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Sample Student-Written and Political Strategy (and Ethics) Case: Groupe Danone and Its Partnership with Wahaha in China by Zhiwei Wang

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Sample Student-Written and Political Strategy (and Ethics) Case: Groupe Danone and Its Partnership with Wahaha in China

by Zhiwei Wang

   Groupe Danone SA, founded in 1972, is a French food company with multiple international joint ventures. In 2008, its global standing included: world no. 1 in fresh dairy products, world no. 2 in bottled waters, world no. 2 in baby nutrition, world no. 3 in medical nutrition. With 20% of the global market (35% in some countries) and a presence in some 40 countries, Danone leads the global fresh dairy product market.

   In 1994, Groupe Danone entered the China market selling consumer drink products, including drinks from fruit juice, dairy products and bottled water, all with Chinese joint venture (JV) partners who were market leading brands in China.

   One such joint venture was formed with a leading Chinese domestic beverage producer, Wahaha. In 1996.Danone bought a 51% stake in a joint venture (JV) with the founder of Wahaha, Mr. Zong Qinghou, the second largest shareholder. The JV has since turned Wahaha mineral water into the market leader in China and one of the best –know consumer brands in the country, a brand more familiar to many Chinese than Coca-cola. In 1999 the two companies signed a further licensing agreement which gave the JV the right to use the Wahaha name.

   In China, Danone’s JV partners are not only Wahaha. For instance, Danone is also the biggest stockholder in the milk brand Mengniu and the juice brand Huiyuan.

In early 2007, Danone accused Wahaha and Mr. Zong of trademark infringement for manufacturing and marketing beverage products under the same Wahaha brand outside of the JV. According to the licensing agreement, the JV has exclusive right to the trademark. The relationship immediately turned sour as Danone sued Wahaha to stop this practice.

Wahaha gave three reasons to reject the challenge made by Danone:

1. The initial JV partnership was a trap for Wahaha; the motive of Danone in the beginning is to lead the market in China, Wahaha misunderstand a key item in the contract when it signed. At the time, the economic circumstances in China were not good.

2. Danone had been aware of Wahaha’s substantial parallel businesses in the early years and both Wahaha said Danone just ignored it.

3. The original agreement between the two beverage giants was never approved by China's trademark office and so is not legally in force or effect. Danone either thought Wahaha was going to record this licensing agreement with the government or never even realized such a recording would be required. In China today, some IP licenses must not only be recorded for the licensing transfer to take effect, they must first be approved by the government.

These three reasons become the foundation of Wahaha in its fight with Danone.

In defending himself and the Wahaha company, Mr. Zong also organized a national PR campaign asking the Chinese government to protect this well known national Chinese brand from foreign invasion, and has asked all the Wahaha employee and distributors to act together to “protect this Chinese company.” Zong asserted that if Wahaha failed in the brand dispute, it would have a significant impact on the employees and distributors of the company. At the same time, Danone spokesman Michael Chu said he didn’t discount the possibility of further lawsuits against Wahaha.

Danone’s suit was dismissed by a Chinese local court and the local arbitration body which ruled in favour of Wahaha group, but Danone did not give up. Danone took the legal battles to other venues. Court fights have taken place between the two in Los Angeles, Samoa, and the British Virgin Islands, as well to other courts in China and the International Arbitration Count Stockholm.  The case has attracted world-wide attention in the business media and international business community and an evaluation by the Stockholm arbitration body is expected.

Many other foreign brands have Chinese partners, not only Danone, So all these companies are focused on this case.  The end of this case is highly relative to them, especially the response of the Chinese government. Though the government wants to remain neutral, the fight for Wahaha brand and equity has become a marathon with the two companies’ home governments also getting involved. Their attitude are important to this case, as the Danone and Wahaha are famous brand in their home countries , Whether the Wahaha group agrees to or is forced to transfer the trademark to the JV is of concern to the two governments. The result from this case is certain to have an effect on China’s policies on investment from overseas and foreign companies’ response to their policies.  

Sample Student Political Strategy Case Analysis Example: Danone & Wahaha Case

by Yifeng Liu

Based on both the economic and the legal environment in China now, what should Danone do to protect position in the case? If you were Danone, would you look to expand in China further (a) alone or (b) with joint venture partner? 
There are five parts of actors in this dispute, Danone, Wahaha, courts and arbitration institutes, Chinese government and French government, dealers, and employees union.

Here is a power diagram about the actors above:

From this diagram, I can know the power of the actors in this dispute and show why Danone was never able to defeat Wahaha in it efforts.

Dealers and Employee Union of Wahaha are one of the vital factors to affect this issue. Because of the threaten boycott, Danone understood it could not get any support form the dealer and internal company of Wahaha. Without the support of internal company of Wahaha, Danone tried to reach the acquisition through the courts and arbitration institutes.

But most of the courts and arbitration institutes are rejected Danone’s accusation. That made Danone could not put the tremendous pressure to Wahaha, and on the contrary, Danone faced great pressure after they failed in such many legal accusations, Although Danone woe a partial victory in SCC, but this victory seems have any influence to this issue. The first reason is SCC is an arbitration institute, and SCC didn’t have any power to affect the issue. SCC just gave their judgments which have any force of law to Danone and Wahaha. Secondly, Danone won the victory, but the accusation expenses and time had been spent a lot. Danone had not enough patients to wait the second round accusation in SCC. In a summary, the courts and the arbitration institutes were gave Danone a great pressure while they sued Wahaha all over the world.

French government and Chinese government have great power at hand to affect the process of this issue. They discussed the dispute when French president visited China. At the intervention of both governments, two companies negotiated the amicable settlement but break down a few months later. The two governments didn’t do anything after the negotiation break down.

At the effects of these five parts of actors, Danone failed to defeat Wahaha and quit the joint ventures on September 30th.
NOTE: This case can also be seen as an ethics case. Here is the student’s analysis of the case as an Ethics Case

Assess the ethical behavior of Mr Zong with regard to Danone’s charge of trademark infringement for manufacturing and marketing beverage products under the same Wahaha brand outside of the JV. Is his response that Danone behaved ethically in the initial contract: (a) he was deceived by Danone in key terms of the initial contract and (b) Danone took advantage of Wahaha because of “at the time (of the initial contract), the economic circumstances in China were not good” and (c) Danone knew this practice had been going on for years?

In this case, because Wahaha set parallel companies and had used the trademark which belongs to the joint ventures to develop its business for nearly ten years, Danone faced problem is whether Danone acquired the non joint ventures companies of Wahaha to protect its right at the stress of the employee union, courts, and governments.

At this dispute, I think Wahaha didn’t act ethically. Although Wahaha won most of the accusations in two years that just means Wahaha’s action was approved in the field of laws, not in the field of ethics.

Firstly, Wahaha operated parallel companies secretly and competed directly with the joint ventures and most of the parallel companies bore the Wahaha name. According to the original joint venture contract in 1996, Wahaha had no right to establish other companies which competed directly with joint ventures. Obviously, Wahaha’s action violated the original contract. In 1999, both groups signed an additional contract transferring the exclusive right of using the Wahaha trademark to the joint venture. But Wahaha used the trademark at parallel companies’ product and siphoned off as much as $100 million from the partnership. Wahaha didn’t respect the agreement signed in 1999 and let the partnership sustain losses.

Secondly, Wahaha utilized the dealers, employee union, and media in China to affect Danone’s acquisition. Dealers and employee union set a threaten boycott to Danone. The founder and chairman of Wahaha, Mr. Zong, claimed that Danone knew all along about the parallel companies, grew jealous at their profitability and sought to purchase. Chinese media described Wahaha as the aggrieved party in order to protect one of the biggest Chinese beverage companies being acquired by foreign companies and put tremendous pressure to Danone. In a word, Wahaha used all possible ways to protect Wahaha being controlled by Danone, none of which were particularly ethical.

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