S23: Contentious Waters

• How did Zhong Shanshan, founder of Nongfu Springs, a bottled water company, become China’s wealthiest man?
• What’s the business of bottled water? How to sell nature as a luxury product?
• When consumer boycott meets national security: Why is Nongfu spring getting cancelled, both in China and in the US? How should it respond?

• 2.2 billion people still lack access to safely managed drinking water services, including 115 million people who drink surface water. (WHO/UNICEF 2023)
• 3.5 billion people still lacked safely managed sanitation, including 419 million who practiced open defecation. (WHO/UNICEF 2023)

• 62% of China’s water is used for agriculture, 22% for industry, only 14% for basic needs like drinking and cooking.
• China has much less freshwater per person: 1/4 of US, and 1/3 of global average.
• Per capita usage: The US uses the most water per person globally, three times more than China.

• Geographical disparity: Southern and eastern China get abundant rainfall, while northern and western regions are dry.
• Northern China has high demand for water but very little supply, using most of the country’s farmland and population.
• Northern regions are overusing underground water, causing aquifers to drop rapidly.
• Rivers like the Yellow River often dry up, and many lakes have disappeared.

Population growth, industrial rise, and farm chemicals have polluted China’s water:

• 2005: About 70% of China’s rivers and lakes are contaminated; half of its cities have significantly polluted groundwater
• 2018 China Water Resource Bulletin: Only 81.6% of the rivers, 25.0% of lakes, 87.3% of reservoirs, and 23.9% of shallow groundwater met the criteria for drinking water supply sources.

• Daily necessity for millions
• Source of further pollution
• Tragedy of the common?

• What’s the story of Zhong Shanshan?
• How did Nongfu Spring beat other bottle water companies?

• Zhong Shanshan (b. 1954) dropped out of school in 5th grade, became a bricklayer to support his family, and worked as a mason and carpenter for 10 years.
• After failing college entrance exams twice, he studied Chinese at a TV university and then worked as a reporter for the Zhejiang Daily.
• In 1988, he moved to Hainan, a new Special Economic Zone, to pursue new opportunities: he founded China’s first private newspaper, the “Pacific Post,” and created a mushroom farm, but neither worked.

• Chinese women’s running team won major races at the World Championships in Athletics in 1993.
• Coach Ma attributed their success to training and turtle soup and endorsed a “Turtle Essence” drink.
• Zhong launched a competing “Turtle Pills” product.
• The original “Turtle Essence” was exposed as brown sugar water in 1995; Zhong advertised his product’s legitimacy during the scandal.
• By 1996, Zhong’s turtle pills were a commercial success.

• Population growth, industrial rise, and farm chemicals have polluted China’s water – increased demand for bottled water.
• Foreign brands (Danone’s Evian and Perrier) initially entered the market but were expensive.
• Domestic brands like Wahaha and Robust offered cheaper purified water.

• Zhong Shanshan claims to have got the idea for bottled water from a visit to the Thousand-Island Lake (Qiandao Lake) – in reality a manmade reservoir created by a dam in the 1950s.
• 1996: Zhong established a drinking water company, renamed to Nongfu Spring in 1997.
• Nongfu Spring launched its first bottled water with a red cap, featuring the slogan “Nongfu Spring tastes a bit sweet.”
• The company sponsored the 1998 World Cup broadcast.

• Competitors Wahaha and Robust focused on water purity.
• Nongfu decided to stop selling purified water, citing “health concerns”.
• Nongfu now only sells “natural” water from Qiandao Lake.
• A slogan stated: “We don’t produce water, we are just nature’s porters.”

• Nongfu argued that drinking purified water carried health risks; their natural water is healthier.
• Nongfu ran ads showing flowers thriving in natural water but wilting in purified water.
• Wa Haha’s founder criticized the ad: “Flowers grow quite well in poo-poo too. Does that mean poo-poo water is the best water for humans to drink?”

• In 2006, Nongfu Spring – now a top-three packaged water business – promoted health benefits of weakly alkaline water.
• They distributed pH strips to the public to test water acidity.
• Slogan: “A healthy life needs natural weakly alkaline water.”
• Critics called their tests unscientific, but the ad campaign worked.

• How to sell quack?
• Why does quack sell?

• Appeals To Vanity: Try and see; disregard scientific evidence in favor of personal experience — to think for oneself
• Turning Customers into Salespeople: Give testimonials; help fellow human beings.
• The Use of Fear: Invented disease (e.g. Attack on water fluoridation)
• Hope for Sale: The love potion, the fountain of youth, the cure-all, and the athletic superpill.

• In 2007, a viral blog revealed Master Kong’s “high-quality source” was actually filtered tap water.
• Consumers were angered by paying premium prices for filtered tap water.

What should Nongfu Spring do?

• Nongfu Spring used a price war between competitors as an opportunity.
• It raised its bottle price from 1.5 RMB to 2 RMB (2010-2012), while rivals sold at 1 RMB.
• Nongfu kept wholesale prices stable, so distributors and retailers profited.
• This led retailers to give Nongfu better stocking and shelf space.
• Nongfu achieved top market share in 2012 and held it for years.
• Profits were invested in new products like juices and teas.

• What is the business bottled water?
• How to make people pay more for something that is essentially free?

500 KM rule

• Bottled water has high gross margins (60%), with main costs being freight and packaging.
• Profitability is only possible within a 500km transport radius.
• Nongfu’s key water sources near major cities, enabling on-site production and reduced shipping costs.

Water or Petrol Company?

• PET bottles, made from petrochemicals and linked to crude oil prices, represent 31.6% of total costs – the largest cost component.
• Falling oil prices have led to reduced PET costs.

• Bottled water price is not driven by the need to satisfy bodily needs, but by social factors.
• Veblen effect of luxury goods: Demand of good rises with an increase in price.
• The high price of a product signals scarcity and appeals to elite consumers: desire to gain respect, group membership, recognition, and distinction.

• Nongfu Spring led the domestic packaged water market for 8 years (2012-2019).
• The bottled water industry is highly profitable: gross profit margins for Nongfu Spring’s products frequently exceeding 30% between 2012 and 2014.
• IPO in Hong Kong in September 2020: stock price opening 85.12% higher than the issue price

• Wahaha founder Zong Qinghou died in Feb 2024.
• Online discussion shifted from praising Zong to attacking Nongfu Zhong.
• The main accusation was that Zhong started unethically while working for Wahaha.
• Zhong denied this, stating he was never a Wahaha employee and respected Zong as a mentor.
• The negative campaign continued and escalated into nationalism.

• Wahaha’s sales increased significantly while retailers removed Nongfu Spring products from shelves.
• Daily online sales dropped by nearly 90%.
• Water sales declined 21% in 2024.
• 2024 annual report: “unprecedented smear campaign”

• Why was Zhong cancelled by Chinese netizens?
• What should he do to save Nongfu?
• What can this controversy tell us about Chinese consumers, the CCP, and Chinese entrepreneurs?

• What just happened?
• What should NH do?
• What should Nongfu Spring do?

• Would you approve or reject NF Spring?
• What are the main issues for you?
• Does it matter that the buyer is Chinese and spent 4 times the assessed price on the property?
• Who are the other stakeholders (NH government, Committee on Foreign Investment in the United States)? Should they get involved – how and why?

The selling price is not widely regarded as exceeding market value. In fact, the property was reportedly one of the few structures of its size in New England available at the time that was capable of meeting the bottling company’s structural and technical requirements.

“The BEA business development manager did not violate any existing BEA or state policies or protocols through his actions in helping to facilitate the purchase of the subject property or in failing to notify his supervisors of the transaction.” But the BEA has since altered its process to better flag these types of investments: “Across both state and local government, certain employees require greater awareness of emerging avenues for malign influence by foreign actors.”

• Before Zong Qinghou of Wahaha died in Feb 2024, he established wills for his wife and daughter, Kelly, and instructed the creation of three large trusts for his extramarital children.
• 2025: Zong’s extramarital children sued Kelly, alleging the trusts were not established and funds were withdrawn.
• Added complication to inheritance struggle: An investment arm of the Hangzhou government has a majority stake of 46%.
• Wahaha became the new target of online boycott campaigns.