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China Tianfu Cola wins lawsuit against Pepsi over formula

Updated: 09 Dec 2010
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China Tianfu Cola wins lawsuit against Pepsi over formula
 
While global soft drink trench warfare has long been fought between Pepsi and Coca-Cola, a once-iconic Chinese cola brand has won a protracted lawsuit against Pepsi, coming after a 12-year joint venture.

The China Tianfu Cola Group has taken the first step toward resurrecting its former household brand, as it won the court's favor in a trade-secret dispute against the Chongqing Pepsi-Tianfu Beverages Company.

This case has been depicted as being symbolic of the struggle of some domestic businesses as they attempt to maintain their market share after aggressive, and potentially ruinous, joint ventures.

"The first battle was hard won. I see hope for the future of our company now the verdict is out," Qian Huang, general manger of China Tianfu, said in a statement e-mailed to the Global Times yesterday.

In October 2009 China Tianfu sued Chongqing Pepsi-Tianfu, seeking to stop the joint venture from using its formula and other production processes.

In a verdict handed down Friday, the Chongqing No. 5 Intermediate People's Court ordered Chongqing Pepsi-Tianfu to stop using the relevant know-how and to hand back all relevant elements and information to China Tianfu within 10 days.

China Tianfu had further claimed compensation of 1 million yuan, but this was dismissed by the court.

Prior to its 1994 joint venture with PepsiCo International, in which it held a 40 percent stake, China Tianfu was the nation's leading cola manufacturer, with 108 sub-operations nationwide and annual profits of 10 million yuan. The cooperation lasted 12 years until China Tianfu sold its stake to PepsiCo Investment (China) in 2006.

"PepsiCo never really wanted to operate this venture successfully. It produced less and less Tianfu Cola starting from the second year until 2000, when Tianfu Cola accounted for roughly 1 percent of the venture's output," said Qian, who claimed PepsiCo had sought to kill off its rival.

This ran counter to the original agreement that specified that Tianfu Cola should account for no less than 50 percent of the venture's total output.

The verdict specified that, for several years, the venture produced Pepsi-branded products on a scale exceeding the ratio agreed upon. It also raised the price of concentrated solutions, a key ingredient in the drink, a practice that netted huge profits for the mother company but resulted in 12 years of losses for the venture.

The joint venture posted a loss of 140 million yuan in 2006, Qian said.

Qian said he would file another lawsuit against PepsiCo, demanding a void trademark transfer, claiming trademark loyalties and compensation for the devalued Tianfu trademark.

It is Qian's intention to revive the Tianfu brand when its non-competition agreement with PepsiCo Investment (China) runs out at the end of 2011.

PepsiCo China said yesterday that Pepsi-Tianfu would respect the verdict and pass on all relevant information to its former partner ahead of the expiration of the contract.

"We have not only absorbed and hired more than a thousand local employees, but also provided various extra financial support to both the joint venture and the local partners," the statement said.

The Pepsi-Tianfu case is only the tip of the iceberg, in terms of business deals between foreign and Chinese companies, that have gone wrong. Analysts point to litigation in industries ranging from beverages and chemicals, to automobiles and pharmaceuticals.

Ma Dongxiao, a partner with the Grandall Legal Group's Beijing office, said the '80s and '90s were rife with such cases, based on foreign companies slobbering at the Chinese market potential, and local companies being hungry for capital.

In these decades, local brands fell behind in terms of technology upgrades and sales, driving them into the arms of foreign companies only too willing to set a foot into China.

However, such marriages don't usually end in divorce if local brands are marginalized or forced out of business.

For example, Power 28, producer of a super concentrated detergent, faded out of the market after a JV with Reckitt Benckiser AG in the 1990's.

Pepsi was embroiled in a similar situation in the '90s with Beibingyang, a soft drink company. Dominant for 40 years in China, the Pepsi deal soon saw Beibingyang fail, China Weekly reported.

He Weiwen, a professor with the University of International Business and Economics, told the Global Times that these alliances are not always negative. They could help Chinese players upgrade their design and innovation capability, which has proved to be a major obstacle for local companies to expand influence worldwide.

Yu Mingyang, a professor of brand marketing at Shanghai Jiaotong University, said foreign brands' business strategies often put local ones at risk.

"While seeking entry into the Chinese market, foreign companies will seek to use local partners' plants and sales channels," he said.

SOURCE: Global Times
  
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