DiligenceChina

How will the Danone-Wahaha mess end? Look for the existing Wahaha brand to fade away into obscurity (a new tainted-product / bribes-to-corrupt-official scandal is a good indicator that it’s all over but the whimpering) and for a new player to suddenly arise on the Chinese food industry scene – maybe Danana or Dahana or something similar. (No, I’m not kidding. It will sound VERY familiar to Chinese consumers.) Headed by someone related to Zong Qinghou, the recently retired head of Danone’s China op.

ChinaLawBlog and China Business Blog both cover the issue in excruciatingly painful detail. It’s a horrible story – all the more so because the European leadership at Danone had all the knowledge and resources needed to rescue this situation years ago.

But here at Diligence China we are about the future – not the past. So how can you protect your assets if you still feel the need to enter into a JV or partnership in China? These 5 ideas will help you keep what’s yours as your China business builds. NOTE: Write as many of these points into your contract in as much detail as possible.

1) Have people on the ground. Your OWN people
a. YOUR people – not the Chinese partner’s classmates, relatives, wives, etc. You need to put someone on the ground that can make HR choices that will protect your interests.
b. Senior people. This goes in the contract. You want to be able to choose key people. Forget about operations and marketing. You want HR, Procurement/Purchasing and Finance.
c. Regular visits. You need to make your own top managers regular visitors and have them interact with key departments. Make middle management feel that you are part of the team.
d. If some locals start squealing about the “overseas meddlers”, all the better. Make a record of who complains the loudest, and get rid of them early. You can fire them outright – but for a more “Chinese” approach you can consider making them Director of the new Wulumuqi branch. They can’t sue you for a promotion – and they won’t volunteer for exile.

2) Multiple data flows – Matrix reporting.
a. Their Head of HR reports to your HQ’s HR chief. Same with Finance, Ops, Marketing, Etc.
b. The goal of this is two-fold. First, you are getting regular reporting on local activity. But second, you are opening up new channels of personal interaction between your people and theirs.

3) Key choke points: HR, Finance and Purchasing.
a. Danone could have prevented most of its problems with better C-Level communication – but that’s not where they shot themselves in the foot. The coup de grace will come when Zong & Co. use their carefully laid HR and Purchasing plans to set up a new competitor – seemingly overnight. In fact, they’ve been working on this since 2006 – or earlier.
b. Westerners focus on Marketing and Operations as the key areas for data flows, because this is where the most sensitive information is easiest to measure. In fact, Chinese ops run on HR and Purchasing. That’s were you can get a clearer picture into what’s really happening on the ground. And of course, finance is important too. Look at who your sources for products and services are – that’s how your local managers are building their new ops.

4) Rotate their people through your offices.
a. Every department head or senior manager should be rotating through your head office every year.
b. Consider regular conferences and meetings held outside of China – Macao, HK, Singapore, Hawaii, etc. Anything to get key people off their home turf where your people can build stronger relationships.
c. Wine & dine key middle managers – and drop broad hints about bringing them over to high-profile posts in the US or European branches. There’s an excellent chance that these important staffers don’t have any great love for their Mainland bosses — but they don’t think they have any alternative. If these people think they have a shot at a western career path, they may get a lot more loyal to your interests in a hurry.

5) Shadow leaders – co-opt or get rid of them early.
a. Every Chinese organization will emerge a ‘shadow leader’ that informally controls a wide range of activities.
b. Use them at the beginning – they will organize your operation quickly, effectively and at low costs.
c. Co-opt early or get rid of them. Once they have served their purpose, you need to get them on your team or get rid of them.

Danone left Zong alone for too long. If they had made their move in 2006 when he started stealing from the company, they would have had the best of both worlds – western technology and capital and a grassroots Chinese organization. Instead, they have probably lost everything.

Zong wasn’t working for Danone – he was attending Danone University. Left alone for years and years to learn and plan and organize, the only surprise is that he waited as long as he did before executing his strategy. His new organization will be a case-study in Next Gen Chinese operating structures. It may be one of the new types of hybrid organizations that will be a harbinger of the next phase in Chinese organizational development. But Danone’s blundering mismanagement doesn’t have to be your standard operating procedure.

If you don’t want someone to steal the keys to the castle, don’t leave them lying around unprotected.