Hangzhou Wahaha Group

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This article refers to the Chinese holding company. For the Sino-French joint venture, please see Wahaha
Hangzhou Wahaha Group Ltd.
Type Privately held company
Founded 1988
Headquarters Hangzhou, China
Key people Zong Qinghou, Chairman & CEO
Industry Food
Products Dairy products, water, Soft drinks
Revenue RMB 15.2 billion (2005)[1]
Operating income RMB 3.2 billion (2006)
Employees 20,000
Website en.wahaha.com.cn

The Hangzhou Wahaha Group (杭州娃哈哈集团有限公司) ("WHH") is a private group of companies, and the largest beverage producer in China.[2] The company is headquartered in Hangzhou, Zhejiang province. "Wa ha ha" signifies "laughing child".

Wahaha has roughly 70 subsidiary companies and 40 manufacturing bases scattered throughout China. Wahaha employs about 10,000 staff[3].

The company was originally a local government owned sales company founded in 1987-8. For most of the time since creation, it has been run by Zong Qinghou (宗慶後), who exercises operational control over the day to day operations.

Contents

[edit] Products and distribution

Wahaha branded products include milk drinks (19%), soft drinks, bottled water (43%), bottled tea (19%), fruit juice (13%), porridges and its flagship yoghurt beverages (7%)[1].

Its largest facility is located in Hangzhou's Xiasha Economic and Technological Development Zone, where one-third of the company's production occurs[3].

Wahaha dealers help them with management and marketing and advertises nationally. The company has 35 provincial sales offices, 2,500 sales team employees, Its distribution is truly nation-wide. Wahaha is one of 3 brands which has few distribution gaps in rural China, with more than 2 million sales outlets across the country[3]. Distributors are responsible for capital, storage, and delivery. The company maintains two grades of distributors: more than 1,500 first-level dealers that need to meet distribution targets and manage large networks and capital; and 12,000 second-level dealers that deal at smaller levels[3]. Distributors' franchise areas are strictly delimited to ensure no poaching between areas, and are guaranteed by forfeitable deposits lodged with Wahaha.

The distribution has given "Future Cola" a close third in national market share through its domination of rural China, its tertiary and secondary cities. According to PRC government statistics, Coca Cola held a 24 percent market share in 2003[3], whilst Future Cola's market share is 70% of that of Pepsi.

Its products are also available in major Chinatowns.

[edit] History

Wahaha had its origins as the sales department of the Shangcheng District School in Hangzhou, created in 1987. The factory, the "Hangzhou Wahaha Nutritional Foods Factory" (杭州娃哈哈營養食品廠), was created in 1989 to tap a niche in the market for a "children's liquid nutrient" 兒童營養口服液[4]. Although there were 38 producers of liquid nutrients on the market, none were specifically for children. The advertising campaign struck a note with single child Chinese parents, and was a runaway success[4]. In 1991, the factory was merged with the ailing "Hangzhou Canned Food Factory" (杭州罐头食品厂) in a social restructuring, but which increased the overheads of the business[5].

In May 1992, Wahaha raised CNY236 million internally in order to start the Hangzhou Wahaha Food City Co. Ltd. (杭州娃哈哈美食城股份有限公司), and to finance the construction of Wahaha Food City, in Hangzhou[5]. Due to inexperience in project management, cashflow became a problem, as construction was delayed for 6 years[5]. This company holds the interests of the employees' union. It changed its name to ZHI at an EGM in August 2001.

During the period from 1992 to 1994, WHH would shift the company away from health drinks to other products. It was to launch a sour plum drink, alcoholic beverages, pseudo-medicinal potions, but these would successively fail[5].

In 1994, the company took over three insolvent companies in Sichuan, and set up its first factory in Chongqing. A local manufacturing base enabled the company to reduce distribution costs to western China[3]. Once talks had started with Danone, capital became available once again for the company. WHH launched Wahaha Pure Water and struck gold with it[5]. Over the next three years, WHH would acquire 40 more companies in 22 different provincial cities, transforming it into one of the largest beverage companies in China.

[edit] Joint ventures

Main article: Wahaha

In 1995, Peregrine Investments Holdings introduced Zong to Danone, and discussions about joint ventures began. The Wahaha trademark was assigned to the main joint venture vehicle on February 29, 1996, and a joint venture agreement was eventually signed on March 28, 1996[5].

The "foreign partners" took 51%, while the "Chinese partners" held 49% (of which WHH holds 39% and employees own 10%)[5]. Groupe Danone and Peregrine together invested US$70 million in return for the stake in five joint venture WHH companies[2] with the exclusive rights of production, distribution and sales of products under the Wahaha brand.[6] When Peregrine collapsed in 1998, Groupe DANONE acquired its stake in the JVs, and became majority owner.

The business had grown into 39 joint venture entities by 2007,[7] and the total injected capital amounts to USD131 million[5].

Since April 2007, Wahaha has been engaged in a public dispute with Danone, its JV partner. Danone has accused Zong of selling identical products using the Wahaha brand outside of the joint ventures, and demands a 51% stake in these[7]. The matter is ongoing.

[edit] Going it alone

Since the dispute began, Wahaha has launched products under different brands. Earlier the company released new beverage products under the name of Nutri-Express Drink and Wahaha Smoothie. U-Yo Milk Coffee has now been launched with a "Qili" logo. The producer was a new company rather than the Wahaha Group. More products are likely to be rebranded with the new logo.[8]

[edit] Ownership structure

[edit] Holding company

The Hangzhou Wahaha Group Co. Ltd. is 29.4% owned Zong, 26.4% by the employees and management as represented by Zhejiang Wahaha Industries Joint-stock Co. ("ZHI") (浙江娃哈哈实业股份有限公司), and 46% by Shangcheng District Government[5]. Zong's shares are controlled by British Virgin Islands registered Ever Maple Trading Ltd. (恒枫) through Hangzhou Hongsheng Beverage Co Ltd (杭州娃哈哈广盛投资公司)[9]. Ever Maple's legal representative is Zong's daughter Zong Fuli.[10]

[edit] Joint-venture companies

The Group holds a 39% of stake in 39 joint ventures, ZHI holds 10%, and the French company Danone holds 51%.

[edit] Other "Wahaha companies"

Whilst the group has many subsidiaries, both local and foreign registered, there are also a number of entities which are essentially private companies owned or controlled by Zong. These companies are the subject of the dispute with the foreign partner. At the end of 2006, total non-joint venture companies reportedly had equity of ¥5.6 billion and profits of ¥1.04 billion. In December, Zong had agreed to sell these to Danone for ¥4 billion.[11]

The Hangzhou Wahaha Guangsheng Investment Co. (杭州娃哈哈广盛投资有限公司) ("GUANGSHENG") established in 2003 with registered capital of ¥50 million, is a key non-JV entity. Its shares were held by Zong and the union in a ratio of 60:40. Its capital was later increased to ¥80 million. The following companies, inter alia, were it's subsidiaries or associates, with holdings ranging from 39 to 60 percent :[12]

  • Hangzhou Wahaha Children's Clothing Co. 杭州娃哈哈童装有限公司, est. 2002
  • Changsha Wahaha Beverages Co. 长沙娃哈哈饮料有限公司
  • Harbin Shuangcheng Wahaha Foods Co. 哈尔滨双城娃哈哈食品有限公司
  • Jian Wahaha Beverages Co. 吉安娃哈哈饮料公司

The shares of Hangzhou Wahaha Children's Clothing Co. (杭州娃哈哈童装有限公司) founded in 2002, were initially held by Guangsheng, but were transferred out in August 2003, in an "interesting series of share transfers". It is now 65% owned by Zong, 10% by his wife, and 25% by Platinum Net Ltd.[12]

The Hangzhou Wahaha Food and Beverage Sales Co. (杭州娃哈哈食品饮料营销有限公司) "WHHFBSC", registered on December 19, 2006, is an external company allegedly now the centre of a parallel distribution network.[10] 10% of its share capital is held by Zong's wife, Shi Youzhen, and 90% by Ever Maple Trading Ltd. [10]

Zong set up non-jv owned factories, such as the Hangzhou Xiushan Shunfa Packaging Co. (杭州萧山顺发食品包装公司),[10] to manufacture or pack products identical to WHH. Danone alleges that distributors were asked to set up new bank accounts for their deposit payments in the name of WHHFBSC to sell products from these factories.[13]

[edit] Offshore companies

These offshore companies have been reported as being subsidiaries of the Wahaha Group, and have been seized in their respective domiciles[14] :

British Virgin Islands : Golden Dynasty Enterprise Ltd, Gold Factory Developments Ltd, Platinum Net Ltd, Sunworld Enterprises Ltd, Great Base International Ltd, Bountiful Gold Trading Ltd and Wintell Enterprises Ltd.

Samoa : Mega Source Investments Ltd and Honour Bright Investments Ltd

[edit] References

  1. ^ a b James T. Areddy & Deborah Ball, "Danone's China Strategy Is Set Back", Wall Street Journal, Page A10, June 15, 2007
  2. ^ a b ""Danone set to sue Wahaha over breach of contract"", South China Morning Post, April 11, 2007, p. B3. 
  3. ^ a b c d e f Paula M. Miller, "The Chinese beverage company's expansion is no laughing matter"
  4. ^ a b “娃哈哈”的新童話(轉載自証券日報) People's Daily, (Chinese)
  5. ^ a b c d e f g h i Liu Hua, 宗庆后反控达能路径调查, 21st Century Economics, April 12, 2007 (Chinese)
  6. ^ Danone Group (April 10, 2007). ""Groupe DANONE confirms being in negotiations with its Chinese partner in beverages, Mr. Zong"". Press release.
  7. ^ a b ""Danone and Wahaha vie for the last laugh"", South China Morning Post, June 11, 2007, p. B3. 
  8. ^ Wang Zhenghua, Family feud between Danone and Wahaha, China Daily, November 12, 2007
  9. ^ Xinhua, "Wahaha says its arbitration application accepted over trademark dispute with Danone", June 18, 2007
  10. ^ a b c d 商标权之争 (trademark dispute) "Wahaha - atypical commercial dispute", Caijing Issue 185, May 14, 2007 (Chinese)
  11. ^ 另一张底牌(another hidden card)"Wahaha - atypical commercial dispute", Caijing Issue 185, May 14, 2007 (Chinese)
  12. ^ a b 谁拥有娃哈哈？(who owns wahaha?)"Wahaha - atypical commercial dispute", Caijing Issue 185, May 14, 2007 (Chinese)
  13. ^ 达能：调查开始了(Danone investigation begins) "Wahaha - atypical commercial dispute", Caijing Issue 185, May 14, 2007 (Chinese)
  14. ^ "Courts freeze 10 Wahaha units assets", Xinhua, November 21, 2007