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How to Avoid Getting Burned in China and India

The recently concluded Danone (DANOY)-Wahaha feud holds important lessons for any company on how to structure and manage strategic partnerships in markets such as China and India.

In the late 1990s, France's Groupe Danone entered into several joint ventures with Hangzhou-based Wahaha Group to pursue opportunities in China's beverage market. Although Danone held a 51% ownership stake in the JVs, it assigned only a handful of managers to work in them. As a result, its control over and visibility into their operations and finances appear to have been extremely limited. Real control rested with Zong Qinghou, founder and chairman of the Wahaha Group and, by all accounts, a brilliant entrepreneur. The feud surfaced in 2007 when Danone alleged that Zong's independently owned companies had been manufacturing the same products with the same trademarks as the JVs, selling them through the latter's sales and distribution channels. The dispute ended in October 2009 when Danone agreed to sell its stake to Wahaha at a 21% discount to the book value.

In emerging markets such as China and India, regulatory requirements and lack of local knowhow often compel companies to work with local partners without the ability to hold complete or even a dominant ownership stake in the local operations. Thus, the question is not whether Danone should have entered into the JVs in the first place. Rather, the relevant question is whether Danone could have been smarter at structuring and managing its partnership with Wahaha.

Cases: GM in China, Wal-Mart in India

Danone's is hardly an isolated case. Consider General Motors in China. Chinese government policy prohibits foreign companies from owning more than 50% of the equity in any vehicle assembly operation in China. Consequently, GM operates in China through multiple joint ventures, all of them with one or more units of Shanghai Automotive Industry Corp. (600104:CH)—one of China's largest auto companies with publicly stated global ambitions. GM's ownership stake in each of these operations is 50% or less. In every one of these ventures, SAIC has an equal or greater ownership stake. Importantly, more than half of what GM reports as its auto sales in China comes from one entity, SAIC GM Wuling Automotive, a joint venture in which SAIC is the majority owner.

Given these ground-level realities, might it be that it is SAIC which sits in the driver's seat when it comes to the two companies' strategic partnerships in China? It is hardly a surprise that, in December 2009, SAIC and GM agreed to a transformation of the ownership structure for Shanghai General Motors, the main joint venture between the two companies, from a 50-50 share to a 51-49 share with SAIC becoming the majority owner.

Consider also the case of Wal-Mart (WMT) in India. Indian government regulations do not permit foreign multibrand retailers to hold any equity stake in a retail operation in the country. There is no such restriction on wholesale operations, though. Consequently, Wal-Mart operates in India via two strategic alliances with Bharti Enterprises, one of India's leading business groups. One of these, Bharti Wal-Mart Private Limited, is a 50:50 JV that opened its first wholesale cash-and-carry outlet (branded "Best Price Modern Wholesale") in northern India in May 2009. The second is a contractual collaboration whereby Wal-Mart provides retail technology and knowhow to Bharti's own retail stores. Given Bharti's publicly stated ambition to become one of India's big retailers, it is difficult to rule out the possibility of a strategic conflict between the two companies at some point in the future.

Regions : Asia

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