PEACE PLEDGE A BRAND NEW TWIST TO WAHAHA DISPTE

(Analysis by AI GUO in Beijing with publications by South China Morning Post on 24th December 2007. This article with clear descriptions is cited here for reference and case studies)

Despite months of heated finger-pointing, estranged joint-venture partners Groupe Danone of France and Hangzhou-based Wahaha Group have cleverly left a back door open for an out-of-court settlement amid a barrage of public allegations that would suggest an inevitable allout confrontation.

Now, that leeway is being seized as both sides last week said they would return to peaceful talks and end all lawsuits and arbitration procedures, in an effort to meet the expectations of the mainland and French governments.

In fact, both companies have scheduled preconditions talks to resolve their disputes on brand and non-competition issues.

Economics professor Ning Xiang-dong, of Tsinghua University, likened the Danone-Wahaha dispute to a marital spat between a young couple, in which each side only thinks of how the marriage will benefit their own parents' families, at the expense of the new family from their union.

“You can blame it on either their rush into marriage, or a failure to tolerate one another in the relationship,”professor said.

Danone established a joint venture with Wahaha in 1996 and took a controlling 51%stake in the company.

Under the agreement, Danone allowed Wahaha to have several independent companies engage in beverage production and distribution outside the joint venture, and Wahaha agreed to transfer the Wahaha brand to the joint venture.

At the initial state of the merger, Danone and Wahaha signed two different contracts in order to pass state scrutiny in 1996. A simplified version was submitted to relevant ministries for authorization, while a detailed contract, with the issue of the brand transfer clearly identified, was kept between the two companies as a guideline for daily operation.

After realizing that Wahaha's non joint venture companies had been generating strong profits by selling products under the Wahaha brand, Danone offered Wahaha four billion yuan earlier this year to inject those firms into their joint venture. The offer was rejected as too low by Wahaha founder and chairman Zong, Qinghou.

Mr. Zong brought the dispute to the media's attention in April and said his company still owned the Wahaha brand because an earlier application to transfer the brand was denied by the State Trademark Office.

Danone, meanwhile, accused Wahaha and Mr. Zong of cheating in the brand transfer issue, and sued Mr. Zong in courts around the world. Danone argued that Mr. Zong and his family members had used the Wahaha brand for their benefit.

Mr. Zong and Wahaha, for their part, sued Danone in mainland court for hurting the joint vesture's interests by investing in rival firms.

Signs of a softening in the dispute emerged late last month after French President Nicolas Sarkoz visited the mainland and reached a consensus with President Hu Jintao on the need for a speedy and amicable resolution.
Emmaneul Faber, Danone's president for the Asia-Pacific region, this month offered to suspend all legal proceedings in exchange for Wahaha returning to the negotiation table with “concrete measures” for a reunification of the joint venture.

Wahaha, which gained an edge after winning a ruling from a Hang-zhou arbitration court over the ownership of a Wahaha brand this month, said it was willing to restart talks on condition Danone dropped all lawsuits first to show its “regret”.

Yang Du, a professor with the business school of Beijing-based Renmin University said both sides had allowed their lawsuits to continue in order to gain bargaining power at the negotiation table.

“This could have been settled if Danone had agreed to pay more to purchase Wahaha's independent companies,” Professor Yang said.

Mr. Zong, 63, who built Wahaha from a backyard production outfit into one of the country's most famous beverage brands, seems to have won the media war by playing the nationalism card. He claimed his fight was an effort to protect the brand from foreign destruction.

A survey at website Combinator showed that about 70% per cent of 347 respondents supported Mr. Zong.

Zhou Dunren, an economics professor with Shanghai-based Fudan University, said the dispute highlighted the need for tight contracts between joint-venture partners.

“You can not take anything for granted. You have to pay to let professionals work every detail out. It's the kind of cost no company should try to save on,”Professor Zhou said.
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