MGT 672 CUNY Brooklyn College Communication Discussion

Brief Integrative Case 2.2
Danone’s Wrangle with Wahaha
In 1996, Danone Group and Wahaha Group combined
forces in a joint venture (JV) to form the largest beverage
company in China. A longstanding trademark dispute
between the JV members, embedded within a broader
clash of national and organizational cultures, came to a
head. Valuable lessons can be learned from this dispute
for investors considering joint ventures in China.
The Wahaha Joint Venture was established in 1996 by
Hangzhou Wahaha Food Group Co. Ltd., Danone Group,
and Bai Fu Qin Ltd. In 1997, Danone bought the interests
of Bai Fu Qin and gained legal control of the JV with
51 percent of the shares. While members of the JV are
entitled to use the JV’s Wahaha trademark, in 2000, the
Wahaha Group developed companies outside of the JV
that sold products similar to those of the JV and used the
JV’s trademark. The Danone Group objected and sought
to purchase those non-JV companies.1
In April 2007, Danone offered RMB4 billion to
acquire 51 percent of the shares of Wahaha’s five non-JV
companies. Wahaha Group rejected the offer. Subsequently, Danone filed more than 30 lawsuits against
Wahaha for violating the contract and illegally using the
JV’s Wahaha trademark in countries such as France,
Italy, the U.S., and China.2
Danone’s Background
Danone traces its routes to Europe in the early 20th century.
In 1919, Isaac Carasso opened a small yogurt stand in
Spain. He named it “Danone,” meaning “Little Daniel,”
after his son. Carasso was aware of new methods of milk
fermentation conducted at the Pasteur Institute in Paris. He
decided to merge these new techniques with traditional practices for making yogurt. The first industrial manufacturer of
yogurt was started.3
Following his success in Europe, Carasso immigrated
to the U.S. to expand his market. He changed the Danone
name to Dannon Milk products, Inc., and founded the first
American yogurt company in 1942 in New York. Distribution began on a small scale. When Dannon introduced
the “fruit on the bottom” line in 1947, sales soared. The
following year, he sold his company’s interest and returned
to Spain to manage his family’s original business.4
By 1950, Dannon had expanded to other U.S. states in
the Northeast. It also broadened the line by introducing
low-fat yogurt that targeted the health-conscious consumer. Sales continued to rise. Dannon expanded across
the country throughout the 1960s and 1970s. In 1979,
Dannon became the first company to sell perishable dairy
products coast to coast in the U.S.5
In 1967, Danone merged with leading French fresh
cheese producer Gervais to become Gervais Danone. In
1973, Gervais Danone merged with Boussois-SouchonNeuvesel (BSN), a company that had also acquired the
Alsacian brewer Kronenbourg and Evian mineral water.6
In 1987, Gervais Danone acquired European biscuit manufacturer Général Biscuit, owners of the LU brand, and
in 1989, it bought out the European biscuit operations of
Nabisco.
In 1994, BSN changed its name to Groupe Danone,
adopting the name of the Group’s best-known international
brand. Under its current CEO, Franck Riboud, the company has pursued its focus on the three product groups:
dairy, beverages, and cereals.7 Today, Danone’s mission is
to produce healthy, nutritious, and affordable food and
beverage products for as many people as possible.
Danone’s Global Growth
Danone, with 160 plants and nearly 100,000 employees,
has a presence in all five continents and over 120 countries. In 2015, Danone recorded €21.1 billion in sales, a
nearly 30 percent increase from its €15.2 billion in sales
in 2008. Danone enjoys leading positions in healthy food:8
∙
∙
∙
∙
No.
No.
No.
No.
1
2
2
1
worldwide in fresh dairy products
worldwide in bottled water
worldwide in baby nutrition
in Europe in medical nutrition
Its portfolio of brands and products includes Activia,
a probiotic dairy product line; Danette, a brand of cream
desserts; Nutricia, an infant product line; Danonino, a
brand of yogurts; and Evian, a brand of bottled water.9
Listed on Euronext Paris, Danone is also ranked among
the main indexes of social responsibility: Dow Jones Sustainability Index Stoxx and World, ASPI Eurozone
(Advanced Sustainable Performance Indices), and Ethibel
Sustainability index. Danone has ranked number 51 in top
100 international brands according to Interbrand 2015
Best Global Brand valuation, with the brand value of
$8.6 billion.10
In 2014, Danone recorded an organic growth rate of
4.7 percent despite a weak European economy, further
strengthening its global standing. The group’s performance is the result of a balanced strategy that builds on
255
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Part 2 The Role of Culture
international expansion, a growing commitment to innovation, and strengthening health-oriented brands. Danone
invests heavily in research and development—€276 million in 2015. One hundred percent of projects currently
in the pipeline focus on health and nutrition.11
As of 2014, Danone is the world’s second largest producer of bottled water. Danone owns the world’s topselling brand of packaged water, Aqua, which recorded
sales of 11 billion liters in 2014. With Evian and Volvic,
Danone also owns two of the five worldwide brands of
bottled water.12 Its revenue from water products amounted
to €4.2 billion in 2014: China, France, Indonesia, and
Mexico accounted for the most sales. Growth is strongest
in China, Indonesia, and Argentina, with emerging markets accounting for 70 percent of all of Danone’s bottled
water sales.13
In the mid-1990s, Danone did 80 percent of its business in Western Europe. Until 1996, the company was
present in about a dozen markets including pasta, confectionery, biscuits, ready-to-serve meals, and beer. The
company realized that it is difficult to achieve simultaneous growth in all these markets. Therefore, they decided
to concentrate on the few markets that showed the most
growth potential and were consistent with Danone’s focus
on health. Starting in 1997, the Group decided to focus
on three business lines worldwide (Fresh Dairy Products,
Beverages, as well as Biscuits and Cereal Products), and
the rest of the business lines were divested. This freed the
company’s financial and human resources and allowed for
quick expansion into new markets in Asia, Africa, Eastern
Europe, and Latin America. In less than 10 years, the
contribution of emerging markets to sales rose from zero
to 40 percent while that of Western Europe went below
50 percent.14 By 2014, emerging markets accounted for
60 percent of all growth, with over 60 percent of all
employees working outside of Europe.15
In 2007, the same year that it attempted to acquire
51 percent of the shares of Wahaha’s five non-JV companies, Danone marked the end of a 10-year refocusing
strategy period during which the Group’s activities were
refocused in the area of health. That year, the Group
sold nearly all of its Biscuits and Cereal Products business to the Kraft Foods group, while adding Baby
Nutrition and Medical Nutrition to its portfolio by
acquiring Numico.
Danone is now centered on 4 business lines:
1. Fresh Dairy Products, representing approximately
53 percent of consolidated sales for 2014.
2. Waters, representing approximately 20 percent of
consolidated sales for 2014.
3. Baby Nutrition, representing approximately 21 percent of consolidated sales for 2014.
4. Medical Nutrition, representing approximately 7 percent of consolidated sales for 2014.
Danone Strategy in China
Danone entered the Chinese market in the late 1980s.
Since then, it has invested heavily in China, building factories and expanding production. Today, Danone has
70 factories in China, including Danone Biscuits, Robust,
Wahaha, and Health. Ten percent of Danone’s workforce
is located in China. Danone sells primarily yogurt, biscuits, and beverages in the Chinese market.16 By 2014,
Danone’s Asia-Pacific division employed 28,000 people
in the Asia-Pacific area, which was almost 30 percent of
Danone’s total employees.
In the early 2000s, Danone’s Wahaha was China’s largest beverage company. In 2008, 57 percent of Danone’s
Asian sales were in China. Two billion liters of Wahaha
were sold in 2004, making it the market leader in China
with a 30 percent market share.17 In Asia, in 2007, Danone
Group was the market leader with a 20 percent share of
a 34-billion-liter market. In comparison, rivals Coca-Cola
and Nestlé had a 7 percent and 2 percent share, respectively. Evian, its global brand, was sold alongside of local
brands such as China’s Wahaha.
In the past 20 years, Danone has purchased shares of
many of the top beverage companies in China: 51 percent
of the shares of the companies owned by Wahaha Group,
98 percent of Robust Group, 50 percent of Shanghai Maling Aquarius Co., Ltd., 54.2 percent of Shenzhen Yili
Mineral Water Company, 22.18 percent of China Huiyuan
Group, 50 percent of Mengniu, and 20.01 percent of
Bright dairy. These companies, leaders in their industry,
all own trademarks that are well-known in China.18
However, while expanding into the Chinese market,
Danone faced challenges due to lack of market knowledge. In 2000, Danone purchased Robust, the then-­secondlargest company in the Chinese beverage industry. Sales
of Robust had reached RMB2 billion in 1999. After the
purchase, Danone dismissed the original management and
managed Robust directly. Because its new management
was not familiar with the Chinese beverage market, Robust
struggled. Its tea and milk products almost disappeared
from the market. During 2005–2006, the company lost
RMB 150 million.19
Wahaha Company
The Wahaha company was established in 1987 by a retired
teacher, Mr. Zong Qinghou. In 1989, the enterprise opened
its first plant, Wahaha Nutritional Food Factory, to produce “Wahaha Oral Liquid for Children,” a nutritional
drink for kids. The name Wahaha was meant to evoke a
laughing child, combining the character for baby (wa)
with the sound of laughter.20 After its launch, Wahaha
won a rapid public acceptance. By 1991, the company’s
sales revenue grew beyond 100 million renminbi (¥).21
In 1991, with the support of the Hangzhou local ­district
government, Wahaha Nutritional Food Factory merged
Brief Integrative Case 2.2 Danone’s Wrangle with Wahaha
257
with Hangzhou Canning Food Factory, a state-owned
enterprise, to form the Hangzhou Wahaha Group Corporation. After mergers with three more companies, Wahaha
became the biggest corporation of its district.22
Since 1997, Wahaha has set up many new subsidiaries.
It was aided by state and local government because its
continuous expansion helped create new jobs and its
increased profits led to more tax revenues.
In 1996, the Hangzhou Wahaha Group Corporation
began a joint venture with Danone Group and formed five
new subsidiaries, which attracted a $45 million foreign
investment and then added another $26.2 million investment. With the investment funds, Wahaha brought worldclass advanced production lines from Germany, America,
Italy, Japan, and Canada into its sites. The terms of the
Danone-Wahaha joint venture allowed Wahaha to retain all
managerial and operating rights as well as the brand name
Wahaha. In the next eight years, the company established
40 subsidiaries in China, and in 1998 launched its own
brand, “Future Cola,” to compete against Coke and Pepsi.23
In 2000, the company produced 2.24 million tons of beverages with sales revenue of $5.4 billion. The production
accounted for 15 percent of the Chinese output of beverages.
The group became the biggest company in the beverage
industry of China with total assets of $4.4 billion.24
Back in 2007, it produced 6.89 million tons of beverage with a sales revenue of $25.8 billion. Today, Hangzhou Wahaha Group Co., Ltd., is still a leading beverage
producer in China with over 60,000 employees and 150
subsidiaries, though sales have dropped since 2013 due to
the shrinking carbonated beverage market. The company
product category contains more than 100 varieties, such
as milk drinks, drinking water, carbonated drinks, tea
drinks, canned food, and health care products.25
According to a report on the “Top 10 Beverage
Companies” released by the China Beverage Industry
­
Association, Wahaha contributed 55.57 percent to the
Association Top 10’s overall production, 65.84 percent to
its revenue, and 73.16 percent to its profit tax. According
to Zong Qinghou, the president of Wahaha: “As China
becomes the world’s largest food and beverage market,
we’ll be a major player in the global market.” Wahaha
implements a strategy of “local production and local distribution’’ and has built an excellent production-distribution network. Its Wahaha R&D center and Analysis
Center provide guarantees for high product quality.26
Danone-Wahaha Joint Venture Conflict
The Wahaha joint venture (JV) was formed in 1996 with
three participants: Hangzhou Wahaha Food Group
(Wahaha Group); Danone Group, a French corporation
(Danone); and Bai Fu Qin, a Hong Kong corporation
(Baifu). Danone and Baifu did not invest directly in the
JV. Instead, Danone and Baifu formed Jin Jia Investment,
a Singapore corporation (Jinjia). Upon the formation of
the JV, Wahaha Group owned 49 percent of the shares of
the JV and Jinjia owned 51 percent of the shares of the
JV. This structure led to immediate misunderstandings
between the participants. From Wahaha Group’s point of
view—with the division of ownership at 49 percent Wahaha
Group, 25.5 percent Danone, and 25.5 percent Baifu—it
was the majority shareholder in the JV. Figure 1 shows the
initial structure of the JV. Since Wahaha Group felt it
controlled the JV, it was relatively unconcerned when it
transferred its trademark to the JV.27
In 1998, Danone bought out the interest of Baifu in
Jinjia, becoming 100 percent owner of Jinjia and effectively the 51 percent owner of the JV. This gave it legal
control over the JV because of its right to elect the board
of directors. For the first time, the Wahaha Group and
Zong realized two things: (1) They had given complete
Hierarchy of the Initial Wahaha Joint Venture
Figure 1
Structure of Initial Wahaha
Joint Venture
The Wahaha Joint Venture
Wahaha Group
(led by Chairman
Zong Qinghou)
40%
Jin Jia Investment
Co. Ltd.
51%
WAHAHA G R OUP
Danone Group
50%
Bai Fu Qin Ltd
50%
Source: Steven M. Dickinson, “Danone v. Wahaha,” China Economic Review, September 1, 2007, http://www.chinaeconomicreview.com/
node/24126.
258
Part 2 The Role of Culture
control over their trademark to the JV and (2) a foreign
company was now in control of the JV. From a legal
standpoint, this result was implied by the structure of the
JV from the very beginning. However, it is clear from
public statements that the Wahaha Group did not understand the implications when they entered into the venture.
The Danone “takeover” in 1998 therefore produced significant resentment on the part of Wahaha Group. Rightly
or not, Wahaha felt that Danone misled them from the
very beginning.28
When the JV was formed, Wahaha Group was a stateowned enterprise owned by the Hangzhou city government. After formation of the JV, it was converted into a
private corporation, effectively controlled by Zong. This
set the stage for Wahaha Group’s decision to take back
control of the trademark it felt had been unfairly transferred to Danone. Zong and his employees now viewed
the transferred trademark as their personal property.29
When the JV was formed, Wahaha Group obtained an
appraisal of its trademark valuing it at RMB100 million
(US$13.2 million). The trademark was its sole contribution to the JV, while Jinjia contributed RMB500 million
(US$66.1 million) in cash. Wahaha Group also agreed not
to use the trademark for any independent business activity
or allow it to be used by any other entity. However, the
trademark transfer was rejected by China’s Trademark
Office. It took the position that, as the well-known mark
of a state-owned enterprise, the trademark belonged to the
state and Wahaha Group did not have the right to transfer
it to a private company.30
Rather than terminate the JV, the shareholders (now
Danone and Wahaha Group) decided to work around the
approval issue by entering into an exclusive license agreement for the trademark in 1999. Because the license
agreement was intended to be the functional equivalent of
a sale of the trademark, they were concerned the Trademark Office would refuse to register the license. Therefore, they only registered an abbreviated license. This was
accepted by the Trademark Office, which never saw the
full license. As a result, Wahaha Group never transferred
ownership of the Wahaha trademark to the JV, just the
exclusive license. Thus, Wahaha Group never complied
with its basic obligation for capitalization of the JV. It
does not appear that any of the JV documents were revised
to deal with this changed situation.31
Although Danone was the majority shareholder and
maintained a majority interest on the board of directors,
day-to-day management of the JV was delegated entirely
to Zong. He filled management positions with his family
members and employees of the Wahaha Group. Under
Zong’s management, the JV became the largest Chinese
bottled water and beverage company.32
Beginning in 2000, the Wahaha Group created a series
of companies that sold the same products as the JV and
used the Wahaha trademark. The non-JV companies
appear to have been owned in part by Wahaha Group and
in part by an offshore British Virgin Islands company
controlled by Zong’s daughter and wife. Neither Danone
nor Wahaha Group receives any benefits from the profits
of these non-JV companies. According to press reports in
China, products from the non-JV companies and the JV
were sold by the same sales staff working for the same
sales company, all ultimately managed by Zong.33
In 2005, Danone realized the situation and insisted it
be given a 51 percent ownership interest in the non-JV
companies. Wahaha Group and Zong, who by this time
was one of the richest men in China, refused.34
Details of the Dispute
In April 2006, Wahaha was informed by its 10-year JV
partner Danone that it had breached the contract by establishing nonjoint ventures that had infringed upon the
interests of Danone. Danone proposed to purchase 51 percent of the shares of Wahaha’s nonjoint ventures.35 The
move was opposed by Wahaha. In May 2007, Danone
formally initiated a proceeding, claiming that Wahaha’s
establishment of nonjoint ventures as well as the illegal
use of the “Wahaha” trademark had seriously violated the
noncompete clause. The two parties carried on 10 lawsuits
in and out of China, and all the ruled cases between
Wahaha and Danone have ended in Wahaha’s favor.36
On February 3, 2009, a California court in the United
States dismissed Danone’s accusation against the wife and
daughter of Zong Qinghou and ruled that the dispute
between Danone and Wahaha should be settled in China.
In addition, Danone’s lawsuits against Wahaha were
rejected by courts in Italy and France; and a series of
lawsuits brought by Danone in China against Zong Qinghou and Wahaha’s nonjoint ventures all ended in failure.37
The rationality of the existence of the nonjoint ventures, the ownership of the “Wahaha” trademark, and the
noncompete clause issue were the key points of the
Danone-Wahaha dispute.38 In 1996, Wahaha offered a list
of 10 subsidiaries to Danone, which, after evaluation,
selected four. Jinja Investments Pte Ltd. (a Singaporebased joint venture between Danone Asia Pte Ltd. and
Hong Kong Peregrine Investment, of which Danone is the
controlling shareholder); Hangzhou Wahaha Group Co.,
Ltd.; and Zhejiang Wahaha Industrial Holdings Ltd.
jointly invested to form five joint venture enterprises, with
shareholdings of 51 percent, 39 percent, and 10 percent,
respectively. In 1998, Hong Kong Peregrine sold its stake
in Jinja Investments to Danone, which makes Danone the
sole shareholder of Jinja Investments, giving it the control
of over 51 percent of the joint ventures. Wahaha and
Danone cooperated on the basis of joint venture enterprises, rather than the complete acquisition of Wahaha by
Danone. As a result, Wahaha was always independent,
and its nonjoint ventures have existed and developed since
Brief Integrative Case 2.2 Danone’s Wrangle with Wahaha
1996. Relevant transactions of Wahaha’s nonjoint ventures and joint ventures were disclosed fully and frankly
by the auditing reports of PricewaterhouseCoopers, an
accounting firm appointed by Danone. Meanwhile, during
the 11-year cooperation, Danone assigned a finance director to locate in the headquarters of Wahaha Group to audit
the latter’s financial information.39
Danone and Wahaha had signed in succession three relevant agreements concerning the ownership of the “Wahaha”
brand name. In 1997, the two parties signed a trademark
transfer agreement, with an intention to transfer the “Wahaha”
trademark to the joint ventures. The move, however, was not
approved by the State Trademark Office.40 For this reason,
the two parties signed in 1999 the trademark licensing contract. According to law, the same subject cannot be synchronously transferred and licensed for use to others by the same
host. Therefore, the signing and fulfillment of the trademark
licensing contract showed that the two parties had agreed to
the invalidation of the transfer agreement. The “Wahaha”
brand should belong to the Wahaha Group, while the joint
ventures only have the right of use.41
In October 2005, the two parties signed the No. 1
amendment agreement to the trademark licensing contract, in which it confirmed Party A (Hangzhou Wahaha
Group Co., Ltd.) as owner of the trademark. In addition,
the second provision of the amendment agreement clearly
stated that the several Wahaha subsidiaries listed in the
fifth annex of the licensing contract as well as other
Wahaha subsidiaries (referred to as “licensed Wahaha
enterprises”) established by Party A or its affiliates following the signing of the licensing contract also have the
right granted by one party to use the trademark. The
“licensed Wahaha enterprises” involved in the amendment
agreement refer to the nonjoint ventures.42 According to
related files, Wahaha maintains the ownership of the
“Wahaha” trademark, while its nonjoint ventures have the
right to use the trademark.43 The Wahaha brand is among
the most famous in China. It ranked No. 16 among domestic brands and is worth US$2.2 billion, according to a
recent report by Shanghai research firm Hurun Report.
Wahaha doesn’t publicly disclose financial figures.44
Ventures and Acquisitions
Several years ago, as Wahaha sought to expand its market,
Wahaha suggested adding online new production lines by
increasing investment, while Danone requested Wahaha
outsource to product processing suppliers for its joint ventures. Wahaha saw the shortcomings in using product processing suppliers, so it set up nonjoint ventures to meet
production needs. Wahaha believed that the existence and
operation of the nonjoint ventures did not adversely affect
the interest of Danone.45
During the 11 years that followed 1996, Danone invested
less than RMB1.4 billion in Wahaha’s joint ventures but
259
received a profit of RMB3.554 billion as of 2007. On the
other hand, Danone acquired several strong competitors of
Wahaha including Robust, Huiyuan, and Shanghai Maling
Aquariust. Wahaha saw Robust as its biggest rival. Wahaha
was disappointed that Danone failed to hold up its end of
the bargain of “jointly exploring markets in and out of
China” listed in the JV contract.46
Through the influence of the Chinese and French governments, Danone and Wahaha reached a peaceful settlement in late 2007. However, Danone’s proposal to sell its
shares in the joint ventures to Wahaha for RMB50 billion
(finally reduced to approximately RMB20 billion) was
rejected by Wahaha.47
After the negotiations were suspended, the two parties
again turned to legal action. All the ruled cases, both in
China and abroad, have ruled against Danone.48
Conflict Resolution
In late September 2009, France’s Groupe Danone SA
agreed to accept a cash settlement to relinquish claims to
the name Wahaha. In a joint statement issued September
30, 2009, Danone announced a settlement with China’s
Hangzhou Wahaha Group Co. by saying its 51 percent
share in joint ventures that make soft drinks and related
products will be sold to the businesses’ Chinese partners.
“The completion of this settlement will put an end to all
legal proceedings related to the disputes between the two
parties,” the statement said.49
The feud over control of the Wahaha empire offered a
glimpse into the breakup of a major Asian–foreign joint
venture. Danone’s strategy to publicly confront its partner
and Wahaha’s strategy to respond with its own accusations marked a break with prevailing business practice in
China, where problems have usually been settled with
face-saving, private negotiations.50
Analysts said the case served to reinforce how difficult
it is to operate a partnership in China. “That’s a key lesson:
To build a [brand] business in China you need to build
from the ground up,” said Jonathan Chajet, China managing director for consultancy Interbrand.51 Foreign firms
such as Procter & Gamble, Starbucks, and General Motors
have operated wholly or in part through joint ventures in
China. But executives involved say the expectations of foreign and local parties can conflict in a JV; for instance,
when an international company is striving for efficiencies
and profits that match its global goals while the local
­partner—sometimes an arm of the Chinese government—
strives to maximize employment or improve technology.
At other times, partners have stolen corporate secrets or
cheated and otherwise sabotaged a venture, while legal
avenues have had little effect on disputes over operations.52
Danone, which reported the Wahaha business generated about 10 percent of its global revenue in 2006 but
has since adjusted how it accounted for Wahaha, said it
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Part 2 The Role of Culture
expects no impact on its income statement from the settlement. In China, it will be left with a much smaller footprint and is essentially starting over.53 Danone’s CEO
Franck Riboud stated: “Danone has a long-standing commitment to China, where it has been present since 1987,
and we are keen to accelerate the success of our Chinese
activities.” China is Danone’s fourth-largest market after
France, Spain, and the U.S., contributing about €1bn, or
8 percent, of Danone’s revenues.54
Lessons Learned55
What can potential foreign investors learn from this dispute? Although JVs in China can be quite difficult, with
proper planning and management, they can be successful.
In the case of the Wahaha–Danone JV, many basic rules
of JV operations in China were violated, virtually guaranteeing the JV’s destruction. According to Steve Dickinson, lawyer at Harris Moure PLC, the primary rules
violated are as follows:56
1. Don’t use technical legal techniques to assert or
gain control in a JV.
2. Do not expect that a 51 percent ownership interest
in a JV will necessarily provide effective control.
3. Do not proceed with a JV formed on a weak or
uncertain legal basis.
4. The foreign party must actively supervise or participate in the day-to-day management of the JV.
Questions for Review
1. When and how did Danone expand into the Chinese
market? What problems did Danone Group encounter while operating in China?
2. How was the Danone and Wahaha JV formed?
What was its structure? Why did Danone decide
to form a joint venture rather than establish a
100 percent-owned subsidiary?
3. What was the problem of the Danone-Wahaha joint
venture that triggered the conflict between the companies? What were the differences in Danone’s and
Wahaha’s understanding of their own respective
roles and responsibilities in this venture? What
aspects of national and organizational culture
affected this perspective?
4. Was Danone successful in proving its claims in
court? How was the conflict between the two companies resolved? What were the key lessons for
Danone about doing business in China?
5. Did Danone follow the advice regarding JVs in
China mentioned in the list just above? Which
aspects did it follow and which did it not?
Source: This case was prepared by Tetyana Azarova of Villanova University under the
supervision of Professor Jonathan Doh as the basis for class discussion. Additional
research assistance was provided by Kelley Bergsma and Ben Littell. It is not intended
to illustrate either effective or ineffective managerial capability or administrative
responsibility.
ENDNOTES
1. Patti Waldmeir and Sundeep Tucker, “Danone to
Quit Joint Venture with Wahaha French Group to
Focus on Expanding Own Units in China,” Financial Times, September 30, 2009, https://www.ft.
com/content/849e7eda-ad87-11de-bb8a00144feabdc0.
2. Wahaha Group, “Danone Encounters Continuous
Frustration in China and a Murky Future Due to
Unsuccessful Litigations,” press release, PR Newswire, September 9, 2008, www.prnewswire.co.uk/
news-releases/danone-encounters-continuousfrustration-in-china-and-a-murky-future-due-tounsuccessful-litigations-152564955.html.
3. “Our Heritage,” Danone, www.danone.com/en/forall/our-mission-in-action/our-heritage/.
4. Ibid.
5. Ibid.
6. Bill Bruce, “Danone Celebrates Its 90th Birthday,”
April 14, 2009, www.foodbev.com/news/danonecelebrates-its-90th-birthday/.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
Ibid.
Danone, 2014 Annual Report, February 20, 2015.
Danone, www.danone.com/en.
“Rankings,” Interbrand, http://interbrand.com/
best-brands/best-global-brands/2015/ranking/.
“Research at Danone,” Danone, www.danone.com/
en/for-all/research-innovation/our-research-at-aglance/.
“Waters,” Danone, www.danone.com/en/brands/
business/beverages.html.
Ibid.
Danone 2008 Annual Report: Economic and Social
Report.
Danone 2014 Annual Report: Economic and Social
Report.
Shangguan Zhoudong, “Danone’s Quick Expansion
in China,” China Daily, June 15, 2007, www.
chinadaily.com.cn/bizchina/2007–06/15/content_
895462.htm.
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Chapter 7
Cross-Cultural Communication
and Negotiation
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Learning Objectives
• Define the term communication, examine
some examples of verbal communication
styles, and explain the importance of
message interpretation
• Analyze the common downward and upward
communication flows used in international
communication
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Learning Objectives (continued 1)
• Examine the language, perception, culture of
communication and nonverbal barriers to
effective international communications
• Present the steps that can be taken to
overcome international communication
problems
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Learning Objectives (continued 2)
• Develop approaches to international
negotiations that respond to differences in
culture
• Review different negotiating and bargaining
behaviors that may improve negotiations and
outcomes
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World of International Management Netflix’s Negotiations
• Faces setbacks due to negotiation and
communication difficulties in:
– China – Setbacks due to a long negotiation process
– Russia – Setbacks because of Netflix’s lack of
communication and negotiation prior to entry
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Communication
• Process of transferring meanings from sender
to receiver
• Advent of the telephone, Internet, and
personal communication devices has
influenced the way people communicate
• Types – Verbal or nonverbal
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Verbal Communication Styles – Context
• Information that surrounds a communication
and helps convey the message
– Plays a key role in explaining many communication
differences
• High-context societies
– Messages are often highly coded and implicit
• Low-context societies
– Messages are often explicit and speaker says
precisely what s/he means
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Indirect and Direct Styles
• High-context cultures – Messages are implicit
and indirect
– Voice intonation, timing, facial expressions play
important roles in conveying information
• Low-context cultures – People often meet only
to accomplish objectives
– Direct and focused in their communications
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Degrees of Communication Quantity
• Elaborate style – Most popular in high-context
cultures that have a moderate degree of
uncertainty avoidance
– Widely used in Arabic countries
– Involves talking, detailed descriptions, and
repetition
• Exacting style – Focuses on precision and use
of the right amount of words to convey
message
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Degrees of Communication Quantity
(continued)
– More common in low-context, low-uncertaintyavoidance cultures
• Used in England, Germany, and Sweden, etc.
• Succinct style
– More common in high-context cultures with
considerable uncertainty avoidance
– People say few words and allow understatements,
pauses, and silence to convey meaning
– Most common in Asia
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Contextual Styles
• Focus on the speaker and the relationship of
parties
– Associated with high-power-distance, collective,
and high-context cultures
– Speakers choose words that indicate their
status relative to the status of the others
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Personal Styles
• Focus on the speaker and the reduction of
barriers between the parties
– More popular in low-power-distance,
individualistic, and low-context cultures
– Speaker uses first names while addressing others
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Affective Styles
• Characterized by language that requires the
listener to carefully note what is said and to
observe how the message is presented
– Meaning is conveyed nonverbally and requires the
receiver to use intuitive skills to decipher the
message
– Common in collective, high-context cultures
• Middle East, Latin America, and Asia
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Instrumental Styles
• Goal-oriented
• Focuses on the sender who clearly lets the
other party know what s/he wants the other
party to know
– Found in individualistic, low-context cultures
• Switzerland, Denmark, and the United States
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Interpretation of Communications
• Effectiveness of communication is determined
by how closely the sender and receiver have
the same meaning for the same message
– If the meaning is different, effective
communication will not take place
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Downward Communication
• Transmission of information from manager to
subordinate
• Purpose – Convey orders or information
– Managers use this channel for instructions and
performance feedback
– Channel facilitates the flow of information to
those who need it for operational purposes
– Sending mixed signals is never helpful in
communication
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Downward Communication (continued)
• Challenges posed by downward
communication in an international context
– Communication is direct and extends beyond
business matters in European countries
– Communication is less direct in Asian countries
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Upward Communication
• Transfer of information from subordinate to
superior
• Purpose – Provide feedback, ask questions, or
obtain assistance from higher-level
management
– Upward communication is not popular outside
Asian countries
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Communication Barriers – Language
• Knowledge of the language used at the
headquarters of an MNC is essential for
personnel placed in a foreign assignment
• Fluency, technical knowledge, and writing
skills
• Misinterpretations often result from unskilled
use of a language
• Inadequate language training
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Cultural Barriers in Language
• Geographic, cultural, and institutional distance
challenge international managers
• Native speakers might deviate from the
standard business communication practices of
other cultures
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Perceptual Barriers
• Perception
– Person’s view of reality
• Advertising messages
– Misunderstandings caused when words are
misinterpreted by others
• View of others
– May be different from what one thinks
– Perceptions influence how individuals see others
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Nonverbal Communication
• Transfer of meaning through means such as
body language and use of physical space
• Types
– Kinesics
– Proxemics
– Chronemics
– Chromatics
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Kinesics
• Study of communication through body
movement and facial expression
• Areas of concern – Eye contact, posture, and
gestures
• Oculesics: Area of communicating through the
use of eye contact and gaze
• Haptics: Communicating through the use of
bodily contact
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Proxemics
• Study of the way people use physical space to
convey messages
– Intimate distance: Used for very confidential
communications
– Personal distance: Used for talking with family
and close friends
– Social distance: Used to handle most business
transactions
– Public distance: Used when calling across room or
giving a talk to a group
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Chronemics
• Way in which time is used in a culture
• Types
– Monochronic time schedule: Things done in linear
fashion
• Used in societies which consider time schedules
important and time to be a controllable factor that
needs to be used wisely
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Chronemics (continued)
– Polychronic time schedule: Several things are
done at the same time
• Place higher value on personal involvement than on
getting things done on time
• Consider personal relationships more important than
time schedules
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Achieving Communication
Effectiveness
• Open feedback systems
– Personal – Face-to-face, phone, or e-mail
– Impersonal – Reports, budgets, or plans
• Provide language training
– Non-native speakers of English need to be
provided training to aid them in making face-toface conversations and telephonic conversations
– Written communication is important in achieving
effectiveness
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Achieving Communication
Effectiveness (continued)
• Provide cultural training
– At least one party has to understand the other’s
culture
• Increase flexibility and cooperation
– Improves effectiveness in communication and
understanding and cooperation
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Negotiation
• Process of bargaining with one or more
parties to arrive at a solution that is
acceptable to all
• Follows assessing political environments
• Used in creating joint ventures with local firms
– Once a firm starts operating, additional areas of
negotiation are included
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Types of Negotiations
• Distributive negotiation: Occurs when two
parties with opposing goals compete over a
set value
• Integrative negotiation: Involves cooperation
between two groups to integrate interests,
create value, and invest in an agreement
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Negotiation Process
• Planning
– Involves identifying objectives, exploring options
to attain objectives, and finding areas of common
ground between parties
• Interpersonal relationship building
– Getting to know people on the other side
• Exchanging task-related information
– Parties setting forth its position on critical issues
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Negotiation Process (continued)
• Persuasion
– Success of a negotiation depends on:
•
•
•
•
Understanding each parties’ position
Identifying areas of similarity and difference
Creating new options
Working toward a solution
• Agreement
– Granting of concessions and hammering out of a
final agreement
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Understanding Cultural Differences
• Counterpart’s home culture should not be
identified too quickly
• Western bias toward doing should be
approached with caution
• Tendency to formulate simple, consistent, and
stable images should be counteracted
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Understanding Cultural Differences
(continued)
• Significance of all aspects of the culture
should not be assumed to be equal
• Differences might exist between the norms for
interactions involving outsiders and between
the compatriots
• Familiarity with counterpart’s culture should
not be overestimated
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Negotiation Tactics
• Location
– Businesses choose a neutral site to avoid gaining
advantage of a location and to finish negotiations
soon due to the cost of staying at site
• Time limits
– Important negotiation tactic when one party is
under a time constraint
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Negotiation Tactics (continued)
• Buyer-seller relationship
– Different for certain countries
• Americans believe in trading favors
• Japanese believe they should get most out of a
purchase
• Brazilians are deceptive and self-interested
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Bargaining Behaviors
• Verbal and nonverbal
– Verbal behaviors are important as they improve
the final outcome and are critical to the success of
a negotiation
• Use of extreme behaviors
– Some begin with an extreme offer or request,
while some begin with an initial initial position
that is close to the one they are seeking
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Bargaining Behaviors (continued)
• Promises, threats, and other behaviors
– Influenced by culture, and is designed to influence
the other party
• Nonverbal behaviors
– Silent language (silent period, facial gazing,
touching, and conversational overlaps)
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Be the International Management
Consultant – China
• If you are working as a consultant for Coca
Cola, how does the dismissal of the deal by
the Chinese government affect your continued
investment in the country?
• What more could private business, like Coca
Cola, do to convince the government that new
enterprise can bring positive economic
development to the country?
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Be the International Management
Consultant – China (continued)
• Is the prospect of China’s sheer volume of
potential customers too good to pass up?
– Do the actions of the government and the
country’s recent stock market woes indicate a
signal that investment should be reconsidered?
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Review and Discuss
• How does explicit communication differ from
implicit communication? Which is one culture
that makes wide use of explicit
communication? Implicit communication?
Describe how one would go about conveying
the following message in each of the two
cultures you identified: “You are trying very
hard, but you are still making too many
mistakes”
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Review and Discuss (continued 1)
• One of the major reasons that foreign
expatriates have difficulty doing business in
the United States is that they do not
understand American slang
– A business executive recently gave the authors the
following three examples of statements that had
no direct meaning for her because she was
unfamiliar with slang
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Review and Discuss (continued 2)
– “He was laughing like hell”
– “Don’t worry. It’s a piece of cake”
– “Let’s throw these ideas up against the wall and
see if any of them stick”
– Why did the foreign expat have trouble
understanding these statements, and what could
be said instead?
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Review and Discuss (continued 3)
• Yamamoto Iron & Steel is considering setting
up a minimill outside Atlanta, Georgia
– At present, the company is planning to send a
group of executives to the area to talk with local
and state officials regarding this plant
• In what way might misperception be a barrier to
effective communication between the representatives
for both sides? Identify and discuss two examples
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Review and Discuss (continued 4)
• Diaz Brothers is a winery in Barcelona
– The company would like to expand operations to
the United States and begin distributing its
products in the Chicago area
• If things work out well, the company then will expand
to both coasts. In its business dealings in the Midwest,
how might culture prove to be a communication barrier
for the company’s representatives from Barcelona?
Identify and discuss two examples
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Review and Discuss (continued 5)
• Why is nonverbal communication a barrier to
effective communication? Would this barrier
be greater for Yamamoto Iron & Steel
(question 3) or Diaz Brothers (question 4)?
Defend your answer
• For U.S. companies going abroad for the first
time, which form of nonverbal communication
barrier would be the greatest, kinesics or
proxemics? Why? Defend your answer
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Review and Discuss (continued 6)
• If a company new to the international arena
was negotiating an agreement with a
potential partner in an overseas country, what
basic steps should it be prepared to
implement? Identify and describe them
• Which elements of the negotiation process
should be done with only your group? Which
events should take place with all sides
present? Why?
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Review and Discuss (continued 7)
• An American manager is trying to close a deal
with a Brazilian manager, but has not heard
back from him for quite some time
– The American is getting very nervous that if he
waits too long, he is going to miss out on any
backup options lost while waiting for the Brazilian
• What should the American do? How can the American
tell it is time to drop the deal? Give some signs that
suggest negotiations will go no further
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Review and Discuss (continued 8)
• Wilsten Inc. has been approached by a
Japanese firm that wants exclusive production
and selling rights for one of Wilsten’s new
high-tech products
– What does Wilsten need to know about Japanese
bargaining behaviors to strike the best possible
deal with this company? Identify and describe five
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