root cause of the Danone/Wahaha dispute was a breakdown in mutual trust.

On the face of it, there is merit to each of the partner’s claims.

From Danone’s point of view, Zong’s decision to set up competing companies to Wahaha certainly runs counter to the spirit of the joint venture, even if there is nothing in the contract which specifically prohibits him from doing so. Likewise, using the “Wahaha” brand in his competing companies hurts the joint venture and is not acceptable behavior, even if the transfer of the brand to the joint venture was never properly registered as claimed by Zong supporters.

In Zong’s defense, if Danone indeed acquired its majority ownership in the joint venture by taking on an additional 10 percent stake through the acquisition of the Hong Kong entity, without first discussing it with him and Wahaha’s board, this too violates the spirit if not the letter of the joint venture agreement. Moreover, Danone’s numerous joint ventures with other beverage companies certainly implies that exclusivity in China is a one way street in their mind.

Who is right, and who is wrong on these various points, however, is not the real issue. The fundamental question is: “How did a financially successful, very large and visible company with two prominent shareholders end up this way?” Somewhere along the line, a breakdown of mutual trust caused each company to go their separate ways and end up in what is likely to be an ugly divorce.

It certainly could not have always been this way. When the joint venture was formed, a certain level of trust had to exist between the two parties. Otherwise, why would either have agreed to do the joint venture in the first place?

Any number of events could have created a crack in the armor of trust, which then widened into the current, full blown legal dispute.

  • If Zong felt that he was not properly consulted before Danone acquired the additional 10 percent ownership, for example, that certainly would have undermined his trust in Danone.
  • Perhaps Zong’s authoritarian management style made Danone believe that it was being excluded from the management of the joint venture, despite its 51 percent ownership? If this is the case, Danone might have begun to mistrust Zong’s motives and concluded that it had no alternative but to create alternative vehicles inChina.
  • Danone’s purchase in 2000 of a 92 percent interest in Guangdong Robust Group, one of Wahaha’s competitors, would have sent a signal to Zong that Danone was intent on creating a parallel path in China. The 2006 acquisition of its interest in China Mengniu Dairy would have only reinforced this view. Why shouldn’t Zong then create his own parallel set of companies?
  • Real differences in strategic direction may have caused each partner to believe that their respective interests were diverging, not coming closer together. Zong claims that Danone rejected his plan to expand into China’s western provinces in line with the Chinese government’s policy of encouraging investment in the interior.

Only Danone and Wahaha know what really happened. Whatever it was, the lesson to be learned is that mutual trust is the fundamental building block of a joint venture in China. It is very fragile, however, and must be nurtured by both parties. Once a crack appears, it is difficult to repair.

If you currently have a joint venture, or must establish one to do business in China, the most important thing that you can do is to try and preserve the spirit of cooperation that exists when the joint venture documents are signed. Work hard to resolve small differences and prevent them from expanding into larger ones. Once trust between the partners is broken, issues that might otherwise be solved by friendly negotiation become impossible to resolve. Once the courts become involved, it’s already too late, whatever the outcome of the litigation or arbitration. When it gets to this point, everyone loses.

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