Wahaha vs. Danone: A Failed Economic Nationalist and a Lame French Predator

The investigation into Wahaha Chairman’s, Zong Qinghou, 300 million Yuan tax evasion has affected the ongoing talks to resolve the equity dispute between Wahaha and Danone. The negotiations have now come to a stalemate and both parties are now more willing than ever to simply end their relationship.

It was reported to China’s tax authority last August that Zong Qinghou had kept secret a large part of his domestic and overseas income; it was also revealed that he hadn’t declared his personal tax truthfully. The State Administration of Taxation soon pressed the Hangzhou local Taxation Bureau to conduct an investigation and the case was put on record in November 2007.

The investigation discovered that Zong Qinghou evaded tax on the income he derived from payments made during Wahaha’s cooperation with Danone. According to the files provided by Danone, from the time the two companies started the joint venture in 1996, up until 2006, Danone paid a total of $71 million to Zong Qinghou as service fees, incentive shares in overseas subsidiary and stock repurchase.

Following Zong’s demands, these funds were deposited into his own, as well as his wife’s, his daughter’s and Ms. Du Jianying’s, the former party secretary of the Wahaha Group, Hong Kong bank accounts. More than $50 million was deposited in Zong’s bank account while the other $20 million was deposited into the other’s accounts. Zong Qinghou did not pay any tax in mainland China, Hong Kong, or Singapore, where Danone’s implicated branch is located.

China’s tax department has not initiated any lawsuits against this popular Chinese entrepreneur. There are discussions inside the tax department about the amount owed by the Chairman. Zong paid more than 200 million Yuan to the department after the investigation was launched. This brought the amount owed by Zong down to a few million Yuan instead of the nearly 300 Million Yuan he initially owed.

In order go gain sympathy from the public in the dispute with Danone, a French giant, Zong Qinghou once sought to emphasize Wahaha’s identity as a local Chinese enterprise, but the revelation that he was involved in tax evasion has since got him into trouble. China is now emphasizing the need for corporate responsibility and one of the basic requirements for responsible business is regular tax payment. Zong Qinghou has quite obviously failed to meet this criterion.     

Some media have raised the prospect that Danone might have been the source of the information that led to the discovery of Zong’s tax evasion. Negotiations between the two parties have been restored after governments from both countries intervened in the dispute, but the negotiations have not been very satisfying.

On December 20^th 2007, Wahaha and Danone officially declared a cease fire, and agreed on a two-month negotiation period, February 20^th being the last day. However, since no agreement had been reached by this date, both parties agreed on a one month extension. Once again, no agreement had been reached by March 20^th and both parties agreed to extend the negotiation period by another three weeks thus making April 10^th the deadline.

By April 10^th, Wahaha and Danone had not reached any compromise, nor had they signed any agreements extending the cease-fire.

Speaking to Caijing magazine, a Danone spokesman said that Danone was willing to solve this problem by selling its shares in the Danone-Wahaha joint venture, but the key issue lies in the price.

The two parties considered three possible solutions: combining the joint venture with Wahaha’s other subsidiaries and getting listed; Danone quits from the joint venture by selling its shares to Wahaha; Zong Qinghou quits the joint venture by selling his shares to Danone.

However, none of these solutions was deemed acceptable to both parties, and the negotiations ended with no agreement. Compared with Wahaha, Danone is in more of a hurry to resolve this problem and get on with its development in China. The French company has made a lot of money in China, but it has also encountered a host of difficulties.

After its frustrating experience in the Danone-Wahaha joint ventures, Danone, which entered the Chinese market more than 10 years ago, sought to cooperate with Meng Niu, a dairy product maker based in Inner Mongolia, to produce and market yoghurt. The plan was not approved by the Chinese government and Danone is now attempting to purchase Miaoshi, a small dairy product maker in Beijing, with hopes of resuming independent production  

Danone’s complete break with Wahaha seems unavoidable. Caijing reported that Zong Qinghou paid a commission to a famous investment bank for the evaluation of his companies. It is still not clear whether this is in preparation for a future sell or listing plans.