Danone's China Venture Falls Apart

Last Updated Jun 12, 2007 5:26 PM EDT

Wahaha WaterIn China, Wahaha means the child who laughs. It also happens to be the name of China's largest beverage maker, but no one's laughing there. Zong Qinghou, Wahaha's chairman, just resigned over the ongoing dispute with Group Danone, which last week filed suit against Wahaha.

In 1996, Danone bought 51 percent of Wahaha and established 39 joint venture companies. The present conflict started back in 2005, when Danone discovered that Zong was using the Wahaha brand name outside of the JV companies, diverting millions of dollars from Danone and into Zong's private enterprises. Last week's litigation filing marks the end of long and fruitless internal negotiations, and the beginning of what likely will be a lengthy legal battle.

And then there's the whole cultural problem: with Zong's resignation, Wahaha employees are now on the verge of corporate revolt, with brazen letters attacking Danone. David Barboza and James Kanter report in a NY Times article:

Two days [after Zong's resignation], Wahaha -- which is 51 percent owned by Danone -- released a series of harshly worded employee letters that accused Danone officials of ignorance and bullying. In one of the letters, which Wahaha said represented large groups of employees, the workers vowed to standby "Chairman Zong" and to punish Danone's "evil deeds." And then, over the weekend, Wahaha issued another statement, saying the company's management and staff "strongly disapprove" of two directors appointed by Danone.
What's the lesson in all this? Double-check the strategy behind your "strategic" alliances, and be sure to stay actively involved in operations -- especially in China. Danone let Zong run the show for years without keeping a close eye on Wahaha's activities, and now they're fighting to keep the brand intact. For more on doing business in China, check out Stephen Rudman's new book, The Multinational Corporation in China: Controlling Interests.

(Image of Wahaha Water Bottles by Wahaha)