Coca Cola’s acquiring Huiyuan Juice was a hot topic after Beijing Olympic Games. As the second largest shareholder of Huiyuan, Danone was said to gain huge benefit from this acquisition. And, there was even a saying that Danone was the initiator of that deal.
Danone, the third largest food group in Europe, took the strategy of “withdrawing as fighting” in China. A report said that once the acquisition of Huiyuan by Coca Cola was certified by China’s Ministry of Commerce, Danone would sell 22.98% of Huiyuan’s share at three times of the premium price. Before that, Danone was caught in the dispute with another cooperator Wahaha. It was generally considered that conclusively Danone was very likely to sell the share to Zong Qinghou (Chairman of Wahaha) or the third party and left with cash-in.
Danone entered Chinese market as a precursor as early as 1987. Then it abused its “acquisition gene” existing in its nature by investing in all the leading Chinese domestic enterprises of dairy or beverage industry. However, in the recent one or two years, Danone’s merger and acquisition and expansion in China seemed to hit a wall. Now, with increasing sense of “Industrial Safety” and “Nationalism” in China, the hard time for Chinese domestic enterprises when the capital and technology was insufficient has been gone for long. Their sense of commercial interest is awaking. So Danone’s acquisition in China has entered the phase of “collective sell-out”.
Emmanuel Faber, president of Danone Asia, didn’t admit Danone’s withdrawal from China in front of the media, but attenuated that it still attached importance to the Chinese market. However, after the part with Wahaha, Mengniu, Bright Dairy and Huiyuan, can Danone find another suitable prey in China?
Entry with Joint Venture
When the reform and opening up of China began, the factor determined the investment profit, was not the direction or measure of investment, but the opportunity. Danone discovered that philosophy in 1987. In that year, Danone Yoghurt Corp was established in Guangzhou. Danone planned to enter huge Chinese market through the dairy industry.
Yet due to such problems as source of milk, favor and cultivation of market, Danone didn’t gain favorable return immediately. In 1994, Danone Biscuit Corp was founded in Shanghai. Then it got its first success in China in the biscuit field in which the contest for domestic resource was not needed. Since then Danone biscuit has taken an important place in Chinese biscuit market. However, ten more years passed. Currently Danone Biscuit Corp is the only one sole-owned company of Danone that has developed products and obtained success in China till 2008.
Actually, Danone changed its strategy in China from the year of 1994. Its first goal was Shanghai Bright Dairy, an established Chinese state-owned enterprise. Years later the relationship between the both sides deteriorated and technology seemed not to be their cooperative foundation; however, this joint venture became one of the top enterprises in Chinese yoghurt field and the main profit source of Danone in that field.
Two years after the cooperation with Shanghai Bright Dairy, Danone established five joint venture companies with Hangzhou Wahaha Group in 1996. Then the number gradually increased to 39. After gaining huge profit, Danone insisted on acquiring the non-joint-venture companies of Wahaha Group.
In 2000, Danone once again began its acquisition on a large scale. It acquired 92% of the share of Robust which used to share the same fame with Wahaha, and 50% of the share of Shanghai Maling Aquarius Co. Ltd.
In April 2005, Shanghai Bright Dairy went public. Danone became that company’s third largest shareholder. By April 2006, Danone has increased its holding of Bright Dairy’s share to 20.01%. In July 2006, Danone took a fancy to Huiyuan Juice, which is the leading enterprise of Chinese juice market and bought 22.18% of the share of Huiyuan Group, becoming its second largest shareholder. In that December, Danone established a joint venture company with Mengniu Group, the company having upriver milk source. Danone held 42% of the share of the company which devoted itself to the production, research & development (R&D) and sale of yoghurt and other products.
In the ten more years of fast growth, Danone behaved like an industrial integrator and a financial investor rather than a manager. While cooperating with Wahaha, Danone, as the large shareholder, even didn’t join in the management of the joint venture companies. It just enjoyed the fruits without toils every year.
Replacement and Shuffle of Cards
Danone’s secession from Huiyuan was the most peaceful cash-in in its phase of “collective sell-out”. Nevertheless, a source told the media that it might be a “stratagem of binding” that Danone sold Huiyuan to Coca Cola. Danone itself wanted to realize the cash-in of its share in Huiyuan but it could not sell its share of 20% more at a high price. So it used some signed provisions and canvasses, making the large shareholder Huiyuan Group agree to sell the share together.
No matter what the real purposes of the source and Danone’s secession were, such saying showed that Danone’s image of “merger & acquisition first and then sell-out” and being very sensitive to profit had been deep-rooted in Chinese market.
For the strategy of Danone in China, its philosophy of only investing in the leading enterprises in a field may need changing. But for Danone, what’s the most important is the profit return of merger & acquisition.
Because of the protracted dispute between Danone and Wahaha and the mutual blame of both sides, we could know a little about the bottom-line of Danone in every phase’s alternation.
Generally speaking, there were three phases of Danone’s alternations in the attitude: before the publicity of the dispute between Danone and Wahaha, after the publicity of the dispute and after the start of legal war.
Before the publicity of the dispute, Danone discovered that Wahaha owned a large number of many non-joint-venture companies and their profit was much larger than the one of the joint venture companies held by it. Danone could not sit by and watch the outflow of this part of profit without any actions. So it showed its first card, quoting 4 billion Yuan (USD 571.4 million) for the merger and acquisition of 51% of the share of Wahaha’s non-joint-venture companies. Then Zong Qinghou also signed the contract and agreed with that deal.
In essence, such quotation obviously couldn’t satisfy Zong Qinghou. Later Wahaha told the inside information of this deal to the public. In the first report about this deal, the media said Danone acquired Wahaha compulsorily at a low price. Such saying was used by Wahaha from the start to the finish.
When the dispute was initially published, Danone wholeheartedly wanted to deal with the dispute through reconciliation. After the great repercussions caused by the first report mentioned above, both sides came to an urgent negotiation. Danone changed its bottom-line, proposing four provisions of the reconciliation. However, these four provisions were denied by Zong Qinghou one by one.
Furthermore, Zong Qinghou told those provisions to the public through the Chat Room of Sina. Com. Many people discussed about those provisions with the mood of “nationalism”.
According to Zong Qinghou, the first provision was that Danone cancelled the proviso that Wahaha’s non-joint-venture companies could not yield products competing with their joint venture companies. But this provision required that the assets of Robust, Maling, Shenzhen Yili which had been acquired by Danone.
In the second provision Danone licensed non-joint-venture companies of Wahaha to use the trademark of Wahaha and the transfer of the trademark was not required, but the products of the non-joint-venture companies should be sold uniformly in the sale companies of the joint ventures.
The third was that Danone rebuked Zong for his holding of the chairmen and general managers of so many non-joint-venture companies. In the fourth provision Danone suggested making the non-joint-venture companies become the OEMs of the joint venture companies and selling their products uniformly through the joint venture companies.
From the view of commercial logic, there were two points in Danone’s appeal in essence. Firstly, Danone wanted to merge Wahaha into Danone’s defective companies of the same kind, like Robust. Secondly, Danone planned to incorporate those non-joint-venture companies, turning them into the OEMs of the joint venture companies’ enlargement of their output capacity. To be short, Danone wanted larger profit and larger output capacity.
This bottom-line showed that Danone made a little compromise compared with its plan to merge and acquire Wahaha’s non-joint-venture companies at the price of 4 billion Yuan (USD 571.4 million). In that phase, Danone did not want to spread the influence of the affair. It hoped that the problems could be solved by the compromise of both sides.
It was proved that the problems of ownership of the trademark, non-competition and so on, which had caused endless chaos for both sides in the media or even in the court, were just the weapons used by both sides to fight against each other. Danone almost abandoned those during the initial negotiation. This certainly reached its bottom-line. Afterwards, even in the commercial wars fiercer than that, Danone didn’t change the bottom-line easily.
Then, both sides didn’t reach agreement after negotiation and protracted gaming started between both sides. Danone began to use the way of lawsuit which was usual in the western world to reach its goal. It firstly proposed eight arbitrations in Stockholm and then sued Zong’s wife and daughter in America. It also brought a series of lawsuits of non-competition. Against this Wahaha also brought a series of counterclaims.
By now Danone lost all the lawsuits which had been judged in China. So Danone has already begun to think about new bottom-line.
There always appeared some giants of financial capital and industrial capital in the news from the sources of both sides. Owing to the long distance between both sides’ appeals, the most likely result is that a third comes up and purchases the share taken by Danone. Currently Danone knows that very clearly. What it is doing now is waiting for the arbitrations in Stockholm while looking for a buyer for itself.
While fighting against Wahaha, Danone also experienced the “rapid marriage and rapid divorce” with Mengniu, as well as the part with Bright Dairy. In December 2006, Danone and Mengniu established a joint venture company which was devoted to the production, R&D and sale of yoghurt products. However, by the end of 2007, this joint venture item aborted for the failure in realization of some precondition. In November 2007, Danone spent 410 million Yuan (USD 58.6 million) ending the cooperation with Bright Dairy. From then on Danone and Bright Dairy parted officially.
Danone didn’t suffer from too much loss due to those two affairs, but it suddenly lost two main investment directions. This established the foundation for the adjustment of its strategy.
The Way of Sole Proprietorship
At the end of 2007, a turning might come out for the dispute between Danone and Wahaha. On November 26, 2007, French president Nicolas Sarkozy visited China. According to certain news, on that day the heads of China and France talked about that topic on Danone and Wahaha in Great Hall of People. Soon they came to an interim compromise that both sides stopped bringing lawsuits against each other and returned to the negotiation.
However, this negotiation procured by politics ended without reasons and generated no news about reconciliation. Then the legal war restarted. Yet Danone resolutely turned around even before the appearance of the turning point. In a forum in November 2007, Frank Riboud, Global President of Danone, expressed that Danone could enter the emerging market through sole proprietorship in some industries where Danone had enough power, like dairy.
On November 8, 2008, Danone declared that it planned to enter the field of the nutrition and health food of infants and young children in China by global acquisition of Dumex Corp. The experts thought that Danone expanded its scale of sole proprietorship in China after the dispute with Wahaha.
After the acquisition of Dumex Corp in 2007, Danone prepared to sell its share in Huiyuan Juice at the end of August 2008. Compared with the fast “merger & acquisition first and then sell-out”, Danone has lowered its frequency of actions after the adjustment of its strategy. This may be attributed to the dispute with Wahaha.
The way of sole proprietorship for Danone, is just like when it first entered Chinese market 20 years ago.
Did Danone make the right choice this time?
