Joint venture companies, like marriages, sometimes end in divorce. So it is for PepsiCo Inc and its partner in southwest China's Sichuan province, a bust-up that provides a stark reminder to other firms.
The message to multinationals thinking of leaping into China is that even as WTO regulations take effect, doing business here remains a somewhat precarious and unpredictable affair.
The companies' long-running dispute came to a head last week when PepsiCo formally filed for corporate divorce in a bid to scrap its joint venture company Sichuan Pepsi, and terminate its union with partner Sichuan Yunli.
Since then, angry finger-pointing and mudslinging has ensued with each party claiming both the legal and moral upper hand.
PepsiCo has alleged that for years, its partner committed a series of violations of cooperation contracts and agreements and has "ravaged" cooperation with the group.
In turn, Sichuan Pepsi has dismissed the allegations, describing them as "sheer fabrication", and accused PepsiCo of commercial hegemonism as well as bullying the joint venture into doing what it wanted.
Qu Zhidi, vice general manager of Sichuan Yunli and a director of Sichuan Pepsi, said that his side was still open to negotiating a "friendly solution".
"We hope the cooperation will survive and develop. We hope they [PepsiCo] will come back to the negotiating table and help the joint venture survive," he said at press conference in Beijing on Friday.
But PepsiCo is taking its long-running battle with Sichuan Pepsi to an international arbitration panel in Stockholm to try to end the partnership set up in 1994 and seek damages for breach of contract.
At the heart of the bitter row between the sodapop makers are difficulties common among many multinationals who have set up shop in China since the country began to court foreign investment in the 1980s.
Who controls the new venture is usually the fundamental problem, said Alex Wang, a lawyer at Jones, Day, Reavis and Pogue.
Losing control
"Often the control of the general management goes to the local people because they are culturally more familiar and have the contacts with the local government," he said.
"And what happens is the foreign partner will find itself in the weird position whereby it's supposed to control the company, but the local managers actually control everything without listening to instructions from the foreign company."
This is particularly true when the multinational's joint venture partner is a state owned enterprise.
If the Chinese side of the venture appoints the management, this makes it even more troublesome due to the difficulty of firing local bosses, said Wang.
But disagreements among corporate partners in today's China are not unlike anywhere else in the world, argues Altheimer and Gray's Fraser White.
"The WTO has changed China. And it's a healthy change from the Chinese perspective," he said.
"Increasingly most of my clients are making money."
The previously common argument in China that operations must be carried out in the "Chinese way" no longer holds ground with multinational corporations, White said.
In April this year, as stipulated by its WTO membership, China clarified the types of industries foreign companies are allowed to invest in and relaxed some of the strict rules on joint ventures which previously forced international companies to tie up with a Chinese partner.
While many market-protecting rules remain in place, business experts agree that China's newly-acquired membership to the global trade club will grant foreign firms more commercial latitude when it comes to setting up a business on the mainland.
Some even say that the days of the typical joint venture company are numbered, as foreign firms gain greater and greater autonomy.
"Over the past two to three years there has been a trend of foreign investments without a Chinese partner, and the number of joint ventures founded has been decreasing, said Fudan University professor of economics, Hua Ming.
"This is especially true after China's entry into the WTO," he said, noting that exclusively foreign-owned companies in China would severely challenge inefficient state owned enterprises.
The ease which most international companies can penetrate the Chinese market without a partner as well as WTO regulations has not only created competition, but also forced Chinese companies that can no longer rely on government connections to become competitive, said White.
For PepsiCo, which has expanded aggressively throughout the country, its commercial options remain hampered, however, by legal restrictions which stipulate foreign brand beverage makers must tie their fortunes to a local partner.
According to Yunli, the US drinks group venture made pre-tax profits of 236 million yuan (US$28.8 million) last year, of which PepsiCo received around 46 million yuan.
While a loss-making enterprise is often a primary reason behind corporate breakups, profits do not appear to be the central issue in this acrimonious split.
PepsiCo has said it wants to find a new joint venture partner committed to "observing law and order, mutual trust and transparent decision-making".
"The break-up of a joint venture is not unlike the break-up of a marriage. Companies part because there are fundamental differences in the way they see things or in the direction they want to go," said White.
Professor Hua hinted that PepsiCo's actions signal another trend among multinationals in the country.
"Many years after foreign companies enter into China they will get rid of their domestic partner or find a domestic partner that will listen to their words," he said.
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