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Joint ventures in China proving a bit of a gamble

Rogue companies. Secret profits. Legal threats. Allegations of "evil deeds" and "tyranny."

It may sound like an overwrought corporate thriller, but all are elements in a dispute between French firm Danone and its Chinese partner which has underlined the lingering risks of doing business in China.

The case has seen a successful Sino-foreign joint venture devolve into a catfight of charges and recriminations. For many, it's a cautionary tale about getting into bed with a Chinese partner.

"In my mind, there is no reason to have a [Chinese] partner anymore," said Mic Mittasch, an Australian who was involved in joint ventures but now runs a wholly foreign-owned business here creating production lines for manufacturing firms.

"A lot of firms that have them are now looking to cut down on the partner's influence," he said.

The French firm, maker of Danone yogurt and Evian water, is now trying to do just that with its estranged partner Hangzhou Wahaha Group Co (杭州娃哈哈集團), China's biggest drinks company.

Since joining forces in 1996, Danone has injected tens of millions of dollars to gain access to Wahaha's China distribution network in a venture run by Zong Qinghou (宗慶後), one of China's most successful businessmen.

But Danone this month filed a suit in the US accusing Zong of setting up dozens of rogue companies that sold the joint venture's drinks, but with none of those profits going to the French firm.

Danone said the underhand dealings have cost it US$100 million.

Zong has since resigned, but not without fighting back with accusations that Danone was attempting a "hostile takeover" of their various joint-venture companies.

His loyalists in the company vowed to resist Danone's control with increasingly angry rhetoric, including allegations of "evil deeds," quotes from Chinese revolutionary leader Mao Zedong (毛澤東) and protests from Chinese staff.

The case seems ripped from the pages of the 2002 book Mr. China, a frequently hilarious real-life business memoir by Tim Clissold, a representative in 1990s China for the Wall Street investment fund Asimco.

The book recounts Clissold's battles with a long list of duplicitous Chinese partners who used Asimco's money to build rogue factories making competing products or to pay off debts.

Clissold and his team eventually lost hundreds of millions of dollars. But other Western companies in China today continue to experience such problems.

"With our Chinese partner, if you gave them a finger, they would take the whole arm," said Anders Maltesen, general manager of Tianjin Alstom Hydro Co, which makes turbines for China's massive Three Gorges hydroelectric project.

Alstom, the French engineering group, has steadily bought out its Chinese partner since the venture was formed in 1995 due to repeated squabbling, he said.

"In China, a signature on a contract is often viewed as merely the start of negotiations," he said.

Zong threatened on Thursday to pull out of the venture and sue his estranged partner, while the new Danone-appointed chairman has vowed to stand firm while leaving the door open to a settlement.

Whatever the outcome, experts say the affair underlines the risks of joint ventures.
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