Pepsi had been competing strongly against Coke throughout the world. In 1993, to gain an upper hand in a new market, Pepsi established a bottling plant in cooperation with the local government in Sichuan, an inland province of China. Sichuan Pepsi's business was a big success. The troubles, however, soon started. Sichuan Pepsi refused to follow the policy of allocating separate sales areas for each bottler. It compelled Pepsi China to reduce the price of the concentrate and was eager to produce beverages with new brands to compete with Pepsi. Investigations showed that the management of Sichuan Pepsi took many actions which went against its agreement with Pepsi. The company had transformed from a state-owned enterprise to a company controlled by individuals who formed the top management of Sichuan Pepsi. Both the local government and Pepsi China had lost control of this new cooperative. This case illustrates a special kind of risk in joint ventures in transitional economies: the privatization of the local enterprise partner through some form of management buyout. This risk is further complicated by the changing relationship between the government and enterprises in China, the guanxi-dominated institutional environment and continuous economic reform characterized by 'crossing the river by feeling each stone' which refers to Deng Xiaoping's policy of moving ahead with economic reforms slowly and pragmatically. In order to succeed in such an environment, a firm must be prepared to face the 'crouching tiger, hidden dragon'.
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