But there have been tensions from the start. Although Danone owns51 per cent of the joint venture, the business has been managed by Wahaha's founder, Zong Qinghou, who has resented the lack of control.

The disagreements broke into the open in April, when Danone accused Mr Zong of setting up a parallel operation to sell the joint venture's products and Wahaha accused Danone of trying to take over Wahaha subsidiaries not included in the joint venture.

Last week Danone started legal proceedings against Wahaha, its Chinese joint venture partner. Suing for breach of contract, it claimed that Zong Qinghou, Wahaha's owner, was selling identical products to their jointly-produced versions on the side.

Tensions in joint ventures are not new. What made this stand out was the combative Mr Zong. He bit back at Danone with accusations of crass ignorance and arrogant imperialism, telling them: "The Chinese have stood up and the era of invasions by eight-country armies is long gone," referring to a twentieth century military campaign in Beijing by colonial powers. A day earlier the Chinese government, with which Mr Zong is well connected, ramped up its rhetoric against the US when Washington filed two more legal cases against them at the World Trade Organisation. The threat of this latest spasm of economic nationalism to the most important relationship in global trade should not be overstated. Relations between the Chinese and the US governments continue to function. Some of Beijing's bluster is for public consumption. Although it might be hard for Midwest rustbelt congressmen to imagine, not everyone in China thinks WTO membership is an unalloyed good. Fear runs deep of foreign "wolves" snatching up hapless domestic industries in their blood-drenched maws.

It is important to distinguish the concerns over investment and ownership from those strictly to do with trade. A draft of the communiqué for June's Group of Eight meeting in Germany found its way into my hands last week. It has a long section decrying the "new investment protectionism", including the injunction that "restrictions to market access for foreign investment should only apply to exceptional cases where national security is at stake".

Given that the fastest-growing parts of the world economy are services, for which physical presence in an economy is often required, encouraging cross-border investment is undoubtedly a good thing. But lumping all ownership restrictions into the same category as out-and-out trade protectionism - the blocking of cross-border flows of goods and services - overstates the problem. Trade protectionism fundamentally alters the make-up of an economy. Ownership restrictions, by contrast, certainly in rich countries and successful emerging markets such as China, will at most affect the quality of corporate governance. For the consumer, for whom public policy should be run, who owns water-bottling plants in China matters less than whether they exist.

Clearly, breaching contracts is not a good thing. But it is hard to look at China's foreign direct investment record and conclude that its business practices and legal system are scaring away European and US investors.

Moreover, if there is a real risk of a breakdown in relations and reprisals against foreign companies operating in China, rich nations are not helping in two ways: first, with their own investment nationalism; second, in how they are expending their political capital on the trade front.

That it was Danone involved in last week's spat is poetically apt. If Mr Sarkozy is France's president by June and the communiqué remains unchanged, his G8 colleagues will be entertained listening to him explain the threat to the Fifth Republic from Americans seizing the commanding heights of the French yoghurt industry. Crème fraiche for the goose is crème fraiche for the gander.

The rich nations' other mistake is too often to pick fights that are based in areas of marginal economic merit and involve hazardous encroachments, real or apparent, into trading partners' national sovereignty. One of the US's new WTO cases was the intellectual property rights complaint, pushed by the US music, movie and publishing industries.

No one would disagree that protecting IPR matters. But pirated DVDs in China, where most consumers could not afford the genuine version in any case, are not the most pressing issue in world trade. It is also dangerous to bring cases insisting that China lock up counterfeiters who produce more than a specified amount. That could create another layer of rent-seekers soliciting bribes to get them to turn a blind eye to disc pressing plants. Washington telling Beijing whom to imprison could also invoke more accusations of imperialism.

There are real and substantive challenges in managing the trade relationship between China and the rich world. They are not, however, helped by moving marginal issues to centre stage and pretending that restrictions on ownership are the same as blocks on trade.

Danone has been threatening to take legal action against Wahaha, while Mr Zong has been publicly complaining that Danone does not understand China. It will now take some effort to patch up a joint venture that accounts for more than five per cent of Danone's operating profits.

In India, it is Danone that stands accused of a cavalier attitude to intellectual property: its partner, Wadia Group, is threatening legal action over rights to the Tiger biscuit brand.

It is all a rich irony. Two years ago, when Danone was a possible takeover target for PepsiCo, the French government unveiled its strategic yoghurt policy: as a matter of national security, Danone could not be allowed to fall into the hands of foreigners. That fuss was no help at all to French citizens, who have nothing to gain from so-called economic patriotism.

Now Danone fears that China's own strategic yoghurt policy is to allow Chinese entrepreneurs to get away with exploiting their foreign partners.

That policy may be convenient for Mr Zong but it, too, will not help ordinary citizens. China is still poor, so it is not surprising that property rights are sketchily enforced. Dare we suggest that the country's long-term development depends on a change of culture?

India's Tiger brand was created in 1995 by Britannia Industries, a 90-year-old biscuit company listed on the Bombay Stock Exchange. Danone owns 51 per cent of Britannia in a 50-50 joint venture with Wadia Group, an Indian conglomerate.

Wadia says the joint venture ran smoothly until 2004, when Britannia discovered that Danone had been selling biscuits under the Tiger brand in Indonesia, Malaysia, Singapore, Pakistan and Egypt, and had registered the brand in some 70 countries.

The group, which claims that all intellectual property related to the brand belongs to Britannia, says Danone did not tell Britannia's board it had registered and launched the brand in other countries.

Wadia says it has given Danone "legal notice" to return the rights. Danone disagrees with Wadia's version of events. It says it did tell Britannia's board what it had done.

"Danone is currently in negotiations with Wadia regarding Britannia in India and therefore would not be in a position to comment publicly about the status of those talks," Danone said.

"However, what we can say is that the international registration of the Tiger brand was made with the full knowledge and support of the Britannia management and the Wadia Group."

The disagreement between Danone and Wadia amid Danone's problems in China, where it has threatened legal action against Wahaha, its joint venture partner there.

Danone has accused Wahaha of setting up a rival business to sell the same products as those marketed by the joint venture.

Wadia says it has been having discussions with Danone over the past two years to resolve the dispute over Tiger biscuits, but that the French group keeps changing its position on the matter.

It also says Danone has offered to pay €1m ($1.3m) as compensation for its use of the Tiger brand, but has also demanded a five-year exclusive licensing agreement in Malaysia, Indonesia, Egypt, Pakistan and Singapore.

Danone includes Tiger in a list of biscuit brands on its website, calling it the "Number 1" biscuit brand in Asia.

The French food multinational, whose brands include Evian and Activia, last month accused Hangzhou Wahaha of undermining their joint venture, which has been one of the most successful in China since its creation in 1996.

The joint venture's products include Wahaha, the leading Chinese brand of bottled water.

Danone claimed last month that its partner had set up a parallel business selling the same productsin direct competition with their joint venture, which had sales of more than €1bn ($1.36m) last year and which is 51 per cent owned by Danone.

In a letter sent on April 9, the French group formally warned Hangzhou Wahaha that it would begin legal action for a breach ofcontract if it could not resolve the matter within30 days.

Yesterday, following the expiration of this deadline, Danone said it had "commenced appropriate proceedings" without specifying what measures that actually entailed.

However, it insisted that the breakdown in its relationship with Hangzhou Wahaha and its chairman Zong Qinghou was not yet irreparable.

"Danone still hopes we can solve the dispute through peaceful discussion, and we are working hard towards this direction," it added in the statement.

Mr Zong, one of China's most successful entrepreneurs, had fired the first public salvo of this increasingly bitter dispute last month, when he gavean interview claiming that Danone was trying totake control of certain Wahaha subsidiaries that were not part of the joint venture.

Arguing that the termsof the joint venture agreement were unfair, he also accused Danone executives of having a "superior" attitude and a weak understanding of China.

The Danone statement emerged too late for Mr Zong to be approached for comment last night.

In an interview with Les Echos, the FT's French sister paper, last month, Franck Riboud, the chairman and chief executive of Danone, said that he hoped that the dispute would be resolved by July.

The French yogurt and mineral water producer blamed conflicting local and international health regulations for the blocked delivery, arguing that the water in the five affected containers met World Health Organisation guidelines.

It added that it did not think that the incident in Shanghai was linked to a commercial dispute with a Chinese joint venture partner that has developed nationalistic overtones.

According to Danone, the bacteria was a harmless strain that was normally present in Evian.

It said that it was not the first time that a delivery to China had been blocked for this reason, adding that it used to encounter the same issue in the US before it adopted the WHO's food safety standards.

The French multinational this month said that it was taking legal action against Hangzhou Wahaha, its biggest joint venture partner in China, which it accuses of undermining their alliance by setting up a parallelbusiness selling the same products.

Zong Qinghou, Hangzhou Wahaha's chairman, had previously used nationalistic imagery in criticising Danone, which he accusesof trying to take control of certain subsidiaries that were not part of their partnership. This involves products such as Wahaha, the leading Chinese brand of bottled water. He has also claimed the terms of the joint venture were unfair.

Yesterday, Danone said that there was no link between the Wahaha row and the Evian incident. "The two issues are not connected," said a spokesman, who added that food safety was a hot topic in China.

The former head of the country's food and drugs regulator was sentencedto death this week for corruption.

"For us it is business as usual," said the Danone spokesman, who pointed out that Evian remained on sale in China. Danone continues to consolidate its 51 percent stake in the joint venture in its accounts, even though its legal battle suggests it is having serious difficulty exercising control over the business.

China is not the only emerging market in which Danone is in dispute with a local partner.

It is also at loggerheads with the Wadia family, a partner in India. The Wadias are understood to feel that Danone is positioning itself to go it alone in India.

"We both think that it is time to rethink the terms of the contract [with the Wadias] and to changethe areas of the partnership," said the Danone spokesman.

In an interview given to Sina, one of China’s leading internet portals, Zong Qinghou, founder and chairman of Wahaha, said Danone did not understand China or Chinese culture.

“I told them the Chinese have stood up and the era of invasions by eight-country armies is long-gone,” he said, referring to a military campaign in Beijing by colonial powers in the 20th century.

Mr Zong said the terms of the joint venture were increasingly “unfair” to Wahaha and accused Danone of trying to take control of parts of the Chinese group not included in the joint venture. He also threatened to launch a new brand in competition to the Wahaha bottled water sold by the joint venture which is the market leader in China.

While disagreements over the fine-print of joint ventures are commonplace in China, Mr Zong’s remarks were unusually aggressive and nationalistic.

Danone said it would not comment on Mr Zong’s specific allegations, other than to say that it wanted to include in the joint venture certain Wahaha manufacturing operations that were working almost exclusively for it.

“This is a negotiating tactic,” said Danone. “Mr Zong is simply trying to increase the pressure.”

While the bulk of Mr Zong’s complaints appear to involve the terms of a joint-venture deal initially signed more than a decade ago, the ferocity of the public attack will make it much harder for the two sides to continue working together in the venture.
 

Mr Zong, who is now a delegate to the National People’s Congress, founded Wahaha in the late 1980s selling milk products at a school store.

He signed a series of joint ventures using the Wahaha name with Danone in 1996 in which the French group has a 51 per cent stake. Since then, Wahaha – the name is designed to mimic the sound of a laughing child – has become one of the best-known brands in China.

One of the richest men in the country, Mr Zong said the terms of the joint ventures were not fair because Wahaha provided the bulk of the management despite not having control and because they restricted the group from launching other products under the Wahaha name.

Mr Zong is the latest entrepreneur in China to invoke nationalistic sentiments in a dispute involving a foreign company.

Last year, the head of Sany Heavy Industry used an internet blog to attack Carlyle’s planned acquisition of rival company Xugong Heavy Machinery. The US private equity group reduced its bid to a minority stake.

In what is turning into an increasingly bitter public dispute over one of China’s most successful joint ventures, the French group has sent a letter to Zong Qinghou, Wahaha chairman, saying Danone could begin litigation in China if the two sides cannot reach an agreement in 30 days.

At a hurriedly-arranged press conference in Shanghai on Wednesday, Danone’s head of Asian operations accused Mr Zong of setting up a parallel operation to sell drinks identical to those the joint-venture markets. “We found out he has founded businesses which are directly competing with ours,” said Emmanuel Faber.

Danone’s joint venture with Wahaha, which was first signed in 1996 and sells water, yoghurt and tea drinks, has helped turn the Wahaha brand into one of the best-known in the country.

Mr Faber said the joint venture with Wahaha, which had sales of more than €1bn ($1.3bn) last year, accounted for 5-6 per cent of the Danone group’s operating profit and 2-3 per cent of earnings per share.

Although there have long been disagreements between the two sides, the tensions burst into the open over the weekend. Mr Zong, one of China’s most successful entrepreneurs, gave an interview to a Chinese website in which he accused Danone of bullying its way into controlling parts of the Chinese group not included in the joint venture. He also said Danone did not understand China.

Danone responded on Wednesday that Mr Zong had independently set up a string of factories that only produced goods for the joint venture. Mr Faber added that, after several months of negotiation, the two companies had signed an agreement in December last year that paved the way for Danone to buy a 51 per cent stake in these factories, which would come under the umbrella of the joint venture.

Mr Faber said that not only had this agreement not been honoured but that Mr Zong had this year set up a separate sales company to market the same products that the joint venture produced.

Mr Faber said on Wednesday he believed the two sides could still resolve the dispute, but added that the group reserved the right to take legal action for breach of contract after 30 days.

Shares in Danone, which fell 1.6 per cent in trading yesterday, closed down 0.44 per cent on concerns that the venture with Wahaha could become unmanageable as a result of the dispute

Wahaha began business in 1988 when one-time farmer Zong Qinghou started to sell milk products out of a school shop. By 1996 he had decided to move into bottled water and did a deal with Danone to help expand.

The partnership seemed a good fit at first. Danone brought the resources of an experienced multinational - including capital and product research - which combined well with Mr Zong's local knowledge. Known to be a hard-driving entrepreneur, he had been adept at winning new markets.

Both sides profited richly as Wahaha water became the leading brand in the market. Mr Zong is now a dollar billionaire and placed 14th on the list of China's richest people, while the joint venture accounted for more than 5 per cent of Danone's operating profits last year and recorded sales of more than €1bn ($1.3bn).

Yet that business now looks in danger of unravelling in an atmosphere of rancour. Given the inherent instability and culture clashes in many China joint ventures, the case will be closely watched by other multinationals.

Mr Zong has long chafed at some of the terms of the initial deal, which gave Danone control with a 51 per cent stake. He is also unhappy about the fact that he has to get approval from the joint venture before he uses the Wahaha name on products launched by his own company.

However, the depth of his discontent only became apparent late on Sunday when a Chinese website published a provocative interview with Mr Zong, full of personal insults about Danone executives' "superior" attitude and lack of understanding of China.

Invoking the image of 19th century colonial invasions of China, Mr Zong also accused Danone of trying to take control of certain Wahaha subsidiaries that are not part of the joint venture - a comparison with wide resonance in China.

Danone hit back yesterday, accusing Mr Zong of setting up an "illegal" operation to make and sell identical products to the ones made by the joint venture. The parallel operation was so large, Danone said, that it was making similar profits to the joint venture.

Danone faces an uphill battle if it is to restore stability to the joint venture, which accounts for 75 per cent of its China operations.

If it takes the matter to court, the case would be heard in Hangzhou, the eastern city that is the home of Wahaha and where the Chinese company is well known and politically connected.

Danone is also facing a public relations battle in China, which Mr Zong has framed in nationalist terms about the growing dominance of multinationals.

The biggest problem, though, is the relationship with Mr Zong.

Danone, technically, has the upper hand, holding 51 per cent of the equity. However, the joint venture depends on Mr Zong's continuing co-operation. Not only is he chairman and general manager of the joint venture, but he is the driving force behind the entire Wahaha organisation. Furthermore, in China, employees in private enterprises often feel a stronger loyalty to the boss than the organisation itself. Winning in the courts or pushing out Mr Zong, therefore, are not solutions to Danone's problems.

A group claiming to be "salespeople and soldiers of Wahaha" put out a statement yesterday saying: "Wahaha is a Chinese brand . . . It is impossible for your management [Danone] to lead us."

After Mr Zong's comments at the weekend and Danone's allegations of back-hand practices, it will be hard for the two sides to work well in the future.

"Our position is still that with appropriate governance, Mr Zong can continue to run the business successfully," Emmanuel Faber, Danone's president for Asia, said. "We will know soon if we are wrong or right."

In an interview given to Sina, one of China's leading internet portals, Zong Qinghou, founder and chairman of Wahaha, said Danone did not understand China or Chinese culture.

"I told them the Chinese have stood up and the era of invasions by eight-country armies is long-gone," he said, referring to a military campaign in Beijing by colonial powers in the 20th century.

Mr Zong said the terms of the joint venture were increasingly "unfair" to Wahaha. He accused Danone of trying to take control of parts of the Chinese group not included in the joint venture. He also threatened to launch a brand in competition to the Wahaha bottled water sold by the jointventure which is the market leader in China.

Although disagreements about the fine-print of joint ventures are common in China, Mr Zong's remarks were unusually aggressive and nationalistic.

Danone would not comment on Mr Zong's specific allegations, other than to say it wanted to include in the joint venture certain Wahaha manufacturing operations that were working almost exclusively for it.

"This is a negotiating tactic," said Danone. "Mr Zong is simply trying to increase the pressure."

While the bulk of Mr Zong's complaints appear to involve the terms of a joint-venture deal initially signed more than a decade ago, the ferocity of the public attack will make it much harder for the two sides to continue working together in theventure.

Mr Zong, who is now adelegate to the NationalPeople's Congress, founded Wahaha in the late 1980s selling milk products ata school store.

He signed a series of joint ventures using the Wahaha name with Danone in 1996 in which the French group has a 51 per cent stake.

Since then, Wahaha - the name is designed to mimic the sound of a laughing child - has become one of the best-known brands in China.

One of the richest men in the country, Mr Zong said the terms of the joint ventures were not fair because Wahaha provided the bulk of the management despite not having control. He said it was unfair also that the terms restricted the group from launching other products under the Wahaha name.

Mr Zong is the latest entrepreneur in China to invoke nationalistic sentiments in a dispute involving a foreign company.

Last year, the head of Sany Heavy Industry used an internet blog to attack Carlyle's planned acquisition of rival company Xugong Heavy Machinery. The US private equity group reduced its bid to a minority stake.

In theory, the Chinese government is a full member of the international legal community. On intellectual property, trade and securities regulation, it has written laws using European and US frameworks. China is part of the World Trade Organisation, has adopted international accounting standards and plans to join the network of international antitrust regulators.

In practice, things are not so clear. Chinese courts heard 668 intellectual property cases last year, up 89 per cent on 2006, and handed down a few big victories to foreigners. But counterfeiting remains rampant and drug and software patents rarely last as long as they should. China adopted international financial reporting standards in 2006 but the government tinkered with the rules. It dropped rules for disclosing related-party transactions because the state has interests in most things, and Chinese companies can book some assets at cost rather than fair value.

China’s new competition law, which comes into effect this summer, requires government clearance for some mergers and allows consumers to sue over anticompetitive behaviour. But the wording leaves open the possibility that the state may be able to protect the many companies in which it has a stake. Some overseas investors address the uncertainty head-on by writing clauses into their contracts that
hold their Chinese partners to international legal conventions and arbitration. They hope the possibility of repeat business will serve as a carrot if state enforcement fails to provide the stick.

What are the lessons here? First, businesses investing in the world’s biggest emerging economy still cannot count on legal certainty. Second, as in foreign affairs, China is keen to join the right clubs but self-confident enough to exempt itself from rules it doesn’t like.

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Danone has accused Zong Qinghou, Wahaha's founder, of running a parallel operation in competition with the joint venture. Mr Zong has claimed that Danone was trying to take control of businesses that were not part of their partnership.

Danone's first-half results, showed that the sales it booked from the Chinese joint venture fell 19 per cent in the second quarter. It expected the second-half decline to be worse, at about 33 per cent.

In spite of this, Danone reported a 5 per cent increase in group sales to €7.55bn ($10.26bn) for the first six months of the year. Net profit fell from €704m to €656m; however, underlying net profit from continuing activities rose 8 per cent to €663m.Adam Jones, Paris

A strongly worded statement, published on a Chinese website, raised the stakes in the dispute between the two companies and will make it harder to negotiate a settlement.

Danone accused Wahaha this week of setting up a parallel operation that bottled and sold the same drinks as the joint venture. It also began legal proceedings against the Chinese group.

The increasingly bitter dispute threatens to tear apart the 10-year joint venture, one of the most successful in China. It has turned Wahaha into the leading brand of bottled water.

The clash could derail Danone's plans to expand in China, where the soft drinks market is growing rapidly. The joint venture has annual sales of about €1bn ($1.35bn) and accounts for 75 per cent of the group's sales in China.

Danone said it had discovered that Zong Qinghou, the Wahaha chief, had set up a string of factories that supplied only the joint venture. After the two sides negotiated to bring the factories into the venture, Mr Zong had begun selling drinks through a parallel company, Danone said.

Wahaha said yesterday that Danone had known about the factories since the agreement was signed in 1996. "Danone audits the company every year," its statement said. "It is impossible they did not know."

Danone had violated the agreement and damaged Wahaha interests by investing in rival operations, including the Robust water company and a yoghurt venture, said Wahaha. "The real rule violator is Danone," Wahaha said.

While Danone claimed that the joint venture had a permanent right to the Wahaha brand name, the Chinese company said this contract was not registered with the authorities, which was against the law. The valid contract for the trademark expired in two years, Wahaha said.

In a statement yesterday, Danone claimed its trademark contract was valid and said Mr Zong's statements were damaging the company. Wahaha had "twisted the facts and misled the public", the French group said.

In India, where Danone has a joint venture with Wadia Group, an Indian conglomerate, through Bombay-listed Brittania Industries, the French group faces legal action in a disagreement over the licensing of international rights to the Tiger biscuit brand.

Wadia says the joint venture ran smoothly until 2004, when Britannia discovered that Danone had been selling biscuits under the Tiger brand in Indonesia, Malaysia, Singapore, Pakistan and Egypt. Danone disputes Wadia's version of events.

Emmanuel Faber, the head of Danone's Asian operations, said that further legal action was possible but hoped the dispute could still reach an "amicable solution".

Danone would not consider selling any of its 51 per cent stake in the joint venture and had not been asked to purchase the 49 per cent owned by the Wahaha Group.

The unusually acrimonious dispute between the two companies has threatened the long-term future of the business and has raised questions about the sustainability of operating through joint ventures in China.

The ill-feeling reached a peak last week when Zong Qinghou, the founder of Wahaha who had run the joint venture with Danone since it was founded in 1996, resigned from the partnership and issued a long open letter which quoted from Chairman Mao and accused Danone of "humiliating" him and disrespecting China.

Danone said yesterdaythe letter's allegationswere "incomplete, twisted, out of context or simply untrue".

Wahaha has not responded directly to Danone's allegations that it has set up a parallel operation to the joint venture. However, it has accused Danone of trying to use the controversy to acquire control of other parts of the Wahaha group.

Geoff Dyer, Shanghai

In what is turning into an increasingly bitter public dispute over one of China's most successful joint ventures, the French group has sent a letter to Zong Qinghou, Wahaha chairman, saying Danone could begin litigation in China if the two sides cannot reach an agreement in 30 days.

At a hurriedly arranged press conference in Shanghai yesterday, Danone's head of Asian operations accused Mr Zong of setting up a parallel operation to sell drinks identical to those marketed by the joint venture. "We found out he has founded businesses which are directly competing with ours," said Emmanuel Faber.

Danone's joint venture with Wahaha, which was first signed in 1996 and sells water, yoghurt and tea drinks, has helped turn the Wahaha brand into one of the best-known in the country.

Mr Faber said the joint venture, which had sales of more than €1bn last year, accounted for 5-6 per cent of the Danone group's operating profit and 2-3 per cent of earnings per share.

Although there have long been disagreements between the two sides, the tensions burst into the open over the weekend. Mr Zong, one of China's most successful entrepreneurs, gave an interview to a Chinese website accusing Danone of bullying its way into controlling parts of the Chinese group not included in the joint venture. He also said Danone did not understand China.

Danone responded yesterday that Mr Zong had independently set up a string of factories that only produced goods for the joint venture. Mr Faber added that, after several months of negotiation, the two companies had signed an agreement in December last year paving the way for Danone to buy a 51 per cent stake in these factories, which would come under the umbrella of the joint venture.

Mr Faber said that not only had this agreement not been honoured but Mr Zong had this year set up a separate sales company to market the same products that the joint venture produced.

Mr Faber said yesterday he believed the two sides could still resolve the dispute, but reserved the right to take legal action for breach of contract after 30 days.

Shares in Danone, which fell 1.6 per cent in trading yesterday, closed down 0.44 per cent on concerns the venture with Wahaha could become unmanageable as a result of the dispute.

Groups representing Wahaha employees, dealers and sales-people have issued statements defending Mr Zong.

However, the French group now faces the difficult task of asserting control over the lucrative but troubled joint venture. Mr Zong, a hard-driving entrepreneur, had almost total management control of the business.

The dispute between the two companies is being closely watched by multinationals because it has highlighted many of the cultural differences that are often present in joint ventures in China.

Danone has been in partnership with Wahaha since 1996 and the bottled water they produce together has become one of the most well-known brands in China.

With sales of €1bn ($1.4bn) last year, the joint venture accounted for 5-6 per cent of Danone's operating profit and about half of Wahaha's profit.

The French group has accused Mr Zong of setting up a parallel sales company to distribute drinks brands controlled by the joint venture.

It has begun legal action against Wahaha in China and requested arbitration in Sweden. It has also initiated a lawsuit in the US.

Emmanuel Faber, head of Danone's Asia operations, will become interim chairman of the joint venture.

"This is a bit of a hollow victory for Danone," said one Shanghai-based executive familiar with both companies. "It does not really solve any of the problems they have with the joint venture."

Mr Zong said he was resigning because of the "humiliation and framing" he had suffered from Danone since the dispute began.

Additional reporting by Adam Jones in Paris

That brand is gaining notoriety for other reasons. The name Wahaha was chosen to sound like a baby laughing but is now at the centre of an increasingly contentious international business dispute.

Danone, the French group that has a joint venture with Wahaha, has launched a $100m lawsuit in the US against two of Mr Zong’s family and a subsidiary company over allegedly illegal sales of Wahaha drinks, while Mr Zong has accused Danone of trying to “frame” him and not understanding the Chinese market.

The dispute could lead to the joint venture, one of the most successful in China, falling apart.

In the process, it has put the spotlight back on whether multinationals should invest in China through such partnerships.

Mr Zong, 62, blends many of the strengths and weaknesses of his generation of hard-driving entrepreneurs. He spends 200 days a year travelling the country, visiting markets and testing competitors’ products to get a sense of what consumers want. While most rivals spent the 1990s focusing on big cities, he concentrated on smaller towns and rural areas to build broader support for the brand.

Wahaha remains a personality-driven company, with operations overly dependent on Mr Zong – who is often referred to as “Chairman Zong”.

He has flirted with eccentric diversification plans. Last year, he talked about going into the defence industry and mining.

For the past decade, Danone has benefited richly from Mr Zong’s entrepreneurial energy. When Wa-haha wanted to launch its own bottled water in 1996, it entered a joint venture with the French company that provided capital for the operation in return for a 51 per cent stake. The bottled water is now the market leader.

In retrospect, however, the business was an accident waiting to happen. Executives familiar with the joint venture say Danone has little influence on day-to-day operations. Yet, if Mr Zong wanted to use the Wahaha name on other products, he needed permission from the joint venture board – in other words Danone.

“In the successful joint ventures, the two companies have skills that complement each other, but in this case they are also competitors,” says Paul French, a retail industry consultant in Shanghai.

According to Danone, Mr Zong’s response was conflict. He set up a parallel sales company to market and distribute water and other joint venture drinks products.

With a slew of lawsuits pending, Danone won the first stage of the battle last week when Mr Zong resigned as chairman of the joint venture company, to be replaced by Danone’s Asia boss Emmanuel Faber.

However, the depth of the task facing Danone as it tries to assert control was underlined on Friday when Wahaha employees issued public statements denouncing the French company.

A letter claiming to be from the Wahaha sales team stated: “We formally warn Danone and the traitors they hire, we will punish your sins. We only want Chairman Zong… Please get out of Wahaha!”

Danone did not comment publicly on the letter.

The danger for Danone is that Wahaha’s extensive sales and distribution network, which deals with both the joint venture’s drinks and Wahaha’s own products, will undermine the joint venture.

A consultant who asked not to be named said: “From Danone’s point of view, it had become impossible to work with Zong, but it might also be impossible to run the company without him.”

However, Lu Jinyong at the Foreign Economic and Trade University in Beijing, says Danone should be able to stabilise the business. “There have been disagreements for some time so I assume Danone planned for the worst-case scenario,” he said.

In his battle with Danone, Mr Zong has tried to use his political contacts. He chose the National People’s Congress in March to go public with his attacks on Danone.

However, there are signs that the heavy nationalist language used by Mr Zong has not gone down well in Beijing.

State media reported that Beijing has tried not to take sides in the dispute.

If Mr Zong is to squeeze Danone out of control of the Wahaha brand, he will need to rely on his own energies.

The French food group said yesterday it was taking legal action in a Los Angeles court against a Wahaha company registered in the British Virgin Islands that it claims has been illegally selling drinks that are part of the joint venture.

The lawsuit is the latest step in a bitter two-month dispute between the two companies that could lead to the collapse of one of the most commercially successful joint ventures in China. It provides about 5-6 per cent of Danone's operating profits and had sales of €1bn ($1.35bn) last year.

Danone has accused Wahaha of creating a separate sales company which was marketing and distributing drinks that were part of the joint venture agreement between the two groups.

Wahaha responded yesterday with a strongly worded statement, accusing Danone of "ridiculous" tactics and of "utilising global pressure" to force Wahaha to concede.

"They do not understand chairman Zong [Qinghou, the founder of Wahaha]. The more you press him, the harder he will become. Once the truth is revealed to the public, Danone's departure from China and the capital markets will not be far away," Wahaha said.

Danone began legal proceedings in China against Wahaha in April. The French group said last week it had filed for arbitration with a body in Sweden that handles a lot of commercial disputes involving foreign companies in China.

In a separate development, Chinese customs last week seized 118,000 litres of Evian mineral water, a Danone brand, which officials said contained unacceptable levels of bacteria.

Danone said its water met international health standards and that it did not think the decision was linked to the dispute with Wahaha.

In the California case, Danone is suing Ever Maple Trading, a British Virgin Islands company that it says controls Hangzhou Wahaha Food and Beverage Sales, the sales company Danone claims is illegally selling the joint venture's products.

Tensions from the beginning

Danone first signed a joint venture with Wahaha in 1996 to make bottled water and since then the Wahaha brand has become one of the best-known in China's consumer industry.

But there have been tensions from the start. Although Danone owns51 per cent of the joint venture, the business has been managed by Wahaha's founder, Zong Qinghou, who has resented the lack of control.

The disagreements broke into the open in April, when Danone accused Mr Zong of setting up a parallel operation to sell the joint venture's products and Wahaha accused Danone of trying to take over Wahaha subsidiaries not included in the joint venture.

The French group said it was "shocked" by a decision from the Hangzhou Arbitration Commission in eastern China, which ruled that Wahaha Group should terminate an agreement to transfer its principal trademark to the joint venture.

The case is the latest episode in a feud between the two partners, which erupted this year when Danone accused Wahaha of setting up a parallel operation to make and sell the same products as the joint venture.

The ruling raises further questions about the future of the lucrative joint venture, which contributed 5-6 per cent of the Danone's operating profits last year. Danone has said that its China sales in the second half of this year will likely be reduced by a third due to the quarrel.

The dispute, which French president Nicolas Sarkozy brought up during his recent visit to China, has raised concerns among foreign companies about the risks of entering joint ventures in China.

The two companies first signed a partnership in 1996 and since then the joint venture, in which Danone has a 55 per cent stake, has turned Wahaha mineral water into the market leader in China and one of the best-known consumer brands in the country.

The row partly revolves around the issue of which company owns the rights to use the Wahaha brand name. In the initial 1996 joint venture agreement, Wahaha Group agreed to transfer the trademark to the new company.

However, when the dispute erupted earlier this year, Wahaha Group alleged that the transfer agreement had been rejected at the time by the local government, which meant the brand name was never actually controlled by the joint venture. The Hangzhou Arbitration Commission, based in Wahaha's home town, accepted the company's request that the transfer agreement be terminated.

Danone said the commission had made a "wrong" decision which "ignored fundamental facts" about the case. The group said that the local trademark office had made it clear that the trademark transfer agreement was never actually rejected.

Danone said it would appeal the ruling. It also said the two companies signed a further licensing agreement in 1999 which gave the joint venture the right to use the Wahaha name. Danone has requested that the dispute be heard by an arbitration panel in Sweden and has also launched a lawsuit against a Wahaha subsidiary in Los Angeles claiming $100m in damages.

Wahaha refused to comment on the ruling. The Chinese group, which has claimed that Danone held back expansion of the joint venture and invested in rival operations, has said it will seek damages from Danone.

Emmanuel Faber, president of Danone’s Asian operations, said the French group had already suspended a number of lawsuits against Wahaha, a Chinese soft-drinks company, and would agree to defer the other lawsuits if Wahaha entered substantive talks to secure the future of the successful joint venture.

However, in an indication that the stance in China could be hardening, a trade union that claims to represent the company’s workers, said Sunday it had won an injunction freezing certain assets of the joint venture in Shandong province as a result of a lawsuit accusing Danone of bad faith.

The conciliatory tone from Danone comes as executives have become increasingly worried that even if they win an international arbitration process about the case, they will not be able to enforce the ruling in China because of parallel judgments in Chinese courts.

The two companies have been partners since 1997 and the joint venture, in which Danone has a 51 per cent stake, has turned Wahaha mineral water into the market leader in China. It accounts for 5-6 per cent of Danone’s operating profits.

Danone has been involved in a public fight with its partner since April when it accused Zong Qinghou, the founder of Wahaha, of setting up a parallel production and sales operation for the same drinks products that the joint venture makes.

Mr Zong has not denied the existence of the parallel network, but says Danone reneged on their agreement by acquiring rival businesses in China.

The case has attracted unusual attention because it has brought into the open some of the tensions that have dogged other joint ventures in China.

Danone has begun a series of legal proceedings against Wahaha companies, including a lawsuit in a Los Angeles court for damages of at least $100m and an arbitration process in Stockholm. It has also made initial approaches to the Chinese Supreme Court. Mr Zong, who resigned from the joint venture, has launched lawsuits in China.

Mr Faber said Danone had put on hold six different lawsuits against Mr Zong in mainland China as a sign of good faith. He said French and Chinese leaders agreed during the recent visit of President Nicolas Sarkozy to Beijing that it would be best if an amicable solution were found.

The two had exchanged accusations and lawsuits for many months, with the French company accusing its Chinese partner of setting up copycat operations outside the ventures selling soft drinks and other products under the Wahaha brand - named after the sound of a laughing child.

The standoff was discussed last month during a visit by French President Nicolas Sarkozy to China and raised during a dinner hosted by President Hu Jintao. Danone chairman Franck Riboud also attended the dinner.

"Both parties agree to temporarily suspend all lawsuits and arbitrations, stop all aggressive and hostile statements, and create a friendly environment for peace talks," the companies said in a joint statement.

News of the effort to resolve the dispute over the highly successful decade-old joint venture with Wahaha, China's leading mineral water brand, helped send Danone's shares up 4.66 per cent at the end of last week.

Danone in April had accused Zong Qinghou, Wahaha's founder, of setting up a parallel production and sales operation for the same products the joint venture makes. Mr Zong has not denied the existence of the parallel network, but says Danone reneged on the agreement by acquiring rival businesses in China.

The dispute has drawn attention as an example of the risks inherent in Sino-foreign joint ventures, but Danone offered a truce by suspending legal action in China after top French and Chinese leaders said they favoured an amicable resolution.

"Both parties will work together to further develop all entities operating under the Wahaha brands and contribute to develop the Sino-French friendship," the two companies said in their announcement.

They gave no indication about how the dispute might be settled and did not say if the truce included a separate legal action against Danone by a trade union claiming to represent the joint venture's workers.

Danone executives have become worried that even if they win an international arbitration process about the case, they would not be able to enforce the ruling in China because of parallel judgments in Chinese courts.