Danone isn’t used to getting roughed up. The French company is the world’s largest yogurt maker and owns Evian, the world’s best-selling mineral water, too. Then it got the bright idea to invest in China.
Danone teamed up with Chinese beverage manufacturer Wahaha Group Co. Ltd. Danone poured in money and Western technology; Wahaha supplied the Chinese credentials. The joint venture is now China’s largest beverage company.
So far, so great. But it all began to unravel earlier this year. Danone alleges that Zong Qinghou, the founder of Wahaha and chairman of the joint venture, had set up 20 of his own rogue companies producing the exact same products as the joint venture, using the joint venture’s suppliers and distributors — but keeping all the money for himself. It’s part of the reason why Zong is now the 23rd richest man in China, according to Forbes.
Breaches of contract and theft of intellectual property happen all the time — that’s what we have courts for. But what do you do in a country that has no independent courts?
At first, Danone offered to pay Zong to make his counterfeit brands part of their joint venture, offering more than $500 million. Zong scoffed, so Danone filed a lawsuit — in California. Danone might even win. But with its bottling plants and market in China, that’s a pyrrhic victory.
Zong quit as chairman of the joint venture. But he didn’t fly to Los Angeles to meet Danone’s case, or to Stockholm, where Danone had previously applied for arbitration. That’s what chumps who believe in the rule of law or sanctity of contracts would do.
Not Zong. He knows how it works in China. Here’s what it looks like when a $19-billion-a-year French company gets into a fight there.
First came a little muscle flexing by the Chinese government, a shareholder in Wahaha. A week after Danone filed its California suit, Chinese customs police seized a huge load of Evian water, claiming that it contained “bacteria.” Then came something even more amazing: the day Danone executives held a press conference in Shanghai to make their case, Wahaha employees held a protest outside, obstructing Danone’s staff. That’s quite something in a country with no freedom of assembly; Chinese police allowed this “spontaneous” protest to proceed for an hour.
But the coup de grace is yet to come. Zong filed for arbitration, too, with the Hangzhou Arbitration Commission, the kangaroo court in his hometown. Zong is arguing that, although he signed a contract with Danone giving them 51 per cent of the business and the right to the Wahaha name, that contract both “failed” and “expired” and never received government approval.
Chinese media have given much ink to Zong’s overheated rhetoric, railing against Danone’s “evil deeds,” quoting Mao Zedong and comparing his contract with Danone to unfair treaties foisted on China in the 19th century by Western imperial powers. Expecting an independent hearing from the Hangzhou Arbitration Commission is like expecting an honest report about Tiananmen Square from the People’s Daily newspaper. It
just isn’t going to happen.
Maybe Danone should have seen it coming. One of Wahaha’s signature brands is Future Cola, marketed in cans and bottles indistinguishable from Coca-Cola, with identical colours and styles. The concept of intellectual property hasn’t quite caught on in China yet.
China is now the world’s second-richest country, when measured in purchasing power. Its economic growth rate is near 10 per cent, and its stock markets have doubled already in 2007. But all of it is built on the same quicksand that is now swallowing up Danone. China has the outward appearance of a capitalist country, but it lacks the core elements of a free market — rule of law, sanctity of contract, property rights, and an independent, transparent judiciary arbitrating the whole thing.
And it’s getting worse. In 1985, Canadian Clive Ansley became the first foreign lawyer to open an office in Shanghai, practising law and teaching it at a university there. “Fifteen years ago, there was hope. We had judges who were largely untrained, but they tended to be honest and they tended to be allowed to go their own way for a period of time and to actually write the judgments in the cases they heard,” he says. Those days are gone; the Communist Party instructs judges on how to vote, rendering them little more than clerks.
Ansley quotes Cao Siyuan, the father of Chinese bankruptcy law, on the fate of foreign litigants: “It is absolutely impossible for a foreign party to win a case against a Chinese party in a Chinese court.” Judicial exchanges by Canadian judges are just exotic tourist junkets for the westerners, and a PR fig leaf for the Chinese government.
“It was very hard to work with people who do not understand the Chinese market and culture,” Zong said of his former business partners. Danone is starting to understand.