China Joint Venture Lessons
The China Economic Review recently featured an article by Steve Dickinson [a former China lawyer with our law firm, who retired in 2021] on the Danone-Wahaha dispute, an outgrowth of a presentation he gave at JP Morgan on China joint ventures. The article, titled Danone v. Wahaha: The lessons to be learned from the tensions within China’s largest beverage joint venture. offers key takeaways for anyone doing business in China.
The article opens by pointing out that Danone’s violations of “many of the most important rules” for doing business in China made its eventual problems all but inevitable.
It then provides a clear and detailed factual background of the dispute:
Joint Venture Formation
The Wahaha joint venture (JV) was established in February 1996. Initially, the three participants were:
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Hangzhou Wahaha Food Group (Wahaha Group), led by Chairman Zong Qinghou
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Danone Group, a French corporation
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Bai Fu Qin, a Hong Kong corporation (Baifu)
Danone and Baifu did not invest directly into the JV. Instead, they formed Jin Jia Investment, a Singapore entity (Jinjia), which held 51% of the JV shares, while Wahaha Group held 49%.
This structure led to immediate confusion. Wahaha believed that with 49% ownership and the Danone/Baifu interest split 25.5% each, it effectively controlled the JV. Confident in its control, Wahaha transferred its trademark to the JV.
In 1998, Danone acquired Baifu’s share in Jinjia, becoming its sole owner—and with it, the 51% stake in the JV. This shift gave Danone legal control of the JV via the right to appoint the board of directors. Only then did Wahaha and Zong realize they had:
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Given up control of their trademark
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Lost control of the JV to a foreign entity
Though the JV structure always implied this result, Wahaha’s public statements reveal they did not grasp the implications. Danone’s 1998 move caused lasting resentment, with Wahaha believing Danone had misled them from the outset.
Wahaha Group becomes a private company
When the JV was formed, Wahaha Group was a state-owned enterprise (SOE) under the Hangzhou City government. Afterward, it was privatized and came under Zong’s control.
This change fundamentally altered Wahaha’s view of the trademark. It was no longer a state-owned asset—it was now seen as Zong’s personal property. That perception drove efforts to regain control of the trademark from Danone.
Failed transfer of the Wahaha China trademark
Wahaha’s contribution to the JV was its trademark, which it had appraised at RMB100 million (US$13.2 million), while Jinjia contributed RMB500 million (US$66.1 million) in cash. Wahaha also agreed not to use the trademark independently or allow others to do so.
But the Trademark Office rejected the transfer, asserting that the trademark—being a well-known mark of an SOE—belonged to the state and couldn’t be transferred to a private entity.
Instead of terminating the JV, the parties signed an exclusive trademark license agreement in May 1999. To avoid registration issues, they filed only an abbreviated version with the Trademark Office, omitting key terms. As a result, Wahaha never legally transferred ownership—just the exclusive license—leaving the JV undercapitalized and structurally flawed.
Management of the JV and creation of competing non-JV companies
Although Danone had majority ownership and board control, day-to-day operations were delegated entirely to Zong. He staffed the JV with his family and Wahaha Group personnel and ran it as his own company. Under his leadership, the JV became China’s top bottled water and beverage company, with a 15% market share.
Starting in 2000, Zong and Wahaha Group established separate companies selling the same products under the Wahaha trademark. These non-JV companies were partially owned by Wahaha and by a BVI entity controlled by Zong’s wife and daughter. Danone received no benefit from these ventures.
Chinese media reported that sales personnel sold both JV and non-JV products, with profits allocated between the two groups by Zong. These actions violated both the JV agreement and trademark license. Danone became aware in 2005 and demanded 51% ownership of the non-JV companies. Zong and Wahaha refused.
Arbitration and Lawsuits
Legal disputes followed:
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May 9, 2007: Danone initiated arbitration in Stockholm (per the JV agreement), naming Wahaha Group, the non-JV companies, and Zong as defendants, and seeking to stop violations of the JV agreement and trademark license.
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June 4, 2007: Danone sued in California state court, targeting Ever Maple Trading (a BVI company), Zong’s daughter (Kelly), his wife, and other affiliated Chinese companies. Danone asked the court to prohibit use of the Wahaha trademark in China. Following this, Zong resigned as JV chairman.
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June 13, 2007: Wahaha initiated arbitration in Hangzhou, seeking to void the trademark licenses on the grounds that they were illegal attempts to evade Chinese law.
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July 2, 2007: Wahaha threatened a derivative suit against Danone-appointed JV directors for alleged violations of Chinese Company Law. It also threatened to countersue Danone
Four Key Lessons from the JV Dispute
Steve Dickinson’s article outlines four main lessons:
1. Do not rely on technical legal structures to assert control
A Chinese JV partner must explicitly understand and agree to any structure that gives the foreign party control. If the Chinese side feels tricked into surrendering rights, they will try to undo the arrangement, as Wahaha did.
2. A 51% ownership stake rarely guarantees control
In China, a 51/49 split is seen as little different from 50/50. True control usually comes from a 60/40 or 70/30 split. Moreover, control of the board is insufficient. Real power lies with the managing director and general manager. Foreign partners must ensure control over these roles if they intend to steer the JV.
3. Do not proceed with a JV built on shaky legal ground
The JV’s foundation—the trademark transfer—was rejected, yet the parties pressed on via a legally questionable license. Foreign parties often fail to enforce their rights in such arrangements because Chinese courts will not uphold illegal or semi-legal contracts.
In this case, Wahaha and Zong are leveraging the potential illegality of the trademark license as a strategic weapon. Even if the legal argument is weak, it has proven highly effective against Danone. These kinds of risks must be avoided.
4. Foreign partners must engage in day-to-day management
Danone left management to Zong, resulting in two predictable problems:
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Resentment from Wahaha, who felt they did all the work while Danone reaped the benefits
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Unsupervised manipulation of the JV for personal gain—most notably, the creation of competing companies
Foreign companies must embed at least one senior manager within the JV to prevent marginalization. Otherwise, they are viewed as absentee exploiters of Chinese labor.
In Wahaha’s case, Danone never integrated itself into the JV. JV personnel viewed themselves as working for Zong. He successfully exploited this nationalist sentiment, even when doing so only served his and his family’s interests.
Final Thoughts on Joint Ventures
I must emphasize the danger of proceeding “with a JV formed on a weak or uncertain legal basis.” My law firm has been consulted countless times by Western companies seeking relief for their joint venture problems only to find that the legal grounds for action are weak or nonexistent. In many cases, the root cause was the Western party mistakenly believing it controlled the venture.
Often, the better choice is to do business in China alone. but whatever the approach, be cautious.
July 19, 2025 Update
Though this dispute began nearly two decades ago, the Danone-Wahaha case remains a textbook example of what can go wrong—and how to avoid JV disasters in China.
