Danone vs. Wahaha

I thought that the Canadian Lawyer website only had a few of my columns from the past three years up on their website. I'm wrong -- they have many more, but I couldn't find them because my name isn't on all of them.

Knowing this, I've been able to locate a bunch more of them, and though some are now a couple of years old, I think they're still interesting and some are even still current. Here's one about an interesting fight that dairy giant Danone got into with its Chinese joint venture partner, with the wonderful name Wahaha:

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.

China is awesome to behold, especially its coastal megalopolises like Shanghai and Beijing. Shanghai is like a combination of Manhattan and Las Vegas, and when I was there two years ago, had 27,000 construction projects going on at the same time.

The Shanghai Daily, an English language business newspaper, reported that random samples of the structural steel being used for construction showed one third of it was substandard -- a terrifying thought when you're sitting atop a 70-storey tower. And that's just what the Communist Party censors permitted to be published.

To me, that perfectly encapsulates the difference between China's cities and Manhattan or Las Vegas. Part of China look modern and capitalist on the outside; but if you scratch beneath the surface, there is no cultural infrastructure that forms the hidden strengths of our system. Capitalism isn't just the ability to build a tower -- even the North Koreans can build tall things. But can they build foundations for them?

Foundations like the rule of law; property rights; sanctity of contract; government and corporate transparency; the ability to seek redress without fear of political repercussions. And what flows from all that is a culture of personal responsibility.

China has successfully achieved the outward appearance of America. I recommend sushi lunch at the top of the Jinmao Tower in Shanghai, if you want to feel like a top-hatted capitalist. But so much of that country is counterfeit -- from counterfeit structural steel, to the counterfeit western brands sold in official government tourist shops.

When I was in Beijing, the toothpaste poisoning scandal broke -- where made-in-China toothpaste was found to have been sweetened with antifreeze. It was fascinating to follow the arc of the story in the English language People's Daily, an official Communist paper.

(The entire newspaper was bizarre, still half-written in that stilted Maost style -- the "splittists in Taipei", etc. But even more strange was their choice of stories -- mainly denials of rumours and accusations that you had never heard in the first place. It was the most defensively written view of the world I'd ever seen -- and a pretty good guide as to what the ChiComs were politically worried about. It's as if they had a headline: "the rumours aren't true".)

But back to the antifreeze. The first phase of their crisis management was to outright deny the allegations -- no, there was no antifreeze in the toothpaste, the rumours aren't true.

The next phase was to come up with a cockamamie excuse that must have sounded good to someone: okay, sure, there's some antifreeze in there, but not too much, and the U.S. Food and Drug Administration approved it!

That lasted for about a day. The final phase of the arc was the execution of some executive somewhere -- not trial, of course, for he might have protested his innocence, or more likely, implicated everyone else, right up to the government regulators. The execution -- really, a murder, let's admit -- was China's way of saying: you Westerner want accountability? You've got it! And not your pansy accountability. We killed a guy over the antifreeze. Are you not satisfied yet?

Yet that, too, is a counterfeit. In the West, we value the trial as much as we value the verdict. We believe in shining a light on misconduct, to learn from it, to improve from it, to follow the rot as far as is required to fix the problem. The end result -- a fine, an imprisonment, whatever -- is less important, actually, than telegraphing to everyone in society right and wrong.

In China, they are indeed telegraphing to society right and wrong: bluff it out; if you're caught, fib; if you're still caught, find a scapegoat and then declare the matter "over".

Come to think of it, Jennifer Lynch follows that same arc of non-accountability.

There are a lot of reasons to be hopeful about China -- for me, the fact that 20 million Chinese bloggers are still able to write on the Internet without disclosing their identities is a key reason for hope. (When I was there, it was bloggers who broke a scandalous story about slaves working at a brick factory, with the approval of local Communist bosses.) But there are plenty of reasons for pessimism, too.

The ability to put up a skyscraper is an impressive feat, and it is certainly the sign of some achievement -- something that, for example, Dubai is unable to do except by important hundreds of thousands of foreign skilled labourers. But unless those skyscrapers are built on the foundations of responsibility, they're wobbly in every sense, including physically.

One last observation. After a few weeks, we started to eat almost exclusively at Western restaurants. They're ubiquitous -- I think the most common face on Chinese streets is Col. Sanders. Seriously, other than on the currency and in some state museums, you can hardly find a portrait of Mao. At those Western restaurants, there was an imposed set of Western standards, rooted in personal responsibility. I was in a Haagen Dasz store (of couse) in Beijing and saw one young Chinese employee interviewing another young Chinese job applicant -- in English. The entire interview was about taking personal responsibility and exceeding standards, not faking them. It was the same in every Western store I attended. (At a Starbucks next to the Great Wall, they literally sent someone in to clean the bathroom after every time someone used it.)

Western values, transmitted through multi-national companies, will help save China. And so, of course, will Christianity, which counts 100 million adherents in that country, all of them doing so to their personal jeopardy.

Why Christianity? Because it is a religion that imposes a moral code on an individual. And it places something other than Chairman Mao or the state or the Communist idol of the day at the apex of obedience. And it tells every one of the billion point two Chinese that they are valuable, that they have worth -- the antidote to Mao's China, where 50 million of his countrymen were expendable and where he actually tried an experiment of replacing individuals' names with numbers.