Managing a Chinese Partner

Insights from Gobal Companies

L. Chong

• Publisher: Palgrave Macmillan
• Year: 2013
• Print ISBN: 9781349434855, 9781137005816
• eBook ISBN: 9781137005823
• Topic: Business
• Subtopic: Business Strategy
• Index: Business

By drawing on the experiences of Danone, Nestlé, Coca-Cola and SABMiller, this book provides an insight into why and how the managing a Chinese Partner can deliver value for a joint venture in China, a goal shared by many but achieved by few.

1

The Case for Laying the Cornerstones

When French president Nicholas Sarkozy made a state visit to China in November 2007, he went about with standard diplomatic protocol and measured political rhetoric, no doubt to the relief of French companies in China given his colourful character and propensity for occasional controversies back home. On that trip, his team secured US$30 billion worth of contracts for French companies, again no doubt securing political points amongst business communities back home. That would have marked the end of a typical presidential visit to China for any head of state. But not this one: In between discussions on pressing global matters such as the Korean Peninsula nuclear issue and the Darfur civil war, President Sarkozy found time in his tight three-day schedule to discuss what had come to be commonly known as the Wahaha Dispute with his counterpart President Hu Jintao.

Brought to light by a number of legal disputes between Danone, a French food giant, and Hangzhou Wahaha, one of its joint venture partners in China, the Wahaha Dispute had developed into a series of public slugging matches that had many riveted to all forms of media for the latest twists and turns.¹ As it turned out, even the presidents of China and France, the most powerful men in the countries, had a word or two to say about the Wahaha Dispute. Shortly after the state visit, Danone and Hangzhou Wahaha “agree[d] to finish antagonism and return back to peace talks. Both parties agree[d] to temporarily suspend all lawsuits and arbitrations, stop all aggressive and hostile statements and create a friendly environment for peace talks.”² That was in December 2007. It did not work out and their joint venture was eventually terminated in September 2009 with the “support of both the Chinese and French governments.”³

Before the Wahaha Dispute, Danone’s success in China was the envy of foreign companies looking to tap the biggest consumer market in the world through a joint venture with a Chinese partner. Like any foreign company, Danone looked for key competitive advantages across the value chain of its Chinese partners, and paid top dollar to secure an equity stake. Danone did just this in 1996. It liked what it saw, and took a 51% stake in a joint venture with Hangzhou Wahaha – its ninth and largest investment in China at that time, some 10 years after setting up its first Chinese factory back in 1987. By 2000, Danone had cornered close to 50% of China’s bottled water market by volume, through its joint venture with Hangzhou Wahaha and another of its subsequent joint venture. In the same year, Wahaha⁴ bottled water became one of Danone’s top five brands and was the second best selling bottled water brand in the world by volume, losing the top spot to Evian, a global household brand that has been around since 1826! On the 10th anniversary in 2006, the joint venture alone accounted for more than 9% of Danone’s global sales, with a staggering US$1.4 billion in sales; numbers that not many foreign companies can boast about in respect of their Chinese businesses. Many foreign companies would give an arm and a leg for this kind of performance and the accolades it brought. Without the benefit of hindsight, it seemed at that time that Danone was winning the race in China, “hand in hand” with Hangzhou Wahaha against its foreign competitors – a champion local brand, Wahaha, with a seemingly unassailable market share that was also world No. 2. And all of these in double quick time, too!

So, what happened?

Both the circumstances around Danone’s development in China, the Wahaha Dispute itself, point to too much emphasis on Danone’s own China strategy and the Wahaha joint venture itself, and too little on Hangzhou Wahaha, its Chinese partner. Like many foreign companies, Danone placed significant emphasis on the execution of its overall Chinese strategy given the importance of this market as a growth driver for its corporate earnings; and intuitively on the operating performance of the Wahaha joint venture since this was where its legal rights and economic interests resided. Consequently, inadequate consideration was given to the impact of its actions on Hangzhou Wahaha, its Chinese
partner, and its plight has shown that this can lead to serious consequences. Chinese strategy and operating performance of the joint venture are necessary conditions for success in China, but in many instances these are insufficient by themselves, particularly if the success is to be sustained over a long-time time frame. Danone is a case in point.⁵

Danone is not alone (at the risk of stating the obvious), although reported instances of joint venture disputes are few and far between. In 2003, PepsiCo accused its Sichuan Chinese partner of breach of contract by transferring ownership of its shares without consultation, and for failing to provide access to the financial records of the joint venture; and in 2004, Virgin Radio ended its Beijing joint venture when its Chinese partner sought to increase the licence fees collectable from Virgin Radio to eight times the amount set in the original agreement. These are just two of the many instances of joint venture disputes that remain unreported. In some instances, joint venture disputes stem from poor operating performances, which can cause a bit of corporate embarrassment to the foreign company given the size and potential of the Chinese market. In other instances – and Danone would fall into this category – the root of the dispute lies not in the operating performance of the joint venture but in the management of the Chinese partner, which is also sometimes a source of corporate embarrassment but more often a source of agitation and serious concern.

Joint venture disputes in China, legal or otherwise, have been around for as long as joint ventures themselves. So, this is not a recent phenomenon. What is recent, though, is the shift of power in the global marketplace and this, to a large extent, was brought to bear in the highly public and acrimonious Wahaha Dispute – a “tipping point” or “wake-up call” for foreign companies, and the reason for this book. With the confidence of Chinese companies now at unprecedented heights, the imperative for foreign companies to raise their gamesmanship and manage Chinese partners has never been more compelling since China’s economic opening in 1978. Foreign companies that fail to acknowledge and act are at risk of losing not just competitive edge in the Chinese marketplace but also strategic relevance amongst important stakeholders including Chinese partners.

There are also, of course, Chinese success stories about foreign companies that have reaped the benefits of having invested significant resources and capital in managing not just their joint ventures but, and here is the key point, their Chinese partners. Or, as characterized in this book, success stories about foreign companies that have laid the cornerstones for building in China. The other three companies analysed in this book – namely Nestlé, Coca-Cola and SABMiller – belong to this exclusive (and often elusive) category of foreign companies which have found success in leveraging on their Chinese partners to gain significant inroads and remain strategically relevant in China. When looking to compete in China, each of Danone, Nestlé, Coca-Cola and SABMiller (collectively the “Players” or “all four”) embarked on its own localization strategy, bringing the best of international expertise and local know-how together to sell food and beverages to Chinese consumers – the classic management textbook strategy for companies looking to sell outside their home markets. All four found success through the 1980s and 2000s with their respective localization strategies in China, but Danone stumbled in 2009. In the meantime, Nestlé, Coca-Cola and SABMiller continue to power on with their Chinese partners.

What are their Chinese stories?

Nestlé started doing business in China back in 1908 but took a leave of absence when the communists came into power. It re-entered China in 1987, which, coincidentally or otherwise, was also the year that Danone made its entry. Perennial rivals, Nestlé is Swiss while Danone is French, and both can trace their origins to within two years of each other in the 1800s. Although Nestlé’s sales and market value are significantly higher than those of Danone, both are locked in fierce battles in a number of product sectors on a global basis. As it turned out, Nestlé and Danone even chose to bring their battles to China in the same year, with Nestlé setting up its first base in north-eastern China, and Danone picking the other end, southern China. Over the next 20 years or so, these two perennial rivals marched on from their initial bases from opposite ends of China, covering different geographic markets and product sectors across the country through a portfolio of controlling equity stakes in more than 10 joint ventures each; and, in the case of Danone, minority strategic equity stakes in two listed Chinese companies as well. In 2009, the same year that Danone terminated its joint venture with Wahaha, Nestlé jointly launched the world’s largest bouillon factory with Totole, one of its Chinese partners, in the presence of the Swiss ambassador and a number of senior Chinese government officials. All these years, while Danone was busy reporting to its shareholders and investors the impressive results of its Chinese bottled water business, driven largely by Wahaha, Nestlé was busy working on a plan with Totole to be the largest producer of bouillon in the world.

Like Nestlé, Coca-Cola had an early head-start in China, making its first foray there in 1927. When Coca-Cola re-entered China, it did so in 1978, right at the start when China opened its economic doors to rest of the world for the first time since 1949. Coca-Cola differed from Nestlé and Danone firstly in taking non-controlling equity stakes, and secondly in setting up three (as opposed to more than 10) joint ventures, two of which were with Hong Kong companies, and one with COFCO Limited (COFCO), a Chinese state-owned enterprise. In 2010, while Danone was busy re-assessing its Chinese strategic options for the bottled water sector without Wahaha, the joint venture with COFCO broke into the league of Coca-Cola’s global top 10 bottlers. In that same year, one of the brands distributed by the joint venture, a fruit-based beverage by the name of Minute Maid Pulp, became Coca-Cola’s first emerging market brand to hit US$1 billion in global retail sales. While Danone was busy building a portfolio of majority controlled joint ventures, Coca-Cola painstakingly (and patiently) built its presence in China through its minority owned joint ventures. Coca-Cola’s relationship with COFCO, its only Chinese partner, started with its appointment as the importer of Coca-Cola, a “decadent” American beverage, at a time when China was emerging from the Cultural Revolution. From such a beginning, Coca-Cola worked with COFCO over the next three decades or so to establish and grow their joint venture into one of the largest Coca-Cola bottlers in the world.

The fourth foreign company analysed in this book is South Africa’s SABMiller, the last of the Players to make its move in China in 1994, when it invested in a non-controlling equity stake in a joint venture with China Resources Enterprise (CRE), its first and only Chinese partner. Like Nestlé, SABMiller picked north-eastern China, the “industrial rustbelt,” as an entry point where CRE had earlier acquired a provincial brewery selling a local favourite beer by the name of Snow Beer. That was 1994, the year that South Africa finally emerged from apartheid after years of international isolation. By 2006, when Danone put Hangzhou Wahaha on notice for breach of contract, the CRE joint venture had grown to become the largest brewery in China, serving a national market and knocking world renowned Tsingtao beer off its perch. Interestingly, in the process of doing so, SABMiller’s joint venture even acquired Danone’s breweries in China. Four years later, in 2010, CRE declared that Snow Beer was the best selling single beer brand in the world by volume. In the end, after years of acquiring numerous breweries all over the world (including that of Miller, another American iconic beer), it was a Chinese beer that finally gave SABMiller the bragging rights to the world’s No. 1 beer in its portfolio of brands. From being the last of the Players off the blocks in China, SABMiller outran Danone, Nestlé and Coca-Cola in the race to produce a world No. 1 brand from China, and it did so without majority equity control and with just one Chinese partner.

Put simply, the Players’ Chinese stories in this book tell of how Danone and Nestlé, both with multiple product sectors, went about establishing a portfolio of joint ventures and wholly owned foreign enterprises (WFOEs) across China for an assortment of food and beverage products; how Coca-Cola set up its bottling plants network in China with one Chinese partner and two other non-Chinese joint venture partners (reduced to one later) to manufacture and distribute Coca Cola; and how SABMiller set up a brewery network across China with one Chinese partner to manufacture and distribute Snow Beer. For this reason, the Chinese stories of Danone and Nestlé contain more sub-plots and are lengthier than those of Coca-Cola and SABMiller; and in the case of SABMiller, it only has one Chinese story, that of its sole Chinese joint venture.

Chapters 2–5 follow the same format, setting out each Player’s history by way of background,⁶ its development in China with a focus on one of its Chinese partners, and presentation of the key relevant insights: Danone’s bitter split-up with Wahaha in Chapter 2, Nestlé’s nurturing care of Totole in Chapter 3, Coca-Cola’s long courtship of COFCO in Chapter 4, and SABMiller’s leap of faith with Chinese Resources in Chapter 5. Later, Chapters 6 and 7 present insights into Nestlé’s activities in the ice cream sector without any Chinese partner, on the one hand, and the food-flavouring sector with more than one Chinese partner on the other hand. In closing, Chapter 8 sets out a proposed three-step approach for a more effective management of Chinese partners, and applies the insights from each of the previous chapters to the experience of Danone, Nestlé, Coca-Cola and SABMiller by way of recap.

2

Danone’s Bitter Split-Up with Hangzhou Wahaha

Of French origin, Danone started as a family-owned glass manufacturing business in 1864, and grew to become global No. 1 in fresh dairy products and No. 2 in bottled water and baby nutrition, with sales of €21 billion (US$28 billion) for the year ended 31 December 2012.

Danone entered China in 1987 and established more than 10 entities, comprising mostly of majority-owned joint ventures, and WFOEs. In 1996, Danone invested in a joint venture with Hangzhou Wahaha, a privately held company¹ founded by entrepreneur Zong Qinghou. Founded in 1987, Hangzhou Wahaha grew from a near bankrupt state-owned factory at inception to become China’s No. 1 bottled water player as well as a leading player in other beverages. In 2007, just after the 10th anniversary of the Wahaha joint venture, Danone and Hangzhou Wahaha accused each other of breaching joint venture contract clauses in both legal as well as non-legal senses. Despite an appeal for calm by French president Sarkozy, and a subsequent agreement to “return back to peace talks,”² the Wahaha joint venture was eventually terminated in 2009.

How did the Wahaha joint venture – which reported more than €1 billion in sales in 2006, or a sixfold increase from when Danone first invested, and was the envy of many foreign companies by any standards – disintegrate into such a bitter split-up?

Passion: glassmaking to food and beverage

What is one brand of supermarket food that is most likely to be found in the kitchen? The answer will vary according to country and region. So, in Hong Kong, one might say Nissin cup noodles, an Osaka invention that many in this part of the world find indispensable. An American’s answer might be Kellogg’s cornflakes, a Michigan invention that many grew up eating at breakfast. Across the Atlantic, an English lady might reach out for a bottle of HP sauce, a Nottingham invention, when the family settles down for a meal (HP sauce was actually at one time owned by Danone). Finally, across the English Channel, a Frenchman might swear by Danone yoghurt, and make sure of sufficient supplies in the fridge.

If the same question is asked, and the subject matter is changed to non-alcoholic beverages as opposed to food, there is a good chance that the answer will be Coca-Cola or Pepsi Cola; and this is regardless of whether it is Hong Kong, America, England or France.

Here is the point: Danone is not necessarily a global household brand name, at least not to the same extent as Coca-Cola and Pepsi Cola. But, and this is a big but, Danone the company is a global food and beverage powerhouse: world No. 1 in fresh dairy product, world No. 2 in bottled water (by volume) and baby nutrition, and European No. 1 in medical nutrition. Danone was ranked 411th on the Fortune Global 500 for 2012, just one notch under the ubiquitous golden arches of McDonald’s. From the branding perspective, Danone was the 52nd most valuable brand in Interbrand’s ranking of Best Global Brand 2012, five notches above Nestlé which came in at 57th, and just three notches below Dell.

Not bad for a company with its origins in a bankrupt Lyon glassmaker.

Lost cause in glass making

According to the official corporate account, Danone traces its origins to 1864 when a glassmaker by the name of Jean-Baptiste Neuvesel acquired a bankrupt bottlemaker in Lyon. Just after the centenary anniversary in 1965, Antoine Riboud, the immediate past chairman of Danone, took over the business, which had then come to be known as Souchon-Neuvesel. Clearly not one to rest on his laurels, Antoine Riboud initiated and completed a merger with Glaces de Boussois, which was primarily a producer of window glass and mirrors, and was roughly double the size of Souchon-Neuvesel – all of this just one year after taking the helm. Appointed the chairman and CEO of the merged business known as Boussois-Souchon-Neuvesel, or BSN for short, Antoine Riboud had in effect engineered a partial diversification of a century-old business, from focusing solely on making glass containers such as bottles and jars to include the production of glass windows and mirrors for buildings and cars. When the dust had settled, Antoine Riboud found himself in charge of a public company in Paris which was France’s second largest producer of flat glass – a very different proposition from the family-owned business that he had previously been running.

And one point, which would not have seemed significant back in 1966 since Souchon-Neuvesel was in the glass-making business. Souchon-Neuvesel had been a bottle supplier to Evian, but was so convinced of the growth potential of mineral water tha...

Table of contents

• Cover
• Title
• Copyright
• Dedication
• Contents
• Acknowledgements
• Note to Reader
• Prologue
• 1 The Case for Laying the Cornerstones
• 2 Danone’s Bitter Split-Up with Hangzhou Wahaha
• 3 Nestlé’s Nurturing Care of Totole
• 4 Coca-Cola’s Long Courtship of COFCO
• 5 SABMiller’s Leap of Faith with China Resources
• 6 Lonely Journey of an Ice Cream Peddler in China
• 7 Catering to Every Palate in China (… almost)
• 8 Three Steps to Laying the Cornerstones
• Epilogue
• Appendix 1
• Notes
• Bibliography
• Index