business in china - pepsi's troubles

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    Friday, September 26, 2003

    Pepsi's troubles show dangers of minority stakes

    ANALYSIS by LEU SIEW YING in Guangzhou

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    PepsiCo's troubles with its Chinese partner are a reminder that any foreign company that takes a minority stake in a joint venture is asking for trouble.
    Chinese firms look at multinational companies as investors with deep pockets, and foreign companies who enter the market as minority shareholders put themselves in harm's way. They cannot expect sympathy if they wallow in a mire they willingly waded into.

    In Pepsi's case, its attempt to get an international arbitration court to dissolve a troubled partnership with Sichuan Yunlu Industrial Development has failed and the case is to be decided under mainland law.

    Pepsi has accused Sichuan Yunlu of financial irregularities and of keeping Pepsi management out of the joint-venture company. In turn, Sichuan Yunlu, which initially stonewalled reporters while media-savvy Pepsi took its story to the press, has accused the multinational of trying to steal its commercial secrets.

    This week a court in Chengdu heard a lawyer for Sichuan Yunlu claim that Zhang Wei, a sales manager for Pepsi China Investment, had tried to steal its managing director's phone records. Sichuan Yunlu is seeking an apology and 10,000 yuan (HK$9,400) in damages.

    From Sichuan Yunlu's perspective, it had worked hard as the majority shareholder in the joint venture, Sichuan Pepsi Cola Beverage, to build the business, and saw no reason why it should be edged out now Pepsi Cola has become a household name in the province.

    In line with most Chinese companies' attitude towards intellectual property rights, it cannot understand why Pepsi should make so much money from sales of what is merely a syrup concentrate. What is essentially an internal matter has been dragged out in the open, creating bad publicity for both firms when they must have worked well enough in the past to have cornered the soft-drinks market in Sichuan.

    As the debacle plays out, another joint venture has ended, but amicably. BNP-Paribas and Industrial and Commercial Bank of China successfully negotiated an end to their 11-year partnership in the International Bank of Paris and Shanghai. Both parties know they have achieved their goals in setting up the joint-venture bank and are willing to go their separate ways.

    Pepsi's rival, Coca-Cola, has its fair share of difficult partners but has chosen to compromise.

    No joint venture is free from conflict, so it behoves both parties to be reasonable in their demands and to be willing to compromise for the sake of future co-operation.

    In Pepsi's case, it looks like the battle will be long and drawn out.

    No soft drinks giant is going to make Sichuan Yunlu's managing director, Wu Fengxian, capitulate. Mr Wu, who sees Sichuan Pepsi as his baby and has nursed it through seven years of negotiations and 10 years of operation, says he will only give in if Pepsi offers him a face-saving exit and a chance to build his own brands.

    With China committed, under the terms of its entry to the World Trade Organisation, to allowing foreign companies to set up wholly-owned subsidiaries, there should be fewer such conflicts. The problem is that most big multinationals are already in the country, and smaller companies may repeat their mistakes because they do not know the market well enough and need a local partner.

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