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By Wang Zhenghua (China Daily)
Updated: 2007-11-12 16:41

In 1996 when Hangzhou Wahaha Group paired up with France's Groupe Danone SA and Hong Kong investment bank Peregrine, it seemed a perfect match.

The tie-up has helped grow Wahaha into China's largest domestic beverage maker and one of the best known brands.

Yet when Danone began efforts to buy out its partner, the marriage turned sour and their public spats became perhaps the most unpleasant between a Chinese company and a foreign firm in recent years.

Danone accused Hangzhou Wahaha founder Zong Qinghou of using the Wahaha brand name for years to develop his own businesses without the consent of Danone, which has a 51 percent stake in the joint venture.

Under the partnership agreement made in 1996, the trademark rights of Wahaha were transferred to the joint venture in which Hangzhou Wahaha holds the remaining 49 percent.

Danone has been pressuring Zong to buy a 49 percent stake in the side ventures for 4 billion yuan, which Zong claims have total assets of 5.6 billion yuan (US$751.7 million) and profit of 1.04 billion yuan in 2006.

Given such numbers, Zong deemed it a malicious takeover bid. He went even so far as describing the proposal as bullying and even tantamount to the invasion of Beijing by eight colonial powers a century ago.

The battle has sparked a backlash against Danone in the public and media. Calls since then have been growing for protection of domestic brands and a curb on possible monopolies brought by foreign mergers and acquisitions (M&As).

Danone has bought into a number of Chinese firms, including China Mengniu Dairy Co as well as Beijing Huiyuan Beverage &Food Group and Shanghai's Bright Dairy.

In 1996, Danone jointly took a 51 percent stake with Peregrine in Wahaha and later took over the latter's shares.

While Danone and Wahaha are still wrangling in a number of courts and arbitration boards in and out of China, it is already a battle with no winners.

Danone last month posted its weakest third-quarter results in six years, partly because of the dispute in China.

Wahaha is now forced to play down its brand, ranked as No 3 on the list of "Top 50 Most Valuable Privately-held Chinese Brands" in the Hurun Report released in May.

For one of the new batch of Wahaha's diversified products sold in Shanghai, Wahaha U-Yo Milk Coffee, the firm replaced the original logo with "Qili". The producer was a new company rather than the Wahaha Group.

Sources said more products will be branded with the new logo.

Earlier the company released new beverage products under the name of Nutri-Express Drink and Wahaha Smoothie.

The wrangle with Danone could be a wake-up call for Chinese companies in creating and protecting brand value.

Many Chinese companies are seen to be ceding control of their brand names to joint venture partners in order to gain fresh capital, economies of scale, management expertise and, eventually, market share.

In the dispute between Wahaha and Danone, Wahaha was barred from making products that compete with those produced by joint ventures, or using the well-known Wahaha brand without Danone's consent.

Some industry observers now are worried some leading domestic brands will be submerged in the surging wave of foreign M&As in China.

Shan Dong, director of Zhejiang Private Economy Research Center, says the M&As "do not necessarily produce a 'win-win' situation".

Some foreign companies can expand their own brand awareness "without barriers" after acquiring local brands, he wrote in a recent article.

And some can even simply let the acquired brands die to make way for the foreign brands, he added.

Shan urges Chinese companies to pay attention to brands during the negotiations for M&As and increase the bargaining power.

"The intangible brand value is always ignored or underestimated. And in some cases, brand is deemed worthless when all the equity is transferred," he wrote.