Danone’s feud with Zong Qinghou has proved a cultural clash case study – write Tom Mitchell & Geoff Dyer

In the annals of international investment SCC Arbitration V (061/2007) will be remembered as a case study in how not to do business in China.

Technically the “partial award” judgement handed down by a Swedish arbitration tribunal on September 30 was a victory for Danone over Zong Qinghuo, the French food group’s Chinese joint venture partner since 1996 and founder of beverage-maker Wahaha Group.

Many of Danone’s claims against Mr Zong were not upheld, including an allegation he defrauded their joint venture. But a three-man tribunal convened by the Stockholm Chamber of Commerce’s Arbitration Institute ruled that he had breached confidentiality and non-competition agreements – allegations that the self-made billionaire categorically denied.

The tribunal also ordered thate he “cease forthwith using, or assisting in/procuring any unauthorised usage of the Wahaha Trademarks and any other intellectual property rights which belong to the [joint venture], and orders that Mr Zong transfers them to or cause their transfer to the [joint venture].

Meanwhile, as victories go, it was a limited and pyrrhic one for the French food group. On the same day that the confidentail judgement was handed down, Danone and Mr Zong formally ended a fued that had gone public more than two years earlier and featured in discussions between the two countries presidents, Nicolas Sarkozy and Hu Jintao.

Under the terms of the embittered partners peace agreement, Mr Zong agreed to pay Danone €300m ($450m) for its controlling 51 per cent stake in their joint venture operations.

Danone had valued those operations on its books at €380m. at the time, Danone and Mr Zong did not reveal the tribunal’s decision, a copy of which has been seen by the Financial Times. Danone had publicly alleged that Mr Zong undermined the joint-venture by establishing a parallel production and sales network. But neither the extent of Mr Zong’s parallel operations nor Danone’s self confessed ignorance of them, in spite of its controlling stake, has been made public.

SCC Arbitration V (061/2007) relates the behind-the-scenes story of one of the most embarassing foreign investment failures in China.

The tribunal’s findings cite the humble origins of Mr Zong, who worked as a rural labourer in coastal Zhejiang province for 15 years until 1978 before getting a job at a paper box factory in Hangzhou, the provincial capital.

He worked there until 1986 when, following market-orientated reforms in China, he was able to borrow Rmb140,000 ($20,506) to set up a small business selling ice creams, sodas and pollen oral solutions.

Mr Zong’s popular oral solutions – especially a product known as “Wahaha Children’s Nutritious Liquid” – were the cornerstone of the Wahaha Group’s success in the early and mid-1990’s.

In 1996 Danone, in partnership with a now defunct Peregrine investment bank, purchased controlling stakes in four Wahaha subsidiaries and a newly created distribution company, Hangzhou Wahaha Health Food Co. While Danone enjoyed board control, Mr Zong remained group chairman and managed five joint venture companies or JV’s.

For his services at the JVs, Mr Zong was paid more than $60m over a 10-year period, not including dividends. He also retained control of six other Wahaha subsidiaries referred to by the tribunal as “the original non-JVs” in which Danone chose not to invest.

Danone’s interests in the JVs were represented primarily by Stephen Yau, a finance director. the French company’s few other personnel at the JVs included Mr Yau’s assistant, a marketing director and a research and development director.

According to the judgement, Danone alleged that “Mr Yau, while technically financial director, was not permitted to take part in the management of or decision-making processes regarding any joint-venture, such that his role was reduced to acting as a “bridge” between Wahaha Group and Danone Asia regarding finance-related matters.”

Mr Zong countered, the tribunal added, that Mr Yau in fact “had access to …..all the financial information pertinent to the operation of the JVs.”

Over time the number of Danone-invested JVs would expand to 39, while the number of non-JVs privately controlled by Mr Zong would mushroom to at least 96.

Danone alleged that the non-JVs competed against its own JV companies, received preferential treatment from distributor Hangzhou Wahaha Health and were managed by Mr Zong through a deliberately opaque web of British Virgin Island, Samoan and Seychelles companies, some of which were held by his family members and associates including a truck driver from Shenzhen, the special economic zone bordering Hong Kong.

Mr Zong denied hiding anything from Danone or giving preferential treatment to his non-JVs, and expressed irritation when questioned on his vast network of offshore companies. “Just like making love to my wife, its none of your business,” he told the tribunal.

Mr Zong also noted that the proliferation of non-JVs stemmed in part from a clash of cultures, as he grew frustrated with his French partner’s relatively cautious approach towards expansion.

As a result of the September 30 agreement, which superceded the tribunal’s ruling, Danone’s stake in – and full legal control of – all Wahaha Group companies was returned to Mr Zong at a 21 percent discount to book value.

Last week the entrepreneur vaulted 15 places up Forbe’s China rich list, to the number three slot, with a fortune estimated at $4.8 billion.

Financial Times 10 November 2009

BEIJING, June 17 (Xinhua) — China’s political advisors brainstormed Wednesday on the country’s economic development and offered suggestions about coping with the impact of the global downturn.

They gave their advice as the standing committee of the 11th Chinese People’s Political Consultative Conference (CPPCC) National Committee continued its sixth meeting, which started Tuesday.

Li Yining, a renowned economist and one of the members of the standing committee, said restructuring and innovation were pivotal for an economic recovery. Once the problems of fair play and difficulty in financing were solved for private companies, their potential for innovation would emerge.

Other proposals ranged from fostering new growth poles to solving social disputes.

Jia Qinglin, chairman of the National Committee of the CPPCC, was present at the meeting.

He said Tuesday that maintaining steady, relatively fast economic development and safeguarding social stability and harmony were the foremost tasks facing China, and he asked the participants to focus their discussions on these themes and make valuable suggestions.

Xinhau – 17th June

DO CHINESE BRAINSTORM? – COMMENTS ARE VERY WELCOME

Vestas, the world’s largest wind turbine maker, is trying to remain on top of aggressive Chinese competition by localising and customising its products for use in the region.

Although the Copenhagen listed company has seen its world market share slide amid an explosive growth in the Chinese market, where domestic competitors take more than 75 per cent of orders for new capacity, Ditlev Engle, chief executive, insisted yesterday that he would not compete on price.

Financial Times – 17^th April

China National Petroleum Corp. suspended talks with Chevron Corp. over an oil-field stake in the Gulf of Mexico, spurning a chance for a key U.S. foothold.

CNPC apparently thinks it deserves a better deal in return for allowing the U.S. company access to one of China’s biggest natural-gas fields back in 2007. (Guanxi?)

Wall Street Journal – March 20th

Wang Zhibo runs a successful business, has plenty of money in the bank and would love to buy a house and trade in his humble second-hand car for a $14,600 Volkswagen Santana 3000.

Just what the crumbling world economy needs – a guy with money to spare and an appetite for houses and cars.

But Wang 33, won’t be coming to the rescue, at least not anytime soon.  The Beijing entrepreneur is hoarding cash until he sees how the Chinese economy is weathering the storm.

Wang’s cautious attitude is typical – and a key reason China’s 1.3 billion consumers are unlikely to dip into their vast savings and go on a shopping spree that would recharge spluttering factories in their own country and around the world.

Shanghai based reserach firm DDMA surveyed 602 consumers in five Chinese cities: 45% were reducing their spending because of concerns about the economy; 12% said they had already lost their jobs.

USA Today – March 20th

China has just enhanced its reach and status as a superpower with the successful staging of the Beijing Olympics 2008. International business in China is booming. No surprise, more and more European corporate heads have been taking a keen interest in China as a business destination. It is a country with sound business and an economy that is experiencing steady growth.

Over the last few years, many British businesses have taken an interest in China. Already, the trade between Britain and China is in excess of £20 billion and is expected to reach over £ 30 billion by the year 2010. Anyone who wants to do business with a Chinese corporation will have to know that business is conducted a little differently there.

It would be advisable to know a little more about the way business transactions take place in China before approaching a Chinese firm or business people. It is pertinent to understand the Chinese business culture to order to gain and sustain corporate contacts. Chinese business etiquette for instance, is different in that your Chinese counterparts would expect to do business on a more personal level. Mutual trust is the key to doing business in China.

European businesses have been looking at China over the past few years for their overseas expansion plans. Being a growing economy, China has exceeded expectations. It is not just any other country with a modest economy; it is one of the world’s biggest business success stories.

More and more European conglomerates have been approaching China for business deals worth billions of euros. France, Britain and Germany are three noteworthy examples. The trade between Britain and China is already worth billions of pounds and is expected to be much higher in the next few years. More business owners are willing to put their money in China, so why should you lag behind?

However, one needs to keep in mind that the Chinese go about doing business in a slightly different fashion, adding more personal value to the transactions at hand. According to Chinese business practices and culture, the host will want to get to know his prospective business partner on an individual level before signing any contracts.
Another important aspect to be noted is the business negotiating etiquette in China. One might want to hire a professional who would be a good resource and help understand the Chinese way of business. It is advisable to have some negotiating strategy sessions and workshops, which may be useful in understanding the way the Chinese go about their business.