Blog: Dean BestDanone's relationship troubles

Dean Best | 25 June 2007

Danone has been in the news over the past week, but one expects it wishes it had not been. The French dairy group’s travails in China and India have brought home once again the risks associated with emerging markets.
 
Such countries may be growth engines for ambitious companies but they are unpredictable places to do business. Some of those uncertainties can be mitigated by joining with a local partner, but that in itself can carry its own risks, as Danone is finding out.
 
On Thursday, it emerged that Danone could be ready to pull out of its biscuit production joint venture with India's Wadia family. Danone wants to produce other brands in India but is bound by a 1995 agreement with the Wadias not to do so without their consent.

Meanwhile, in China, Danone is embroiled in a dispute with the millionaire Zong Qinghou, the company’s partner in the Wahaha drinks operation. Danone is suing Zong who has produced Wahaha-branded drinks outside of the joint venture.

While both stories underline the difficulties of working in emerging markets, one has to feel a little sorry for Danone. On the face of it, working with local partners is an extremely sensible way to approach a developing market, allowing a company to tap into local expertise and share the risk. Danone, unlike some of its more domineering peers, has been very open to the idea of joint ventures and partnerships, which it believes are flexible and allow it to move quickly.

"The group in Asia has chosen a specific development model, based on joint ventures with local partners to grow in a quicker way and reduce investments," said one analyst in the press this week. "This development model carries risk if, after some years, the partnership becomes a conflict."

There is no doubt Danone has benefited from this policy, which has allowed it quick entry to key growth markets. However, it has also left itself vulnerable to the behaviour of its local partners, who may well have a differing view to business ethics and best practice.

Unfortunately, aside from the financial downside of extricating itself from these joint ventures, the company’s reputation for business development can also take a hammering. But that is with the proverbial Honours Degree in hindsight.
 
Looking ahead, after its recent experiences in China and India, Danone could be forgiven for adopting the more controlling tendencies favoured by some of its competitors.


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