Groningen, 15.11.2009 Introduction International Business Lecturer: S. Beugelsdijk Professor of tutorials: H.C. Stek Case Study: Danone’s affair in China (“International Business Strategy – Alain Verbeke) Group 12, Team 6 Date of submission: 16.11.2009 S. N. Veldhuizen (1858610) Thijs Hofland(1942778) 1. Furthermore. There was the establishment of joint ventures between Wahaha and Danone. leading to conflicts. The responsibilities and leadership were given to Zong to run the joint ventures. 2. Wahaha needed cash. How did the relationship between Wahaha Group and Danone change during the 11 years of cooperation? How did the bargaining power of both parties change? In the beginning Both Wahaha and Danone saw a great interest in cooperation. In 2007. What were the intentions of Wahaha Group and Danone when setting up joint ventures in China? Danone entered China in 1987 by founding Danone Yogurt Company in Canton. Both expected a cooperation that worked well. one could say that the alliance collapsed. Danone let the former executives run the businesses and didn’t get involved much in daily operations. Wahaha made non joint ventures compete with the joint venures that were established. Wahaha would control them for 49 percent. especially considering Danone’s disastrous 1987 solo efforts in China. The bargaining power changed significantly. Both Wahaha and Danone expected to gain something from the cooperation. Danone on the other hand was searching an opportunity to enter the Chinese market. linking its joint ventures through capital rather than joint products. they were much more interested on profits that came from these JV’s. Danone did not get involved a lot with it. So Danone decided to capitalize successful local business rather than build its own businesses from scratch. Zong argued that Danone had neglected them and that Danone wanted to stop the development of the Wahaha Group. The Joint Ventures started in 1996. Wahaha would be the company leading these joint ventures. furthermore the Wahaha group has let other companies use the brand name Wahaha on their products. Danone 41 per cent and Peregrine 10 per cent. Not knowing much about the peculiarities of the Chinese market. joint ventures with a strong local firm in a fast-growing emerging market were a perfect opportunity for Danone. Danone bought almost identical French products to the Chinese market. having the knowledge to run a business in China. We think that the trust had vanished over time. They wanted to adopt new technology and managerial techniques from Danone. but these had room for other interpretations. It probably starts at the very start of these joint ventures. resulting in a strong focus on joint ventures and acquisitions. In fact. Most of the consumers had no refrigerators to store fresh dairy products and Danone’s products were too expensive for the average Chinese consumer. as both parties seemed to work against each other. There were contracts. Danone saw malpractices at Wahaha and vice versa. For Danone. The joint ventures and acquired firms continued to sell their product under their own brands. Danone functioned more like a capital investor. Wahaha was searching opportunity to gain cash. In 2006 Zong agreed to sell a majority share in the non JVs to Danone . Danone on the other hand was not really involved in the joint ventures. and it also hoped to adopt new technology and managerial techniques from Danone. A second source of bounded reliability is benevolent preference reversal. When the joint venture started. in which an actor’s initial promise is made in good faith. Moreover. Another long-time conflicts between Wahaha and Danone was that Zong accused Danone of designing a trap in the original JV agreement to win control of both the Wahaha brands and the JVs. 3. the more complex the disputes became. but such individuals may produce long-term conflicts. they would have no knowledge of how to lead this company in China. but later on conflicts aroused. By 2007. The disputes between Danone and Wahaha became known to the public on 3 April 2007. the two firms started the cooperation with good intensions. The more time passed. 39 JVs between the Wahaha Group and Danone had been established. I did observe problems of bounded reliability with the two firms’ cooperation. Did the long-term cooperation between both firms lead to more trust? Did you observe any problems of bounded reliability with the two firms cooperation? Was there a vicious cycle of suspicion? Was there a vicious cycle of increasing dependency on a partner? The cooperation between Wahaha and Danone started in 1996. 4.however pulled out the offer in 2007. Was there a learning asymmetry in the joint Ventures? There was definitely a learning asymmetry between Danone and Wahaha. All parties agreed to let the Wahaha Group take full control of the everyday operations of the JVs. In the end Danone had to make the conclusion that even when they would win in court. thereby leading to incomplete fulfilment of promises. Wahaha was depending on Danone. but in fact Zong was in charge.6 billion assets of the non-JVs for only RMB 4 billion. Danone did not have a single executive in the joint ventures and Zong ran the joint ventures with a high degree of autonomy. Jinja and the Wahaha Group then set up five JVs in 1996. Wahaha had been China’s number one domestic. Danone and Peregrine Group set up a Singapore-based firm called Jinja. although not in a self-centred way. Like we see in the Danone case. Bounded reliability is about imperfect effort towards pre-specified goal achievement. the negotiations on the use of Wahaha brands and the takeover conditions did not lead to a positive outcome. Danone agreed that Wahaha should lead the company. So the long-term cooperation between both firms did not lead to more trust. but the actor’s preferences then change over time. One source of bounded reliability is opportunism and the problem with opportunism lies with the individual’s self-centred desires and effort. non-alcoholic beverage producer in both production volume and sales revenue. The cooperation appeared to work well and the new cash from Jinja enabled Wahaha to invest in both marketing and advanced production lines. Zong expected apparently that they would receive technical or managerial . when Zong told Chine reporters that Danone wanted to take over the RMB 5. So Individuals can perform as expected in the shortterm. This was because that the Wahaha brand name was competing against the Wahaha joint ventures. but then be unable to run the JVs by itself. Danone was in a very difficult situation. Nevertheless I think Danone should not have rejected the joint venture entry mode in the first place. such as when Wahaha tried to launch Feichang Kele. giving them a better position in the market. Despite the worsening cooperation. Moreover. and using their own manager’s and not just let the former executives run the businesses. We can conclude that Danone had not been able to access the location-bound FSAs of the Wahaha Group. 6. Danone did not have a single executive in the joint ventures and Zong ran the joint ventures with a high degree of autonomy. Danone and Wahaha were involved in over 30 lawsuits about the use of the name Wahaha. Danone should be more involved in daily operations of the joint ventures by doing market research. Danone was not involved themselves in the Chinese market. They have received 300 million for their shares from the Chinese business man Zong Qinghou. Furthermore. does not have the management recourses to control the JVs and does not have much experience in running successful businesses in China on its own. From Zong’s perspective. Danone on the other hand did not expect Wahaha to create businesses that would compete against the joint ventures. the Wahaha Group had not received any technological or managerial expertise from Danone. When Danone and Wahaha had not reached any agreement on how to proceed further. they left it up to the joint ventures. . 5. tried to expand their production of bottled water and tried to invest in the western regions of China. because of Danone’s lack of understanding of the Chinese market at the early stage of the cooperation Danone had even created barriers when Wahaha tried to expand the JVs’ business. the Wahaha group benefitted from this alliance.expertise from Danone. Can you provide an update on the relationship between Danone and the Wahaha Group. Has Danone been able to access the location-bound FSAs of the Wahaha Group? Should Danone have rejected the joint venture entry mode in the first place? Even after Danone took the position of majority shareholder in 1998. Danone has withdrawn itself from the joint ventures that they had with Wahaha. using materials available on the Web? From July 2007. Danone had never operated the JVs. Because it might win in court and remain the legal owner of the Wahaha brands.