Zong case study

Question

C L O S I N G C A S E LOOK BEFORE YOU LEAP
Group Danone SA, the Paris-based marketer of yogurt, nonal-
coholic beverages, and baby foods, has long been a savvy inter-
national competitor. Employing 101,000 persons, its sales in
2010 totaled €17 billion, 45 percent of which are outside its
home base of Western Europe. It is the world’s largest seller of
fresh dairy products, and the second largest vendor of bottled
water and infant nutrition products. Like many other MNCs,
Danone believes emerging markets—which currently produce
one-third of its sales—offer it significant opportunities for
growth. Group Danone has adopted a strategy of allying with
local companies to penetrate promising emerging markets.
Danone contributes its financial clout, manufacturing expert-
ise, and sophisticated marketing skills to these joint ventures,
while the local partner contributes its knowledge of the host
country’s legal system, political process, distribution channels,
and the consumption habits of local consumers.
In Bangladesh, for example, Danone created a joint ven-
ture with the Grameen Group (see page 139 for a fuller discus-
sion of Grameen). Danone viewed Bangladesh’s 159 million
people as an untapped market. Grameen had two different, but
complementary goals. It wished to improve nutrition in that
country through the provision of healthier foods. It also wanted
to reduce poverty by creating new markets for Bangladeshi
farmers. To accommodate Grameen’s goals, Danone had to
make some changes in its normal business practices. For exam-
ple, its local factory uses as little automation as possible, in
order to maximize job creation, and Danone scientists tinkered
with product formulas to eliminate the need for sugar, which
would have had to have been imported. Grameen Danone’s
first product is low-priced Shoktidoi yogurt (Bengali for “yo-
gurt that makes you strong”), which is fortified with vitamins
to overcome nutritional deficiencies in the diet of rural chil-
dren. Shoktidoi yogurt is made using milk provided by local
farmers and is sweetened with molasses made from locally
produced dates.
Danone adopted a similar strategy in entering the Chinese
and Indian markets. In the former market, Danone established a
partnership with Zong Qinghou, the entrepreneur who in the
1980s founded the Hangzhou Wahaha group, a drink manufac-
turer and owner of one of China’s most famous brand names,
Wahaha. Starting in 1996, Danone and the Wahaha group formed
a series of joint ventures—a total of 38 in all—to produce soft
drinks, sport drinks, tea, and bottled water. In most of these joint
ventures, Danone had a 51 percent ownership share and Wahaha
a 49 percent share. On paper, these joint ventures were quite successful; most
enjoyed large market shares with significant growth prospects.
For example, Wahaha is the largest bottled-water marketer in
China, with a 39 percent market share. Danone’s joint venture
with Hangzhou Wahaha and another small partner made Danone
the country’s largest soft drink seller, with an 18 percent market
share. Its soft drink sales enjoyed annual growth rates between
10 and 15 percent in the past several years.
Despite the market successes of these companies, the rela-
tionship between Danone and Hangzhou fell apart. Danone
argued that Zong Qinghou, the founder of Hangzhou Wahaha,
set up without its permission 20 parallel soft-drink businesses,
with cumulative sales of $1.46 billion, which operated outside of
the Danone-Hangzhou agreement. Mr. Zong did not deny his
creation of these parallel companies that compete with products
made by the Danone-Hangzhou joint venture companies. Rather,
he responded he was forced to do so to protect his rights to the
Wahaha brand name and because Danone was not aggressive
enough in building and investing in their joint venture opera-
tions. Zong also argued that Danone has been unfaithful as well,
investing in other Chinese companies—such as the Mengui
dairies and the Hui Yuan company, a manufacturer of fruit
juices—that competed with their joint ventures.
Besides depriving it of its share of the profits, the parallel
operations, in Danone’s view, made it impossible to determine if
the products sold to consumers were legitimate. Accordingly,
Danone sued Mr. Zong and Hangzhou Wahaha in Chinese,
Swedish, and American courts, alleging they had violated the
joint-venture agreement. Danone did not fare well in Chinese
courts. Danone claimed its joint ventures had the right to the
Wahaha name. However, when Hangzhou Wahaha first submit-
ted its request to transfer the Wahaha brand name to the joint
ventures as was required by their contract, Chinese regulatory
authorities failed to approve it. No reapplication of the request
was ever made. Thus, in December 2007, the Hangzhou