French food giant Danone wanted to find a way into China's vast market. It needed a partner that understood the local business. Wahaha, one of the country's biggest beverage makers, needed capital, technology and international expertise to lead the market.

Danone took a 51-percent stake in a joint venture with Wahaha Group in 1996 to form one of the most successful joint ventures in China. 

But cracks started appearing in the partnership several years ago. Wahaha has been increasingly uneasy about Danone's ties with other Chinese firms like Mengniu Dairy and Robust. And Donone revealed it wanted to take control of Wahaha Group's other businesses, a public dispute erupted.

According to Danone, the joint venture was operating well until 18 months ago when it discovered Wahaha had set up side ventures marketing similar products.

Danone said it was considering legal action against Wahaha over the right to use the brand, owned by the joint venture under the 1996 contract.

Zong Qinghou, the outspoken chairman of Wahaha, has drawn widespread attention to the case. Zong, his distributors and even some local government figures described Danone as a "foreign invader" of a national brand.

Unlike other foreign ownership cases like Xugong and Carlyle, the government has not weighed into the debate, despite all the media attention. But it did issue a notice to Wahaha urging an end to the public dispute.

"As China has already issued regulations on foreign mergers and acquisitions of Chinese enterprises, the Ministry of Commerce will adhere to these regulations so as to not only encourage foreign investment but also to protect the rights and interests of Chinese businesses," said ministry spokesman Wang Xinpei in answer to a question on Danone's potential acquisition of Wahaha. That was the only response from the government on the issue.

The government's neutral position has left enough space for the two sides to solve the problem through discussion and agreement, according to Qiao Xinsheng, a professor at the Zhongnan University of Economics and Law.

And that is also a reflection that nationalism and patriotism - be it out of real concern, a colorful excuse or market strategy in disguise will be less persuasive in an open market economy. Enterprises have to obey the rules of the game. And if mistakes are made, they will have to deal with the results.

The squabbling between Danone and Wahaha is largely the result of unclear allocation of profits and investments. Under the contract, Wahaha gave up ownership of the brand to raise its stake in the joint venture at the very beginning. The Chinese company should have considered the cost of losing ownership of its brand in exchange for technology and capital from Danone when it signed the contract. Dumping Danone and establishing a new brand, as Zong threatened in an interview, will not be that easy. 

But it won't be easy for Danone, either. Zong's image as the brand-builder and his social network with distributors complicates the case beyond the legal issue. If relations between Danone and Zong collapse, it will damage the joint venture. The venture's annual sales are around $1.35 billion, 75 percent of Danone's sales in China, which accounted for about 10 percent of its global total.

For now, as Danone suggested late last month, reallocating the benefits and repairing relations seems to be the best choice for both parties.

(China Daily 05/08/2007 page15)