The French company hasn’t abandoned China, but its chief operating officer wants to avoid another joint-venture debacle.
A few patches of gray hair are some of the only visible signs that Emmanuel Faber has changed since his Groupe Danone suffered a crushing defeat in 2009 at the hands of its former partner in China, Hangzhou Wahaha Group Co. Ltd.
Faber, the French food and beverage group’s co-chief operating officer, came across as graceful and energetic during the recent interview in Paris as he appeared during an August 2007 interview in Shanghai with this reporter.
Back then, Faber had just been promoted to the position he still holds. And he was smack in the thick of a fierce legal battle with Wahaha over their joint beverage business.
In the course of the bitter dispute, Faber was faulted for misjudging China’s complex market and a lack of flexibility. Today, he displays the same pride and stubbornness that some say led to Danone’s defeat, repeatedly saying he would «block any action that harms the interests of the company’s shareholders.»
Faber’s words are backed by a company culture based on ethics and strict adherence to contractual obligations. It was this culture that contributed to Danone’s recent decision to go alone in China, developing new operations without a joint venture partner.
In addition to Wahaha, which under a court settlement bought Danone’s 51 percent stake in Wahaha for what was considered a low 300 million yuan, Danone has tried but failed over the past three years to work with China’s Bright Dairy Co. Ltd. and China Mengniu Dairy Company Ltd.
Now on its own, the French company is building a food and beverage factory in China.
«In the future, we won’t opt for any more joint ventures or acquisitions,» Faber said. «Our own factory in Shanghai will be completed in early 2011.»
Seeking Balance
Faber was asked to assess the difference between the market in China and those in the United States and Europe. «I don’t have an answer for this,» he said. «But I believe that you do.»
He continued: «To me, there are vast differences in business operations in different markets. It doesn’t matter if we are operating in China, Latin America or Indonesia; we will always encounter certain problems with localizing and adapting.
«Some of these differences will be reduced or disappear as the two sides deepen cooperation,» he said. «But there are also some differences closely tied to local culture and history that are difficult to change.
«With regard to the latter types of situations, we need to positively adapt and properly integrate ourselves with local economic characteristics.»
Faber said his greatest responsibility these days revolves around balancing the need to build financial value for shareholders and create social value for the enterprise.
Having parted with Wahaha, Bright and Mengniu, Faber now faces the challenge of independent development for the group’s core businesses in China: drinking water, baby food, medical nutriments and yogurt products. All are highly segmented and competitive industries in China.
With the exception of water, the biggest challenge to independent development is finding and controlling dairies, since independence implies that the company’s China team handles all local tasks.
Danone is trying a «decentralized rural household» management program to arrange suppliers milk for its dairy operations, mirroring a business technique that’s proved successful in France and Mexico.
However, the strategy seems to run counter to Chinese market demands. And the decentralized rural household management model has been criticized in China due to safety issues.
A scandal over toxic melamine in powdered baby milk in 2008 prompted changes for China’s dairy industry. It encouraged development of stronger dairy companies with their own cow pastures, giving them direct control over dairy product sources.
Unlike Mengniu, Bright and Inner Mongolia Yili Industrial Group Co. Ltd., Danone doesn’t have pasture land in China, which may be an Achilles heel for its independent business development plan.
Yet Danone has faced similar challenges and won in the past. For example, 10 years went by before the company successfully negotiated cooperative deals with dairy farmers in Poland and Romania, the company’s Global Nutrition and Health Director Agnes Martin told Caixin.
When seeking deals with dairy farmers, Martin said, Danone is more interested in quality than herd size. The company invests in technology upgrades for its farmers and compensates based on the milk quality. The company is trying to adopt this model in China, but progress is slow.
«We are currently discussing cooperation with dairy farmers,» said Martin. «But it has not been easy.»
Sales and marketing channels are another soft spot. Danone’s current sales model relies primarily on key accounts, and the company lacks the kinds of mature distribution channels needed for fast-moving consumer goods.
The company also faces immense challenges in terms of production capacity and operational cost controls in its quest to develop independently in China. The independent strategy may avoid contract dispute risks, but China’s government policy environment still presents a challenge.
Is Faber prepared? He studied finance and management in college before working in management consulting at Bain & Co. Later, he joined the London-based Baring Brothers investment bank, and in 1993 joined the French mechanical engineering company Legris as chief financial officer.
After joining Danone in 1997, Faber worked as head of the mergers and corporate strategy departments, and was later appointed CFO. He was named a board director in 2002 and senior vice president for Asia-Pacific three years later.
The latest interview in early June at Danone’s head office on Boulevard Haussmann was the first Faber, 46, has granted Chinese media since the Wahaha row.
On July 12, Faber headed a management team from a China-based Danone subsidiary that makes powdered milk for babies, Dumex, to the Shanghai World Expo. Dumex expanded its marketing activities in China during the first half of this year.
Interestingly, Wahaha launched its own infant milk formula at the same time as Dumex came on the scene, even though the Chinese company lacks a dairy source. It’s the first product Wahaha has launched since splitting with Danone.
Moreover, Dumex and Wahaha have staked out similar market positions and are targeting similar consumer products.
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Source: Caixin Online