Danone's long-running and increasingly bitter dispute with its Chinese partner, Wahaha, is likely to have an “unfavourable impact” on future sales of the French food group.

Rumours emerged in the stock market last week that Danone had briefed analysts, asking them take the negative impact of the legal dispute with Wahaha into account in their earnings forecasts. In the new spirit of glasnost that now governs these analyst briefings, the French company has promptly disclosed what was said.

For those who haven't been following the case, Danone filed a lawsuit in California this year accusing it Chinese JV partner of breach of contract by using the Wahaha brand on products sold outside their joint ventures.

The Chinese company, for its part, wants to terminate the 10-year-old agreement between the two companies that saw the Wahaha trademark transferred to Danone and made Wahaha the leading brand of bottled water in China. But the Chinese company believes it got the short end of the stick in the deal and is now at a great disadvantage.

For good measure, Zong Qinghou, the founder of the company, also accuses the French giant of not understanding the Chinese market — see this EngagingChina story for more.

In the most recent development, Danone has managed to oust Zong from the chairman's chair at the JV and replaced him with a Danone executive.

In an ideal world, the two companies would have gone their separate ways long ago. But Danone wants to continue selling water under the market-leading Wahaha brand and it needs Wahaha's sales and distribution network in China, even if that network is also used to sell rival products — which is what Danone alleges is already happening.

Wahaha, meanwhile, sees the JV as a straight-jacket and has decided the only way to break free of it is to create so much bad publicity that the French company will choose to sue for peace.

There are painful lessons to be learnt here for all western companies contemplating or already operating JVs in China.


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