Wahaha Joint Venture Company
| Company type | Joint venture |
|---|---|
| Industry | Beverage |
| Founded | 1996 |
| Founder | Zong Qinghou, Groupe Danone, Hangzhou Wahaha Group |
| Headquarters | Hangzhou , China |
Area served | China |
Key people | Zong Qinghou (Chairman and Managing Director) |
| Products | Beverages |
The Wahaha Joint Venture Company was established in 1996 as a collaborative enterprise between Hangzhou Wahaha Group, recognized as China's top beverage manufacturer, and Groupe Danone, a prominent international food corporation.
Initially, the alliance received acclaim from Forbes, which described it as a "model" joint venture. As the enterprise expanded, Danone attempted to acquire Wahaha outright but faced continual resistance. In December 2006, an agreement was reached between Danone and Wahaha's general manager Zong Qinghou for Danone to purchase a controlling interest in operations outside the joint venture. However, Zong later retracted his consent, arguing that the proposal undervalued the company and reportedly sought a more favorable price.
This disagreement led to legal conflicts, with Danone initiating arbitration proceedings in Stockholm in May 2007 and filing lawsuits in Los Angeles targeting entities linked to Zong's family. By December 2007, both sides consented to halt all litigation and recommence negotiations.
In 2009, Danone withdrew from the partnership by selling its 51% share back to Wahaha Group for roughly $500 million.
Background
Established in 1987, Hangzhou Wahaha Group Co. Limited originated as a state-owned sales enterprise located in Hangzhou's Shangcheng District. From the outset, Zong Qinghou directed and grew the company while overseeing daily management. In 1995, through Peregrine Investments Holdings, Zong was introduced to Danone, which led to joint venture discussions culminating in a contract signed on 28 March 1996. Key segments of the beverage business were incorporated into the joint venture structure, with Zong appointed chairman while maintaining his managing director responsibilities over the parent and operating firms. During the transition from a state-owned enterprise to a private entity, Zong acquired a significant minority ownership stake.
Joint venture holding structure
The foreign investors held a 51% interest, whereas Chinese stakeholders possessed 49%, divided between WHH’s 39% and employees’ 10%.
Foreign partners' holding structure
Groupe Danone and Peregrine together invested US$70 million for equity stakes across five Wahaha joint venture companies. Their ownership was administered via Jinjia Investments Co (), registered in Singapore, with governance including two representatives from Danone and Francis Leung Pak-to representing Peregrine.
In April 1998, shortly before Peregrine’s collapse, Leung was replaced by an additional Danone appointee. Although transferring shares within WHH companies required State approval to safeguard state assets, Jinjia shares were exempt from this rule. After Peregrine’s downfall and subsequent transfer of its Jinjia shares, Groupe Danone became the majority shareholder. Zong asserted that this transfer constituted an underhanded hostile takeover conducted in bad faith.
Scope of joint venture
On 28 March 1996, five joint venture entities were formed:
- Hangzhou Wahaha Baili Foods 杭州娃哈哈百立食品有限公司
- Hangzhou Wahaha Health Foods Co 杭州娃哈哈保健食品有限公司
- Hangzhou Wahaha Foods Co 杭州娃哈哈食品有限公司
- Hangzhou Wahaha Beverages Co 杭州娃哈哈饮料有限公司
- Hangzhou Wahaha Quick Frozen Foods 杭州娃哈哈速冻食品有限公司
By 2007, the number of joint venture companies had grown to 39, with total capital contributions amounting to US$131 million.
In 2006, these joint ventures generated €100 million in revenue for Danone and represented more than 5% of Danone’s net earnings.
Non-joint venture entities
When the joint venture was formed, five WHH companies remained excluded from its framework. By the close of 2006, these non-JV entities reported equity totaling ¥5.6 billion and profits amounting to ¥1.04 billion. In December of that year, Zong consented to transfer ownership of these companies to Danone for ¥4 billion.
Hangzhou Wahaha Guangsheng Investment Co. () ("GUANGSHENG"), founded in 2003 with an initial registered capital of ¥50 million (later raised to ¥80 million), stands out as a significant non-JV company. Ownership was split with Zong holding 60% and the union controlling 40%. Subsidiaries or affiliated companies with shares ranging from 39% to 60% include:
- Hangzhou Wahaha Children's Clothing Co. (established 2002)
- Changsha Wahaha Beverages Co.
- Harbin Shuangcheng Wahaha Foods Co.
- Jian Wahaha Beverages Co.
Originally owned by Guangsheng, Hangzhou Wahaha Children's Clothing Co. experienced several share transfers in 2003 and is currently owned 65% by Zong, 10% by his spouse, and 25% by Platinum Net Ltd.
The Hangzhou Wahaha Food and Beverage Sales Co. (WHHFBSC), incorporated in December 2006, manages an external sales distribution network. Zong’s wife owns 10%, while Ever Maple Trading Ltd., a company registered in the British Virgin Islands and serving as Zong’s personal vehicle, holds 90%. The legal representative of this company is Zong’s daughter.
Zong also launched non-JV manufacturing facilities such as Hangzhou Xiushan Shunfa Packaging Co., producing or packaging products identical to those of WHH. Danone alleges that dealers were instructed to establish new bank accounts under WHHFBSC to handle payments related to these products.
Trademark ownership
The Wahaha trademark was transferred to the primary joint venture on 29 February 1996, following a joint venture agreement signed on 28 March 1996. Danone claims it possesses valid and exclusive rights for the production, distribution, and sales under the Wahaha brand, having paid RMB 100 million to Hangzhou Wahaha Group, including RMB 50 million from the joint venture itself.
Although local authorities approved this trademark transfer, WHH maintains that only the National Trademark Bureau has jurisdiction over such transactions. The National Trademark Bureau rejected the transfer to safeguard national interests. While trademark transfer regulations were loosened in October 2001, an additional agreement was executed in October 2005 clarifying trademark usage concerning company names and product branding.
Operational management
Danone consented to a joint venture model that limited its day-to-day involvement, leaving operational control firmly in Zong’s hands, who exercised an authoritarian management style. Reports indicate Zong dismissed managers appointed by Danone and acted entrepreneurially by making numerous decisions independently. Prior to the escalation of disputes, Zong pursued external business activities beyond Danone’s scope; however, Danone later attempted to regain stakes in these ventures.
Emergence of public dispute
Danone made multiple attempts to acquire Zong’s non-JV operations but faced rejection. A December 2006 agreement permitting Danone to purchase these assets was subsequently declined by Zong due to concerns about undervaluation and co-investor complications. On 3 April 2007, Xinhua released an article characterizing Danone’s ¥4 billion offer as a hostile takeover, influenced by internal briefings from Zong to political officials.
On 10 April, Danone accused Zong of violating agreements by establishing joint ventures with other partners using the Wahaha brand outside the JV framework and demanded a majority (51%) stake in these entities. Danone also issued a formal notice allowing thirty days for cessation of unauthorized trademark use.
Zong countered by asserting that Emmanuel Faber had authorized these external companies. Danone confirmed that around 2003 it permitted Zong minority ownership in businesses producing Wahaha products outside the joint venture structure to comply with local government requirements. By 2005, Zong controlled approximately twenty such companies, accounting for about one-quarter of Wahaha product output; Danone estimates that over eighty unauthorized firms using the WHH brand were created between 2001 and 2006.
Additionally, Zong established factories manufacturing identical products outside WHH’s operations, with dealers reportedly instructed to open new bank accounts under WHHFBSC for processing sales revenue. As Danone depended on WHH's distribution channels for its own goods, this situation caused significant mis-channeling problems amid the dispute.
Following the public outbreak of the conflict, distributors and employees predominantly sided with Zong and called for a boycott of Danone products.
Legal actions
While Danone initiated international legal proceedings against HWG and Chairman Zong, Wahaha responded with multiple legal challenges targeting the local subsidiaries. Political figures from both nations encouraged a peaceful settlement.
On 9 May, Danone submitted a request for arbitration in Stockholm. Subsequently, on 4 June, Danone filed a lawsuit against Ever Maple Trading and Hangzhou Hongsheng Beverage, as well as Zong's wife and daughter who oversee these entities, seeking damages amounting to US$100 million. Ever Maple holds controlling interest in Hangzhou Hongsheng, which is the parent company of Hangzhou Wahaha Food and Beverage Sales. On 5 June 2007, Zong stepped down from his position as chairman of the joint ventures.
WHH disputed the joint ventures' entitlement to use the WHH trademark. On 17 June, the Hangzhou Arbitration Committee accepted an arbitration claim concerning this trademark conflict.
In August 2007, Hangzhou Wahaha Foods Co, the principal joint venture, initiated legal action against the State Trademark Bureau over alleged improper administrative conduct in 1996 and 1997; nevertheless, the lawsuit was withdrawn due to expiration of the statute of limitations.
Danone pursued legal claims against ten Wahaha-affiliated companies registered in Samoa and the British Virgin Islands. On 9 November, the BVI High Court placed eight of these companies under receivership and froze their assets. Similarly, two Samoan companies had their assets frozen by order of the Supreme Court. Danone succeeded in arbitration proceedings held in Stockholm.
On 10 November, the Hangzhou Arbitration Committee determined that Danone had missed the deadline to appeal a prior decision. The Wahaha labor union entered the dispute, expressing concerns about potential job losses and accusing Danone of holding shares in competing businesses outside the joint ventures.
Facing political pressure from both governments, Danone and Wahaha agreed on 21 December to halt ongoing litigation and recommence negotiations.
Cultural factors
Despite Danone acquiring a 51% stake in Wahaha through foreign partners, Zong perceived this as a covert takeover. This perception fueled his nationalist stance against Danone, invoking references to "unequal treaties" that echoed historical resentments. Nonetheless, critics pointed to Zong’s use of offshore tax havens and noted that his daughter resided in the United States.
Contractual limitations curtailed Zong's entrepreneurial autonomy since most decisions required approval from Danone's board on a quarterly basis. He voiced dissatisfaction with these constraints, feeling increasingly less reliant on his foreign partner as the business developed.
Marketing strategy and investment disputes
Divergent marketing strategies further exacerbated tensions. Zong accused Danone of merely collecting profits without supporting reinvestment: "Whenever we sought expansion, they rejected it but wanted entry once ventures succeeded."
Outside of the joint ventures, companies operating in less developed markets remained profitable despite Danone’s lack of interest. Additionally, Zong introduced Future Cola in 1998 against Danone’s preferences; however, it was tolerated due to its profitability.
Conflicts of interest
Zong has ownership over multiple companies that compete directly with the joint venture, such as Hangzhou Xiushan Shunfa Packaging Co. and WHHFBSC distribution. He opposed Danone's acquisition of stakes in rivals including China Huiyuan Juice Group, Shenzhen Health Food, Bright Dairy & Food, as well as a joint venture with Mengniu.
Since 2001, Wahaha has strongly resisted Danone's control over its main competitor, Guangdong Robust Group, of which Danone owns 92%, along with a 50% share in Shanghai Aquarius Drinking Water. After these purchases, Wahaha claimed to have suffered losses amounting to 80 million yuan (approximately US$10.5 million) and lodged formal complaints with Danone.
In July 2007, Shenyang Industrial Development Co., which holds a 5% stake in Shenyang Wahaha Drinks, initiated legal action against Qin Peng, a director appointed by Danone, accusing him of serving on boards of competing firms without proper authorization from the joint venture’s board.
Turning point
An official from the Commerce Department suggested that the conflict was driven more by personal grievances than purely business or contractual disagreements.
A May 2007 article in Caijing revealed potential misconduct: profits were allegedly redirected into manufacturing facilities and outside ventures in violation of the joint venture agreement, while shareholdings were restructured to the disadvantage of other investors.
In an attempt to resolve these irregularities, Danone reportedly proposed paying ¥4 billion to acquire these external businesses. Despite this offer, no agreement was reached, and ongoing media criticism from Zong left Danone with limited options for a peaceful resolution.
The dispute escalated when Danone filed a lawsuit in Los Angeles targeting Zong’s wife and daughter, who controlled interests connected to the external companies. In response, Zong accused Danone of seeking to dismantle his family's holdings.
Ultimately, in 2009 Danone withdrew from the joint venture by selling its 51% share in Wahaha Group back to Wahaha for around $500 million.
Timeline
- 28 March 1996: Signing of the joint venture agreement
- 1998: Groupe DANONE gains majority ownership following Peregrine’s collapse
- December 2006: Alleged arrangement allowing Danone to purchase companies outside the joint venture
- January 2007: Zong declines buyout proposal
- 9 April 2007: Danone issues warning to Wahaha JV chairman regarding unauthorized sales under the Wahaha brand
- 11 April: Zong accuses Danone of conducting a "hostile takeover"
- 9 May: Danone initiates legal proceedings in Stockholm
- 4 June: Danone files $100 million lawsuit in Los Angeles against parties connected to Zong
- 5 June: Zong steps down as chairman of the joint venture
- 17 June: Hangzhou Arbitration Committee accepts arbitration request
- 22 June: Chinese partners in JV reject appointment of Emmanuel Faber as chairman succeeding Zong
- 12 July: Legal representatives for Danone allege Zong committed forgery to establish offshore entities
- 9 November: Court in British Virgin Islands places several companies under receivership and freezes assets
- 14 or 21 November: Supreme Court of Samoa freezes Mega Source Investments Ltd and Honour Bright Investments Ltd and appoints receivers
See also
External links
- Official Wahaha website
- Wahaha – an unusual commercial conflict (comprehensive joint venture history review) , Caijing Issue 185, 14 May 2007