We came across an interesting example of how historic and now changing  joint-partnership arrangements within China, coupled with the power of consumer preferences, drive rather interesting  global supply and value-chain requirements.

Wahaha is reported to be China’s third-largest and most innovative soft drinks and beverages provider. The company name represents the sound of a laughing child, and its founder and current chairmen, Zong Qinghou, is noted as one of China’s wealthiest entrepreneurs.

The company had a previous joint-partnership arrangement with French company Danone which helped to develop many of its current top brands, but that partnership has been dissolved because of previous legal disputes involving alleged copycat products under the Wahaha trademark.  The dispute was settled in an out of court settlement in 2009.

An article appearing in the print and online Financial Times (preview sign-up or paid subscription may be required) features highlights of an interview with Mr. Zong where he states that Chinese consumers, long after the previous 2008 incidents of tainted milk and milk powder, still remain highly concerned about the safety of local infant formula with ingredients sourced from Chinese farms.  That has motivated these consumers to be more attentive to non-Chinese brands or milk sources. Readers can review two of our previous commentaries concerning these changing Chinese consumer perceptions by clicking here and here.

Wahaha has introduced a new upmarket infant formula with the brand name of Edison. The company elected to source the milk powder from an unnamed Dutch provider, which packages the product in Holland within Wahaha branded tins.

Mr. Zong is now in search of a new joint-partners who can provide other input material product sourcing external to China, where consumer and brand perception is more positive for China’s consumers. In the interview, Mr. Zong notes that: ”…foreign companies need markets and we need good products.”

He further reinforces that goals for China’s resident corporate joint-partnerships with non-Chinese companies has now shifted toward mutual technology-based partnerships vs. previous market access based partnerships.  The implication is that foreign companies should be prepared to share both technology and external value-chain arrangements. Mr. Zong adds in the FT interview that while Wahaha has plans for further export product growth, it does not seek to build factories overseas. He has also not ruled out an acquisition of a foreign brand.

There has been much concern expressed from multinational companies on the new rules for market access to China, especially when it now requires technology-transfer conditions.  In the specific case of Wahaha, consumers are influencing a rather different dynamic in value-chain requirements, one that will be interesting to observe in the coming months.

Bob Ferrari