(FORTUNE Magazine) – WHEN PERRIER'S management put bottles of Badoit Rouge in the factory cafeteria in June, the union knew that war had been declared. Badoit Rouge had just been launched by rival Danone to go head-to-head with Perrier's new super-bubbly brand, Eau de Perrier. "It was a provocation," recalls one Perrier truck driver. "We took the bottles and dumped them in front of the factory director's door, so he couldn't get into his office."

"It was not a provocation," says André Sembelie, head of human resources at Perrier. "It was to make the union realize that there was a competitor under our nose."

Perrier, the self-styled champagne of mineral waters, is in turmoil, with a vicious struggle underway for the soul of the business. In one camp stands Nestlé, which bought Perrier in 1992 and says it has never made a Swiss franc on the brand. Nestlé's corporate style may be as cold as an ice-cream freezer, but executives steam up at the mere mention of the CGT, the left-wing union that is supported by 93% of Perrier's 1,650 workers and that has resisted all of Nestlé's attempts to turn a profit. "We have come to the point where the development of the Perrier brand is endangered by the stubbornness of the CGT," says Nestlé CEO Peter Brabeck-Letmathe. For his part, Jean-Paul Franc, 49, head of the CGT at Perrier, is just as serious. "Nestlé can't do whatever it likes," he says of the company's plan to cut 250 full-time jobs by 2007. "There are men and women who work here."

Nestlé's showdown with the CGT may have farcical moments, like the Badoit brouhaha. Yet it promises to be a defining moment in global capitalism's struggle to force the old Europe of mighty trade unions and benefit-laden workers to respect the profit motive. France, home of the 35-hour workweek, is the front line in this war--and foreign companies have begun testing the enemy's defenses. In July, Bosch, the German auto-parts firm, forced its French employees to accept longer hours for less pay and fewer benefits after threatening to close its plant near Lyon.

But the battle for Perrier is on a different scale, pitting the world's largest food company against an entrenched union over the world's most famous mineral water. So it isn't just competitors like Danone that are monitoring the news from Vergèze. In September, Economics Minister Nicolas Sarkozy declared that the Perrier dispute was damaging France's image with foreign companies. He followed up by banging Perrier management and union heads together in a futile attempt to find a solution.

On the face of it, Perrier employees have no cause for complaint. True, the factory, on the site of the original source, stands in drab contrast to Perrier's effervescent image. The compound covers a 234-acre stretch of a dreary Mediterranean coastal plain not far from Nimes. From a distance it could be mistaken for a power station or an auto plant. But life isn't so bad for Perrier's workers. When they're not striking (the last time in April), they work a 35-hour week and earn an average annual salary of $32,000. That's good money in this part of France and more than most European mineral-water workers earn.

They are, however, steeped in a left-wing tradition that goes back to the French Revolution, when their peasant ancestors sacked the local chateaux. The union's worldview is summed up by two pictures. The first is a cartoon in the CGT magazine, which depicts Brabeck-Letmathe as a cigar-chomping, top-hatted capitalist. The second is an oil painting in Franc's office showing a Perrier worker in overalls, one of the doughty sons of the local soil determined to defend their heritage. "Morally speaking," Franc says, "the water and the gas stored below this ground belong to the whole region."

What foreign company wouldn't be discouraged by such talk--or by Perrier's numbers? Last year its pretax profit margin was 0.6% on sales of about $300 million, compared with 10.4% for the Nestlé Waters division overall. This year Perrier will revert to form and record a loss. The problem is worker productivity: The average Perrier worker produces only 600,000 bottles a year, compared with 1.1 million bottles per worker at Contrex and Vittel, Nestlé's two other international French mineral-water brands, where the CGT is weak. Put another way, it takes 22 workers to make a bottle of Perrier from beginning to end, compared with 12 at San Pellegrino, Nestlé's Italian mineral-water brand.

Brabeck-Letmathe has threatened to sell Perrier if it doesn't make money soon. "There is no reason productivity should be so low and absenteeism so high," he said at an October press conference.

His message may finally be getting through. Earlier this fall the union, under intense pressure from Sarkozy, lifted its veto on Nestlé's latest restructuring plan--its fourth since 1992. (Ironically, the veto derives from a labor law introduced by Sarkozy, which boosted the powers of the majority union in an enterprise.) Sarkozy believes that if Nestlé pulls the plug on Perrier it will be a terrible advertisement for the French capitalist model, which attempts to balance the rights of workers against the demands of shareholders.

Nestlé's plan to cut 15% of its workforce doesn't sound like much, but management has also launched a compulsory assessment and retraining program for the remaining workers. If they don't shape up, Nestlé has made clear, it will carry out its promise to sell the company.

The trouble is, Franc and his troops remain opposed to the plan and reserve the right to take further action. "I know the CGT can act against our plan," says Richard Girardot, the CEO of Nestlé Waters France, who spent 17 years at Perrier, "so I have my doubts."

NESTLé WOULD NEVER be in this mess if Perrier hadn't been one of the 20th century's greatest marketing triumphs. Louis-Eugène Perrier, a local doctor, bought the source near Vergèze in 1898, then sold the business to John Harmsworth, an English entrepreneur. Under Harmsworth, Perrier became the epitome of French joie de vivre. After World War II, another marketing genius, Gustave Leven, acquired the company. Leven promoted Perrier as the perfect tipple for Wall Street yuppies who wanted a clear head for their next banking deal. At the peak of its fame, in 1989, Perrier sold 1.2 billion bottles (compared with 830 million last year), of which almost half were destined for seemingly unquenchable U.S. customers. "It was fabulous to be at Perrier at that time," recalls Franc, who joined the company in 1977.

It was certainly fabulous for workers. Leven caved in to every pay raise, social benefit, or extra holiday demanded by the CGT, financing the cost from Perrier's effervescent profits. The workers even won the right to be described as "co-manager" of the plant. But in 1990, Perrier lost its fizz overnight when a minute trace of benzene was found in a bottle bound for the U.S. American sales collapsed, and Leven resigned the same year. By 1992, Perrier's annual output had been halved, and the company was close to bankruptcy.

Enter Nestlé, which bought the brand for $2.7 billion. What Nestlé saw was a turnaround opportunity. Perrier was still the world's best-known mineral water. And packaged water was a fast-growth business for a lumbering food company like Nestlé.

You can't accuse Nestlé of lack of effort in trying to restore Perrier's fortunes. Between 1992 and 2000, it fought the CGT to cut 1,000 jobs. Since 2000 it has invested about $250 million to launch new brands like Eau de Perrier and move into cheaper plastic bottles, which are increasingly popular in the U.S. "From a technical point of view, we're in a good position," says Pierre Mineraud, 57, Perrier's co-general manager in charge of production.

The other half of the plant management team is human resources director Sembelie, 48, who has years of experience dealing with the CGT. He insists that the time for diplomacy is over: "The CGT says, 'Be charitable.' From my point of view that isn't the question. The main purpose of a private company isn't charity but profitability."

Unlike most Nestlé executives, Sembelie refuses to trash Franc. But he sticks to the Nestlé line that if the CGT would only get out of the way, Perrier could be a viable business. That may prove a strategic error by Nestlé. The reason Perrier workers overwhelmingly back the CGT is that, like Franc and his comrades, they don't get capitalism. No amount of retraining will adapt Perrier's time-warped proletarians to 21st-century market forces. And that means both the CGT and Nestlé will probably emerge defeated from this battle, with France's reputation among investors suffering collateral damage. At Vergèze there's no doubt about who will lose the most. Nestlé can easily afford to sell a brand that contributes less than 0.5% of its total revenue. But in the event of a sale, the CGT could end up co-managing nothing.

Brabeck-Letmathe insists that the Perrier brand is not tied to a locality and that a new owner might build a new plant elsewhere. Industry experts agree. "Perrier is a brand that is easily transferable," says Tom Pirko, head of BevMark, a Santa Barbara beverage consultancy. "Consumers don't care all that much about the geographic representation."

Not surprisingly, such an outcome would be anathema to the CGT. "It would be fake Perrier," says Franc. He adds that if a new owner tries to move from Vergèze, "they will find us in their way."

It is hard, though, to see how yet another strike could prevent the construction of a Perrier plant in, say, Slovakia. Outside Franc's office, Dr. Perrier's source still gurgles away. But one day soon the Vergèze plant may finally run dry.