Three months after returning to Wahaha, Zong Fuli has made some new moves. Recently, Wahaha Digital Technology underwent industrial and commercial changes: the former legal representative, executive director, and manager stepped down and exited the shareholder list, while Zong Fuli became a director and new shareholder, and Zheng Qundi took over as legal representative and manager, with multiple senior executives also changed. As Zong Qinghou's name is gradually removed from Wahaha's affiliated companies, power is being handed over to Zong Fuli. The power transition at Wahaha has been dramatic, and Zong Fuli, who staged a high-profile resignation and return, naturally attracts much attention. The public's long-term focus is on where Zong Fuli will lead Wahaha, while the short-term concern is whether she can secure her position.

Escalating Conflict Behind Employee Rights Disputes

Recently, the issue that has put Zong Fuli in the spotlight is the employee rights dispute. China Industry News reported on September 3 that several former and current employees of Wahaha Group claimed that the company recently required employees to re-sign labor contracts and repurchase employee stock ownership shares at low prices, leading dozens of employees to file a collective lawsuit. The trigger for this lawsuit can be traced back to August 2024, when Wahaha Group began requiring employees to terminate existing contracts and sign new ones with Hongsheng Beverage Group, led by Zong Fuli. This move directly led to the cancellation of the "dividend shares" (dry shares) benefits that employees enjoyed at Wahaha Group. Phoenix Net's Storm Eye learned from many employees that Hongsheng Beverage Group generally pays lower salaries than Wahaha Group, with "employees at the same level earning up to half as much." If layoffs occur, the compensation would also be significantly reduced because the length of service would be calculated based on the new contract. 21st Century Business Herald reported that some employees said that if they switch contracts and lose dividend shares, their annual income could drop by 20% to 30%. On September 7, Wahaha's official Weibo responded: "Recently, some media have spread false information about the labor union through articles using keywords such as 'Wahaha Rights Protection Committee lawsuit' and 'requiring employees to re-sign labor contracts,'" adding that they had never heard of a "Wahaha Rights Protection Committee" and that the union had not received any lawsuit information from such a committee. However, on September 8, a "Public Statement on the Collective Rights Protection of Wahaha Employees" (hereinafter referred to as the "Statement") circulated on Weibo, stating that the court had formally accepted the lawsuit materials from Wahaha employees. The statement was signed by the "Wahaha Employee Rights Protection Liaison Committee." On September 18, at her first employee representative meeting after taking office, Zong Fuli stated that this year's dividend shares would not be canceled and the salary structure would remain unchanged. However, dividends would be based on individual job performance, not solely on past seniority or rank.

Regarding the dry shares, we need to trace back to 2018, or even the last century. According to the book "Zong Qinghou and Wahaha: An In-depth Study of a Famous Chinese Enterprise," after the shareholding reform was completed in 1999, the Shangcheng District State-owned Assets Bureau held 51%, Zong Qinghou's shares remained at 29.4%, the then employee stock ownership association (1,885 people) held 17.34%, and 38 senior executives held 2.06%. After the reform, according to the employee stock ownership association's charter, regular employees who had worked for one year were eligible to subscribe for shares at a price of 1 yuan per share, thus forming an all-employee shareholding system. By 2003, the 38 senior executives transferred 2.26%, and the Shangcheng District transferred 5% of its 51% to the employee stock ownership association. The shareholding structure then became: Hangzhou Shangcheng District Assets Management Co., Ltd. held 46%; the employee stock ownership association held 24.6%; and Zong Qinghou held 29.4%. Under the system at that time, employee shareholders (members of the employee stock ownership association) were minority shareholders in enterprises within the Wahaha Group system. According to reports, the annual dividend per share could reach more than 0.8 yuan, making dividends an important part of employees' income and a legitimate right as shareholders. In 2018, Wahaha repurchased employee shares and changed to the current dry share dividend system, with the repurchase price being "2 yuan premium + 1 yuan par value." According to media reports, some employees were unwilling to sell their shares at the time, believing the price of 3 yuan was too low, but eventually signed the agreement due to various factors. Amidst anxiety about the inability to guarantee future rights, the rights protection committee demanded a re-examination of the legitimacy of the 2018 share repurchase, including whether it was reasonable to use undistributed dividends from previous years as the source of funds for the repurchase, and whether the employee stock ownership association, which was an important shareholder of Wahaha Group, becoming a shell after the repurchase affected the vital interests of more than 10,000 employees. Therefore, this rights protection incident is not only a conflict between employees and management but also a game of interests between minority and majority shareholders.

Two Wahahas?

In July this year, a letter of accusation circulated online titled "Solid Evidence Accusing Zong Fuli, President of Hongsheng Group, of Embezzling Huge State-Owned Assets from Wahaha Group." The letter claimed that Zong Fuli sidelined Wahaha's old employees and replaced the original management with Hongsheng personnel. At the same time, through Hongsheng Group directly entrusting external production, investing in factories with overseas investment companies, and adjusting procurement routes, she transferred the rights and interests of the state-owned Wahaha Group to "her own Hongsheng Group." According to media reports, after Zong Qinghou's death, Wahaha underwent huge personnel changes, with many employees, even senior executives, leaving, and Hongsheng Group's core staff began to enter Wahaha. Not long ago, 21st Century Business Herald pointed out in an article titled "Resources Tilted Towards Hongsheng Beverages? The Controversy of Two 'Wahahas' Brought to the Fore" that as Zong Fuli takes the helm of Wahaha, the relationship between Wahaha and Hongsheng Group is changing. Hongsheng Group was established in 2003 and has been undertaking OEM processing for Wahaha products. Zong Qinghou even said that Hongsheng's profit margin is higher than Wahaha's, reaching 30%. After Zong Qinghou's death, Hongsheng Group established a large number of companies covering production, trade, and marketing. Production companies include Jiangshan Hongsheng Hengfeng Food, Jining Hengfeng Beverage, Gaobeidian Hongsheng Hengfeng Beverage, etc.; trade companies include Shanghai Yan Orange, etc.; marketing companies include Hangzhou Hongchen Marketing, Hangzhou Hongsheng Marketing, Lhasa Hongsheng Marketing Co., Ltd. According to relevant media reports, "In the company's sales team, most of the national regional managers (provincial managers) have already transferred their labor contracts to Hongsheng Beverages." 21st Century Business Herald quoted the head of the rights protection liaison committee as saying, "After the death of the old Zong in February this year, we found that from front-end R&D to procurement, production, transportation, and back-end sales, there is a trend of resources gradually tilting from Wahaha Group to Hongsheng Beverages." Some companies related to Hongsheng have also been questioned for illegally authorizing external OEM processing to make profits. The publicly circulated accusation letter also provided specific details: "Zong Fuli, in the name of Hongsheng Group, entrusted external processing factories to produce Wahaha purified water under the Wahaha brand, and then sold it to Wahaha Group's sales company. Since the state-owned Wahaha Group is the only company with the right to entrust external processing of Wahaha brand products, Hongsheng Group's direct external production not only seriously infringes on Wahaha Group's rights but also illegally appropriates Wahaha Group's profits." Whether it is illegal entrustment depends on two key points: the ownership of the trademark and the ownership of the entrusted company. This is similar to the Danone-Wahaha dispute. The difference is that now the ownership of the trademark is not in dispute. At that time, there were many non-Danone-Wahaha joint venture companies that used the "Wahaha" brand but had no connection with Wahaha in terms of business registration. In 2007, Caijing magazine reported that according to registration records from the Guangzhou Administration for Industry and Commerce, a document signed by Zong Qinghou and Zong Fuli and stamped with Wahaha Group's official seal stated that Zong Qinghou and Zong Fuli were respectively from Wahaha Group and Hangzhou Hongsheng Beverage Co., Ltd. (now Hongsheng Group), proving that "Guangzhou Wahaha Hengfeng Beverage Co., Ltd." was a subsidiary of "Hangzhou Wahaha Group Co., Ltd." with "Hangzhou Hongsheng Beverage Co., Ltd." as the Chinese shareholder. Once the relationship was clarified and with Wahaha Group's authorization, it was reasonable for these companies to use the trademark. Returning to the present, it is equally important to determine the relationship between Hongsheng Group and its affiliated companies and Wahaha Group.

Why Were Offshore Companies Established?

According to Yicai, Zong Qinghou's autobiography stated that as Wahaha grew rapidly, it needed to increase investment to expand production capacity, but Danone's board refused or delayed, so a series of off-balance-sheet companies were established outside the joint venture to meet production and processing needs. Hongsheng Group is one of them. Hengfeng Trading Co., Ltd. is the major shareholder of Hongsheng Group, holding 98%, and is registered in the British Virgin Islands. In reports on the Danone-Wahaha dispute, some media said that the legal representative of Hengfeng Trading is Zong Fuli, while others reported that Hengfeng Trading was independently invested and established by Zong Fuli. Hongsheng Group once participated in the strategic placement of listed company Wankai New Materials. A 2022 announcement by Wankai New Materials showed that Hengfeng Trading is 100% indirectly held by Zong Fuli.

(Source: Wankai New Materials announcement)

Among the newly established companies of Hongsheng, some have shareholders other than Hongsheng Group, including non-mainland enterprises, and some are even actually controlled by the latter. For example, 90% of the equity of Zhengzhou Hengfeng is held by HONOUR BRIGHT INVESTMENT LIMITED. Regardless of the relationship between Wahaha and these shadow companies, there are large-scale related-party transactions in between. If they cannot be recognized as parent-subsidiary relationships, then related-party transactions can easily breed interest transfer. In the capital market, to prevent listed companies from transferring benefits through unreasonable related-party transactions with major shareholders and their affiliated companies, there are more transparent and higher disclosure requirements. As a non-listed company, Wahaha Group has large-scale related-party transactions with shadow companies without disclosure requirements. The less transparent, the more likely it is to arouse suspicion. If the related company or its parent company is an overseas company, another issue arises: whether funds have been illegally transferred overseas. We obtained a document showing that a board resolution of a domestic subsidiary of Hengfeng Trading approved a profit distribution plan of several million yuan. The committee also mentioned that Hongsheng's overseas platform may involve foreign exchange violations and has submitted report materials. Facing external accusations of "embezzling state-owned assets" and "violating foreign exchange regulations," and internal conflicts over employee rights that continue to escalate, despite having power in hand, Zong Fuli still has many problems to solve.