Recommended Reading

These two links are highly worth reading.

China vs. The Earth – by Elizabeth Economy. From The Nation

Enemy of the State, the Complicated Life of an Idealist – by Jianying Zha.  From The New Yorker

More to come…

This past week has been really busy for me as I had a sudden surge in school work and  just finished the 6 month process of determining who my future employer will be after graduation this spring.   I have decided to take a job with a consulting company in Beijing, and I am really excited about it.

Also, I have been reading allot about the Danone/Wahaha dispute in the 21st Century Business Herald (21世纪经济报）which has been putting out great investigative coverage. It seems Zong Qinghou of Wahaha has set himself up quite the mirror company, complete with enterprises listed in the BVI under the name of his daughter who has an American passport and did her udergrad at USC.   By doing this, Zong was able to launder his money and re-invest in  China  as a foreign  enterprise and literally city by city siphoned off business from the JV.

This is why foreign companies contemplating partnerships in China better have one hell of a forensic accounting team and employ 24 hour surveillance on the Chinese management.   No wonder there are numerous “risk investment” consulting companies in China such as Kroll, Control Risks, Hill & Associates and Navigant Consulting, I hear their business is booming.

Stay tuned, I will get some interesting Danone/Wahaha translations up soon.

The story behind the Wahaha Danone JV dispute

After reading China Law Blogs post on the Danone and Wahaha Joint Venture dispute, I just had to translate this 21st Century Business Herald article which ran over the weekend. Its details surpass anything reported so far in the western media, and explains in stunning detail how the Wahaha group and its CEO Zong Qinghou went about setting up mirror companies to steer profits away from the JV and into his pocket. Continue reading for the gory details:

[Rushed translation from Chinese]

21st Century Business Herald
Reporter Chen Xiaoying
2007-04-13

When Wahaha went under reorganization, Zong Qinghou had to find help, but while Danone became his best partner, it also sowed the seeds of today’s conflict.

Why does Danone all of a sudden want to buy these “Non-Joint Venture Enterprises” (NJVEs)? Why does Zong Qinghou not hesitate to at all costs resist this move? How were these NVJVE’s formed? And how did they become the cake that both sides are fighting over?

On the 11th of April, after both sides refused to budge and a tit-for-tat war of words, Danone finally decided to hold a press conference and open their mouth in defense. At the news conference, Danone President of Asia Area Fan Yimou not only produced evidence and stressed that the Wahaha brand was part of the Joint-Venture, he also criticised Zong Qinghou for “using public opinion to obtain personal interests.”If you look a little deeper past the ruckus and track down the interests and their origins, you can see very clearly how things developed. The fuse that ignited the bomb between the two is not about trademarks, but rather Wahaha’s non-Joint venture enterprises, and Danone’s demand that they be bought for a price of 4 billion RMB in a forced buy-out.

61 “Non-Joint Venture Enterprises” became the cake.

Wahaha’s shareholder structure is extremely complicated, according to this newspapers investigation, there are only over 100 companies that have the three letter name “Wa Ha Ha”. According to Zong Qinghou, among them are: the post-restructuring Hangzhou Wahaha Group Co, 39 subsidiary JV companies with Danone, and there are even more employee (management) stock held “NJVEs”

These NJVE’s began to grow in strength after the 2000 reorganization, Danone’s President for Asia Fan Yimou stated: “Especially in the last 18 months” the NJVEs have had explosive growth. Until present, the total sum of these companies has reached 61 with total assets reaching 5.6 billion yuan, and in 2006 only, total profits reached 1.04 Billion Yuan.

The NJVE’s made Danone furious and they put forward the demand of buying 51% of shareholders rights for a price of 4 Billion yuan.

Why have these enterprises made Danone uneasy and move with such quick action? This newspapers reporter was able to find that the products produced by the NJVE’s and the JV’s are nearly identical, with the only difference being in how and where the products were sold. The products made by the JV are mostly distributed in the coastal areas, and the NJVE products are distributed in the mid and western regions of China. Zong Qinghou’s explanation was that these moves were in order to answer the call of the nation and finish the distribution of their products in the mid and western regions of China.

“The Decision makers at Wahaha wanted to participate in the opening up of the west, hand in hand with the state revitalize impoverished areas including the Three Gorge’s Damn reservoir construction project. But Danone had misgivings about the consumption ability of these areas and didn’t want to carry out investment” Zong Qinghou said in his explanation of the formation of these NJVE’s. Furthermore, according to Zong, the profit margins of the NJVE’s clearly exceeds those of the Joint Venture.

According to an industry insiders explanation:”Actually, the biggest costs in the beverage industry lie in sales costs, especially advertising. Because the products made by both companies are the same, the NJVE’s obviously don’t have to pay for any advertising fee’s, so their profit margins are also a little higher.” Danone and Wahaha were both clearly aware of this point, and both parties talked over profit sharing, but in the end were unable to reach an agreement.

Failing to reach an agreement, starting in the second half of last year both sides started to quietly make their moves

In the past, there have been reporters in the media who have seen copies of the contract Wahaha would give to their dealers. The contract stated, that from November of 2006 they not only have to continue to sign the contract with the JV companies, but they also have to sign a contract with a company named Hangzhou Wahaha Beverage Sales Ltd. Company. Furthermore, besides handling the JV sales companies Gold Card account, the Hangzhou Wahaha Beverage Sales company required them to put the payments for goods into a Gold card account created under the new company. This kind of financial operation is clearly aimed at separating the operation of the JVE’s and NJVE’s and individually settle the sales accounts of the NJVE’s.

In order to resolve the problem of JV companies competing with their NJVE counterparts, Danone decided to take steps on their own and put up 4 billion yuan in capital and buy 51% of Wahaha. But Zong Qinghou and Wahaha were unwilling, and facing Danone’s pressure he angrily rejected this “low price forced buyout.”

Who’s “Non- Joint Venture Companies”?

Now that they are to be included in the buyout, this drags in the problem of ownership with regards to the NJVEs. Now, how exactly did these NJVE’s come about and who after all are the owners?

According to records, the Hangzhou Wahaha Beverage Sales Company was founded on December of last year, with the main stock holder being Zong Qinghou. There are no connections with the Wahaha Group and its Labor Union.

The sole financier of the Hangzhou Wahaha Beverage Sales Company was Hangzhou Hongsheng Beverage Company(杭州宏胜饮料有限公司), which on march of this year changed its name to Wahaha Hongsheng Beverage Group Ltd. Co (娃哈哈宏胜饮料集团有限公司)and put up 3 million RMB in capital. The legal representative of the Hongsheng group is Zong Qinghou’s daughter, Zong Fuli 宗馥莉. Hongsheng’s registered capital is 80 Million RMB and has two shareholders.

One of the shareholders naturally is Shi Youzhen(Zong’s wife)施幼珍, who owns 10% of the company, and the corporate shareholder representative (法人股东)Hengfeng Trade Ltd. Company (恒枫贸易有限公司) holds the remaining 90%. Furthermore, Shi Youzhen is also the number two shareholder of the Wahaha Group. Hengfeng trading was registered in the British Virgin Islands and its legal representative also is Zong Fuli (Zong’s daughter).

The Hongsheng factory was set up inside the Wahaha Xiaoshan(萧山) #2 production base. It produces fruit-vegetable and bottled water beverages. Since its formation in 2003, within a short time Hongsheng’s account accumulated over a billion RMB in profits that were not shared with Danone, and in 2005 it was number 30 on Hangzhou’s list of highest profit earning foreign invested enterprises.

Zong Qinghou in his explanation of these companies, said that Danone acquired similar beverage companies in China and had control over the JV’s commercial secrets. “It brought harm to us.”

Besides NJVE’s producing Wahaha’s traditional beverages, another important component among these NJVE’s is the Hangzhou Wahaha Child’s Wear LItd. Co. (杭州娃哈哈童装有限公司) One of China’s biggest youth clothing companies. Zong Qinghou has previously stated that Hangzhou Wahaha Child’s Wear and the JVE do not have any relation and were exclusively or jointly financed by the Wahaha Group and its Labor Union. From material the newspaper was able to obtain, the shareholders of Hangzhou Wahaha Child’s Wear have been through numerous changes, ultimately ending up in the hands of three shareholders. One is a foreign enterprise named Platinum Net Limited and the other two are Zong Qinghou and his wife. Zong Qinghou holds 65%, his wife 10% and Platinum Net Limited holds 25% whose financier is unidentified.

The helper becomes the competitor

Why did Wahaha hatch out such huge “None-Joint venture Companies” and become the the focus of the conflict? In reality, it is related to Wahaha’s path of reorganization.
Starting in 2000, reorganization led the Wahaha Group down the road of privatization.

At that time, Wahaha and Danone had already set up many joint venture subsidiary companies. For the parent company Wahaha, reform was unavoidable which has become connected to the JV subsidiary companies. According to a document titled “Document 1999 #32”; at that time the net assets of the Wahaha Group were about 700 million RMB. After excluding company housing, real estate projects and awards given for scientific achievements, actual net assets were 500 million RMB.

In an asset evaluation report that was made at the time of Wahaha’s reform, the assessor, Zhejiang Assessment Company clearly noted that in the assessment of the groups assets, Wahaha’s trademark, business reputation, production technology, and liquid assets were not included. Thus at that time, Wahaha’s trademark was not put in the assessment report.

“Because at the time of the JV, Wahaha’s trademark was covertly put into the joint venture, this was not only the premise of the JV but also to decrease the difficulty of the restructuring” A legal professional who was familiar with the restructuring stated. If it wasn’t carried out in this way, Wahaha’s restructuring total of sum of money would have been much bigger, and if the managing level wanted to retain the same shareholding proportion they would have had to put up more capital.

The restructuring documents requested that the groups original sole owner, Hangzhou Shangcheng District Government transfer 49% of the net assets to Zong Qinghou who was to be the leading manager and employee. Zong himself put up about 150 Million RMB which accounted for 29.4% of the shares and the workers and staff members(management) put up 19.6% in capital or 100 million RMB. The actual financing was based upon 81% of the original value. Furthermore, already among the peeled off assets, the awards for achievement in science(“科技成果转化奖) became the source of capital for the companies management. The total sum of these awards totaled 70 Million RMB, of which 80% was given to Zong Qinghou and the remaining 20% was turned into the collective shares of the workers and staff.(management). Although during the restructuring in 2000, Zong Qinghou individually had to pay 60 Million RMB to purchase stock rights which was not permitted to be a bank loan.

Whether it was coincidence or sedulously planned out, at that time it was a win-win for the management of both Wahaha and Danone. Now solely in the hands of Zong Qinghou, shortly afterwards Wahaha was able to get rid of former competitor company Robust (乐百氏) and enter a period of super-speed development.

In may of last year, Zong Qinghou held discussions with the Hangzhou City Bureau of Asset Management to give up their 45% stake in ownership. At that time Zong stated that there wasn’t a timetable, nor would there be any difficulty(in obtaining investment) but in no way was he going to consider foreign investment.

But from the beginning of this year, due to Danone putting forward the plans for purchase of the NJVEs, these negotiations have already stopped.

Some of the opinion has said that when Wahaha went under reorganization, Zong Qinghou had to find help, but while Danone became his best partner, it also sowed the seeds of today’s conflict.

—————-
Original article (Chinese) http://www.nanfangdaily.com.cn/southnews/sjjj/sjgs/200704130533.asp
“Danone’s China Deal Goes Sour: French Food Firm Accuses A Leading Businessman Of Undermining Venture,” – Wall Street Journal
宗庆后的转折点：掌控娃哈哈 － Xinhua

Cool stuff for Google Reader

If you are like me and rely on Google Reader for RSS updates, here are some cool tools that will allow you to change the interface look of the reader and learn how to use shortcuts etc.  Most of this is for mac users.

Hack Attack, Getting Good with Google Reader

Google Reader Mac Theme

Hunan Cadre nailed for sex with Russian prostitute, Chinese netizens suspect it was a set-up

Chinese anti-corruption official sacked for Russian tryst
Apr 12, 2007, 11:27 GMT

Beijing – A Communist Party official who was a top provincial campaigner against corruption has been sacked after he was caught in a hotel room with a Russian prostitute, the party’s official newspaper said on Thursday.

Du Xiangcheng was expelled from the party and sacked from his post as deputy secretary of the party’s Commission for Discipline Inspection in the central province of Hunan, People’s Daily and other state media reported. Du was found ‘in a compromising situation with a Russian woman’ at a five-star hotel while he was in Beijing on official business last December.
The party’s central discipline commission has also opened an investigation into Du’s assets and financial dealings, the reports said. Du had cemented a reputation as a stalwart campaigner against corruption through a case against the head of discipline inspection in Hunan’s Changde city in 2004. ‘Cadres are only human and they have desires, so all leading cadres should be able to handle such tests,’ Du told the official Xinhua news agency during the investigation into the Changde case.

Read more of this story here Chinese version of the story on Netease here

According to the Chinese press this happened on December of last year, but according to Sing Tao and Boxun,this happened in December of 2005 and reported on it in March of last year. Why did Sina fudge the dates by a year?

Whats interesting are the Chinese netizen comments on the Netease story, there are over 2,700 of them and its the hottest story right now. Besides netizens professing outrage, many have serious doubts, and believe this was a setup. Netizens speculated that as the Discipline Inspection Deputy Secretary, he most certainly has a number of enemies. And why would someone who knows the ins and outs of vice-investigation be caught in such a dumb act? According to the Chinese version of the story, the room he was in was rented out by a friend, and he had been at a KTV earlier that night.

Some of the netizen comments:

在北京五星级酒店嫖娼居然出事，会不会因为得罪的人太多？告发者早有预谋。
Unexpectedly at a 5 star beijing hotel have an accident with a prostitute? Maybe its because he offended allot of people? The accusers here were premeditated

“他是个好官!没有人说他贪污受贿!
如果是坏官他这样的职务用的着去嫖吗?
肯定是被陷害的! 居然有警察跑五星级酒店去查!”
“He is a good official! Has anyone heard that he was corrupt and accepted bribes?
If he was a a bad official, would he visit a prostitute under his official title?
This guy was framed! The police just all of a sudden go check 5 star hotels ?!”

被人盯上了的。
大家什么时候见过四星级以上酒店查房的？
Someone had their eyes on him.Who’s seen room inspections in 4 and 5 star hotels?

标准的蠢货,当上这么大的干部还去嫖娼.
Standard idiot, that big of a cadre still goes looking for prostitutes?

What really went on here I’m sure we’ll never know, but it highlights how fighting corruption and internal strife within the CCP does happen, and sometime’s its hard to tell who’s on what side.

Hospitial poisoning in Harbin intentional

From China Daily:

“Police are investigating how rat poison ended up in the breakfasts served at a Harbin hospital cafeteria on Monday, leaving one person dead and 202 others sick. The hospital’s patients and staff who fell ill had earlier eaten breakfast in Heilongjiang Provincial Hospital of Traditional Chinese Medicine located in the capital of Harbin.”

 UPDATE

In this one sentance report from Xinhua, the Heilongjiang Public Security Office spokesperson said that the poisoning was intentional and it is now under criminal investigation.

from Xinhua:

“新华网4月12日报道 黑龙江省公安厅新闻发言人12日在新闻通气会上说，经过调查，确定9日发生在黑龙江省中医研究院的中毒事件是一起故意投放危险物质的刑事案件.”

Chinese criticize US naval intelligence gathering in the China Sea

I saw this posted on almost every major Chinese website and the lack of English coverage on this intrigued me.

According to Sina’s Pioneer  magazine ( 国际先驱导报) and China’s Maritime Department, the United States has on several occasions (cited as 2002, 2003, 2004, and 2005) “illegally entered” China’s maritime territory to conduct maritime surveillance.

The sina article states that:

“When America engages in military surveying, on the one hand it’s for helping the American military familiarize with the “battlefield environment,”  yet at the same time they are conducting surveillance, such as monitoring China’s naval activities in maritime territory China has direct jurisdiction over(管辖海域).  This clearly is an extreme threat to China’s maritime security.” (这显然是对中国海洋安全的极大威胁)

In one instance, the article claimed that a US Naval Survey Ship, while conducting operations in the China Sea for 23 days, was repeatedly warned to leave the territory and “by coincidence” the sonar array it was towing to gather sea-bed intelligence crashed into a Chinese fishing boat.

According to the Pioneer ,the American naval vessels were conducting surveillance in China’s “Exclusive Economic Zone”(中国专属经济区) which encompasses an area beyond what the United Nations recognize as a nations sovereign territory.  Thus the United States routinely wanders about these areas, and in extreme cases  these operations have led to diplomatic crisis such as the 2001 spy plane incident over Hainan.

The article also states that China is well aware of these activities, and despite unclear international laws, China has engaged in pursuit and monitoring operations in order to “sternly express the position of the Chinese Government.”

 Link to the article in Chinese

Three party cadres in Shanxi tried for slander in whisteblowing case

I have translated this article from the Southern Metropolis Daily which details how the government went about prosecuting with vigilance three mid-level party cadres who accused the local secretary of “losing the will of the people” after selling land for real estate development when it was was intended to be used for building parks or other forms of “symbolic architecture.” Original in Chinese can be found here.

 

Three cadres from Jishan, Shanxi punished for reporting questionable activities by local county secretary
Southern Metropolis Daily

After writing an anonymous letter reporting illegal activities, two cadres from Jishan in Shanxi province (山西稷山县) put in jail for slander, another already being sued.

Three section level cadres arranged and wrote out material reporting on the activities of Jishan County Party Secretary, then sent copies to 37 local government branches. After the local Public Security Office determined the identity of the materials authors, the local procurate brought the authors to court on the basis of slander. Currently, two of the authors have already been sentenced and another has been sued. Thus forth the local people have endlessly been talking about the crimes of the three cadres.

37 Copies of Anonymous Material titled “The People Call Into Question Party Secretary Li Runshan” Sent Out
On March of 2006, Shanxi Jishan county People’s Legal Working Committee (人大法工委) Director 杨秦玉 Yang Qinyu while talking with 南回荣 Nan Huirong and 薛志敬 Xue Zhijing at the country party committee’s office brought up the incident regarding some tracts of land that had been recently sold. Originally, the government had decided to build “Symbolic buildings” (标志性建筑) such as parks and statues, but it was suddenly sold to someone to be used for real estate development. The three thought that the government had made unpredictable changes in policy. After mentioning more of the counties problems they concluded that the local party secretary
李润山 Li Runshan had lost the will of the people. The three of them then decided to put these problems down in writing.

Nan Huirong did the writing while Xue Zhijing and Yang Qinyou stood by helping to revise and add additional points. After 10 days time, the letter titled <<The People Call Into Question Li Runshan>> was finished easily. The paper brought forth 4 problems with Li Runshan: “1: First we ask why did Secretary Li Runshan make sudden policy changes? Second, why has all the investment been met with disaster? Third, with such air of importance what kind of work does the secretary do in his presidential suite? Fourth, while your financial resources have swelled why haven’t our salaries moved a bit?”

“首问书记李润山，朝令夕改为哪般？二问书记李润山，为啥引资遭祸端？三问书记好威风，总统套间办啥公？四问书记财力涨，为何工资老不动？”

After every “Question” there were detailed explanations written proving their claims. At the end of the document it was signed by “The Tongue-tied of Jishan”

With concern for their safety, after writing the essay Nan Huirong went to a copy center in the nearby Houma City and made several copies, then he gave it to Yang Qinyu who sealed the envelopes and sent them out from Houma City. Their document was sent to the Party Secretary and Majory of Yuncheng City, the 4 biggest leadership groups in Jishan and all the leadership in every government department, in total there were 37 copies.

Participants arrested

Public Security Bureau Chief Personally Conducted the Interrogation with the Party Secretary

Just before dawn on 4/19/2006, Nan Huirong was brought by 6 police officers to the Jishan County Public Security Department’s Criminal Unit for questioning. After daybreak, he was sent to Pinglu County police station for further questioning which was over 100km away. 2:00pm that afternoon, Nan Huirong finally admitted that he had written the letter. Two hours later he was officially detained on criminal charges and sent to the Pinglu county detention center.

False advertising? Hey, I’m just an actor!

From Netease:
“On February 10th, the police uncovered Beijing’s biggest pyramid scheme case, exposing the fraud behind the”Yilin is your first choice for a forestation partner”scheme. Ge You acting as the spokesperson in the Yilin ad naturally received the publics questioning, and is now facing a reputation crisis. ”

Ge You, the Chinese star of movies such as The Banquet, is not the only one facing a PR crisis after doing advertisements for sham companies and unreliable products. In this Southern Metropolis Weekend article, several Chinese celebrities are interviewed and asked how they feel about doing advertisements and being a spokesperson for commercial products in light of recent events.

A famous TV star in China endorsing medicine

In translation: Original Chinese article can be found here.

Nailhouse torn down!

According to Chinese news outlets the Nailhouse was torn down after the owners Mrs. Wuping and her husband reached an agreement with the developer.   See more from Danwei