TMTPOST -- The death of rags-to-riches billionaire Zong Qinghou triggered a nation-wide mourning of the founder of China’s leading beverage company Wahaha and the end of an era when people from humble beginnings had a chance to get rich. Meanwhile, his only kid Zong Fuli was also thrust into the spotlight. Will Zong Fuli, who has long been groomed as his successor, take over her father’s beverage empire? Many netizens were wondering back in February.

Now it is certain that the daughter has been ousted from the leadership team. Zong Fuli, the Deputy Chair and General Manager of the beverage company, handed over her resignation letter on July 15 due to some shareholders’ dispute over the legal basis of her de facto managerial leadership.

Actually her ousting had been predetermined upon her father’s victory in a war against French company Danone, the then majority shareholder of the Wahaha-Danone joint venture (JV), in September 2009 over the trademark of Wahaha and other issues. If Danone had not exited the JV, Wahaha’s internal governance would have been much more predictable and its global market share would not lag far behind that of Nongfu Spring.

And Zong Fuli would not have to solve an even bigger problem, i.e. Hongsheng Beverage, that was once at the core of a series of legal battles.

Today’s young people may not have a clue about the lengthy legal battles that prompted the presidents of China and France to ask each party to find an amicable solution. The legal proceedings involved nearly 100 lawsuits and arbitrations. I was one of few investigative journalists that covered it from the beginning to the end. I was the first Chinese journalist to report the award from Sweden Chamber of Commerce. During the period of about three years, I also learned a lot about commerce and human nature. 

Their legal dispute first emerged in April 2007 when Danone publicly accused Wahaha of setting up parallel businesses outside their joint venture, which also used the Wahaha trademark.   Wahaha, founded in 1993,had a humble beginning as a small school-affiliated factory. Later,  Shangcheng District State-owned Assets Supervision and Administration Commission in Hangzhou city, where Jack Ma’s Alibaba Group is headquartered, became the largest shareholder with a 46% stake. In 1996, Danone contributed 45 million U.S. dollars to form a joint venture with Wahaha, with Danone and a Hong Kong-based company holding a combined 51% of the JV. Danone also paid 50 million dollars to Wahaha Group for acquiring the Wahaha trademark.  

However, China’s trademark authorities did not approve the transfer of the trademark. Thus the two parties signed a supplementary agreement, which is that Wahaha Group will authorize the "Wahaha" brand to a series of joint ventures exclusively for a long term. There are also non-compete provisions in the joint venture agreement for Zong Qinghou and others. Later, Danone invested more in the JVs thanks to rapid expansion of the JV in the China market and capital needs. According to the official data of Wahaha in 2005, the total investment from Danone reached about 120 million US dollars.   

The amount may not seem very large today, but in the late 1990s when China’s economy was booming, with such funds in a war chest, the advantage of Wahaha as a first-mover was self-evident.  Wahaha's advertisements were everywhere, and it became a household brand. Of course, Zong Qinghou as the founder of the company also played a decisive role. 

Through the creation of the joint ventures, Zong Qinghou had an opportunity for the "Wahaha" brand to transform from a school-affiliated collective enterprise, with a complex equity structure, to a global enterprise with modern governance. There was also an opportunity to go beyond China and become a world-renowned brand.

But Zong Qinghou chose another path. He created a large number of Wahaha series "joint ventures" unrelated to Danone. Based on preliminary statistics, the series included 87 companies in many places across China, the most important of which were the Hongsheng Beverage series controlled by Zong Fuli and her mother Shi Youzhen. In terms of sales channels and brand use, they were mirroring Wahaha-Danone joint ventures, and the business expansion speed were even faster than that of joint ventures. This was the result of Danone's investigation in 2006, which shocked Danone and the international media. After Danone’s effort to spend 4 billion yuan to "acquire 51%" of the parallel enterprises failed, both parties went to court, and various lawsuits were initiated at home and abroad.

Then, Zong Qinghou began an ideological and public opinion war with Danone in the name of the nation. Zong Qinghou claimed that the exclusive trademark license and non-compete provisions it signed between Danone were a "contract trap" and Wahaha, a national brand, was a victim of a frame-up. Danone insisted that this was a normal investment business contract, and it was Zong Qinghou who lacked respect of the contract.

In March 2007, Zong Qinghou sent a fax to Danone, saying: “The Chinese people have now stood up, and it is no longer the era when the Eight-Nation Alliance invaded China. Your continuous use of a threatening and intimidating tone in speaking with us only increases our indignation.”

On the surface, this appears to be a commercial interest dispute, but in reality, it also has profound conflicts when it comes to their understanding and values of modern commerce.

The legal battle between the two sides was lengthy and protracted. Danone found themselves caught in the nationalism of the Chinese people and the difficulty of the lawsuit. Eventually, they became disheartened and decided to sell their shares to their Chinese partners for a settlement, at a price of 300 million euros, exiting the joint venture. Shortly after, Danone also chose to completely withdraw from the Chinese market. 

I clearly recall that at that time Zong Qinghou publicly stated that he was in talks with the Hangzhou Municipal Commission of State-owned Assets Supervision and Administration (Hangzhou SASA) about the exit of the 46% stake it held in Wahaha Group. Zong Qinghou said that the issue of the state-owned assets' withdrawal was not very difficult.  It was just temporarily delayed due to the dispute with Danone. At that time, Hangzhou SASA did  stand on Zong Qinghou's side, successfully facilitating Danone's exit. 

However, even five or six years after Danone’s exit, Zong Qinghou still had not resolved the issue of letting state-owned shares exit. I once had a discussion with a management insider at Wahaha, who believed that it was much more difficult to let state-owned assets withdraw than foreign capital. If the joint venture had completed the transfer of the Wahaha brand at that time, since Danone hardly cared about the management of the company and only cared about financial performances, with Zong Qinghou's control over the company, it would be quite possible to negotiate with Danone to transfer some shares at the right time, so that Zong Qinghou could achieve control of the company.  But to let the state-owned assets withdraw and let the Zong family take control, he judged that it was already impossible.

His words turned out to be prophetic. Until Zong Qinghou's passing, this issue was still not resolved.  It complicated Zong Fuli's successorship. To make it worse, it also put a question mark to whether the series of companies outside the group controlled by Zong Fuli, such as Hongsheng Beverage, have infringed upon the interests of the state-owned shareholder of Wahaha Group.

However, the nature of the defense from the initial allegations of infringing upon the interests of foreign capital like Danone, to the current allegations of infringing upon state-owned interests, is completely different. For Zong Fuli, this is likely to be a more difficult situation to resolve than the initial one.

When Zong Qinghou used state-owned assets as a backing to drive Danone away, he completely lost the opportunity to truly and completely control Wahaha. In addition, during Zong Qinghou's lifetime, whether Zong Fuli had the ability to take over Wahaha Group was also a matter of much internal dispute. As it was difficult for Zong Qinghou to fulfill this wish while he was alive, it will only be more difficult after his passing.

The repercussions of the Wahaha versus Danone legal and media war still linger today. It has become a microcosm and an important lesson in the process of corporate reform and development in China.