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Knives come out in Danone China dispute

By Neil Merrett , 11-Apr-2007

The ongoing spat between French giant Danone and Chinese business partner Wahaha is no longer a laughing matter with the multinational threatening to go to the court over the disagreement.

At a media briefing earlier today in Shanghai, Emmanuel Faber, Danone's president for the Asia Pacific region revealed that the company will seek litigation against Wahaha over claims that it has breached a contract. The news could have particular significance for food companies looking to operate in China, as local companies look to assert more control of their operations.


Danone and Wahaha have worked under an agreement since 1996 regarding a number of locally-based joint ventures, of which Danone holds a 51 per cent stake. Under this agreement Danone claims it has exclusive rights to use, produce and distribute goods under the Wahaha brands through the joint ventures. However, Danone's attempt to take full control of the ventures has put the two companies at loggerheads.


Following Monday's rejection by Wahaha of the proposed buyout, relations between the two companies have soured significantly. The multinational yesterday revealed that it was in talks with the head of Wahaha, Zong Qinghou, over the company's obligations regarding their co-operation.


"In accordance with agreements signed by Mr. Zong and approved by Chinese authorities, these joint ventures have the exclusive rights of production, distribution and sales of products under the Wahaha brand," stated the company. "[The Company] intends to ensure the proper application of agreements entered into with Mr. Zong. In this context, discussions have been initiated pertaining to the relationship between the Danone Wahaha joint ventures and other non-integrated companies developed by Mr. Zong."


Zong is unhappy with the deal however, claiming it is unfavourable to its own operations. "We consider such provisions unfair, prohibiting us from making goods that are produced by the joint ventures while imposing no restrictions on Danone itself," he said.


With the talks apparently stumbling, the court action appears set to go forward. Danone declined to further comment on the nature of the legal proceedings at this time.


Wahaha's stance represents the changing climate for foreign country's looking to enter China's booming marketplace. Some Chinese authorities in particular are concerned at the current level of foreign investment in its companies, and have called for a review of practices that encourage foreign investment.


As a result, at last month's annual legislature session, some politicians suggested a review of the current policy of offering tax incentives to foreign companies.


The issue has been driven by criticism from local companies that tax breaks offers an unfair advantage to foreign companies and needs to be changed.