China Law Blog

David Barboza, who has been doing a great job covering the Danone-Wahaha dispute (see his New York Times article, "Rancor Level Rises in Rift Over Danone China Venture"), just came out with a new story on the dispute in the International Herald Tribune and the New York Times, entitled,  "A brawl threatens a huge investment by Danone in China, in which he interviewed CLB's own Steve Dickinson.   For background on this dispute, check out my earlier posts:

Barboza's new article does a great job explaining some of the things that caused this venture to go wrong and Steve does a great job explaining how Danone's joint venture problems are anything but unique.  The article starts out talking about how two years ago Danone "began noticing something peculiar in the financial figures coming from their joint venture here with the Wahaha Group."  A "lengthy investigation" led Danone to conclude that Wahaha's chairman, "Zong Qinghou, was operating a series of secret parallel companies outside the joint venture - companies that were mimicking the joint venture and siphoning off millions of dollars." 

The article then discusses how after months of negotiation between Danone and Zong the parties could not resolve who has rights to the Wahaha brand and as the fight for control over Wahaha continues. 

Barboza rightly deems this fight as emblematic of the "pitfalls of doing business in China" and Steve Dickinson agrees:

"This is a cautionary tale," said Steve Dickinson, a Shanghai-based lawyer at Harris & Moure. "This is not a message that you can't do business in China, but if you come to China and let the Chinese run the business without supervision, they can do this kind of thing.

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"This is a flashback," said Dickinson at Harris & Moure. "This is why a lot of companies don't do joint ventures any more. Many of them ended up like this. You need to have protections in place."

Taking up where Steve left off, Andrew Hupert at the Diligence China blog has a post, entitled, "Don't get Danonized ' 5 Steps for Protecting Your JV or Partnership Interests in China," setting forth how not to avoid emulating Danone in China.  Hupert sets forth the following five steps, all of which must be in your contract with your joint venture partner:

1.   Have people on the ground. Your OWN people.  Not your Chinese partner's classmates or relatives, but someone who will protect your interests.  You want need to choose the joint venture's key people and that means Human Resources (HR), Procurement/Purchasing and Finance.  You need to have your own top managers make regular visitors to interact with key departments and to make management know you are part of the team.

2.   Institute multiple data flows.  The head of the joint venture's HR department reports to your head of HR.  "Same with Finance, Ops, Marketing, Etc."  This gives you regular reporting and it maintains interaction between your people and theirs.

3.   Recognize HR, Finance and Purchasing are key choke points.
Westerners focus on Marketing and Operations as the key areas for data flows, because this is where the most sensitive information is easiest to measure.  But since Chinese operations "run on HR and Purchasing" it is there that you will get a clearer picture on what is happening with the joint venture company.  "Look at who your sources for products and services are ' that's how your local managers are building their new ops."

4.  Rotate their people through your offices.  Every department head or senior manager should be rotating through your head office every year.  Hold conferences outside China (Macao, HK, Singapore, Hawaii) to "get key people off their home turf where your people can build stronger relationships."  Wine & dine key middle managers and "drop broad hints about bringing them over to high-profile posts in the US or European branches:"

There's an excellent chance that these important staffers don't have any great love for their Mainland bosses ' but they don't think they have any alternative. If these people think they have a shot at a western career path, they may get a lot more loyal to your interests in a hurry.

5.   Move quickly to co-opt or get rid of shadow leaders.  Every Chinese organization has a 'shadow leader' who informally controls a wide range of activities.  You can use these shadow leaders initially to "help organize your operation quickly, effectively and at low costs, " but once they have served this purpose "you need to get them on your team or get rid of them."

Yogurt anyone?