Public Enemy No. 1 A Chinese Executive Wages War with France's Danone

French food conglomerate Danone is embroiled in a bitter dispute with a Chinese joint venture partner. The quarrel reveals just how fragile business deals in China still are today.

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An employee work on the production line at Wahaha Group in Hangzhou in eastern China's Zhejiang.
REUTERS

An employee work on the production line at Wahaha Group in Hangzhou in eastern China's Zhejiang.

The Chinese protestors headed straight for the Portman Ritz Carlton, a Shanghai luxury hotel. They wore yellow caps and yellow shirts, and they were carrying huge protest banners that read, in blood-red characters: "Traitors and watchdogs will come to no good," and "We want Chairman Zong. Under no circumstances do we want Danone."

The spectacle was short-lived. The police quickly moved in and removed the troublemakers from the scene. But their anger reverberated into the hotel, just as the protestors had intended. Inside, French food giant Danone was in the process of taking on Zong Qinghou, 62, the founder of Wahaha, a joint venture with the French corporation, in a bizarre mud-slinging contest.

Hardly a day goes by without further escalation in the dispute between the French and Zong, their Chinese partner of many years. Danone accuses Zong of having used his relatives to secretly establish a series of parallel companies that produce mostly identical products. Zong, for his part, accuses the French of forming alliances with domestic competitors and ganging up on him.

Danone has already filed suit in a US court against two of Zong's family members, his daughter and his mother. In response, the enraged Zong resigned as CEO of the joint venture company. He has also managed to stir up popular resentment in China against Danone, and his company, Wahaha, has also filed a lawsuit against the French.

Danone is losing about $25 million a month because of the quarrel. Its stock has suffered, losing 15 percent of its value since February, both as a result of these losses and of the uncertainty the severity of the dispute has created in the markets.

Western businesspeople are keenly following the case, looking on with a mixture of polite sympathy and hidden schadenfreude as Danone slides into disaster. The multinational food company, which earned revenues of €14.1 billion ($19.2 billion) in 2006, has since slipped into the role of public enemy No. 1 in the People's Republic, partly as a result of its clumsy and arrogant handling of the situation.

The public quarrel is highly symbolic, because it ultimately affects every foreign company, and because it serves as a lesson in how not to behave in the huge Chinese market otherwise so highly praised by corporate executives in the West. And yet, despite their enthusiasm they know how fragile economic relations with the Chinese can be, and how narrow the divide is between a good deal and the risk of being taken to the cleaners by the Chinese.

The rivals in this current economic crime drama couldn't be more different. Danone's representative in Shanghai, Emmanuel Faber, 43, is a typical gray-wool-suit executive, a man whose work revolves around contracts and clauses. His adversary, beverage tycoon Zong, is a vigorous, nouveau riche climber literally bursting with self-confidence. He managed to turn Wahaha into China's most popular domestic beverage brand.

Zong is smoking his sixth cigarette in the space of half an hour. He directs the battle for his life's work -- a battle against Danone -- from his hotel suite in Shanghai. His eyes sparkle with pugnacity. He chuckles to himself whenever the conversation turns to "Fan Yimou" -- the way the Chinese pronounce the Frenchman's name, Faber -- seizing every possible opportunity to ridicule the man. Fan Yimou, he says, doesn't have a clue about Chinese culture.

Zong talks as if he were still in charge of the joint venture. He says that he can't believe that it can actually operate without him. In fact, his absence has had an impact. As a result of the dispute, Wahaha has seen a noticeable drop in its growth figures. Danone expects sales at the joint venture to decline by one-third in the second half of 2007.

Employees and dealers working for the conglomerate have shown little interest in selling beverages for Danone. They practically worship their legendary boss, the man who generously shared Wahaha's success by giving them stocks, just as the Chinese once revered their Great Chairman Mao.

There are indeed similarities between Wahaha's founder -- a self-described "enlightened dictator" -- and Mao. As an adolescent, Zong was fascinated by the works of the founding father of the People's Republic. Mao's thoughts were more or less the only reading material for Zong, who, because of his non-proletarian background, was forced to labor in salt fields and tea plantations for a year and a half during the Cultural Revolution. He began his swift ascent into the ranks of China's multimillionaires in the late 1980s. His story, and that of his company, is like many in Asia's global factory. It also shows how rapidly China is developing from a cheap exporter to a hotly contested consumer market with a self-confidence of its own.

In his hometown of Hangzhou, Zong first ventured into the beverage business by riding his delivery bike through the streets, selling water, soda, popsicles and school notebooks. He eventually moved on to selling Wahaha, a health drink that quickly gained popularity among parents who bought it for their children. Zong borrowed the name Wahaha -- meant to resemble a child's laugh -- from a song that was popular during the socialist era.

By 1995 the company had already reached sales of about $100 million. But Zong wanted to expand, and to do so he needed capital. In 1996 he formed five joint ventures with Danone. In return for their investment, Zong allowed the French to control 51 percent of the businesses, which have since multiplied into 39 joint venture companies.

  • Part 1: A Chinese Executive Wages War with France's Danone
  • Part 2
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