China: Its Time …. I think.

#winebiz:

Talking to a US producer the other day about his Chinese exports, I asked what I should tell others about selling in China. He said tell them, “Come on in. The water is fine.” Really? Is it time to jump in and export?

Clearly their consumers are growing in their taste for wine. As producers they are now 5th in World Production. Today in their 10 growing regions, there are more than 800 wineries. Seventy percent produce less than 60,000 cases. The largest 6 wineries are responsible for 70% of total Chinese production.

Hong Kong with a serious lust for wine dropped its import duty to 0% about 5 years ago. Since then the volume of wine traded in the region has spiked, and as demand has grown some of that wine has made it into China without the 41% duty required for imported wine to the mainland which is raising eyebrows among the protectionist ruling party.

What else is evolving besides more potential consumers?

  • China also has a well-deserved reputation for not protecting trademarks and that extends to wine. A recent article in Decanter estimated that 30% of wine sold in China is not what the label represents it to be. Recently the Government did decide to protect the Napa brand so there is slow progress.
  • There is change over in the Leadership of China that is presently underway, leading to a long debate about how the new leaders will balance fiscal policy, protectionism, and personal freedoms.
  • Economically the country is seeing a slowdown that is mirroring the rest of the world. Unable to sell to Europe as before, there is more and more discussion about the conversion to moving back from a pure manufacturing economy and transitioning to more of a consumer economy.
  • Wine consumption is evolving. After the last decade of using first growth wines for gifting, many of the younger Chinese are developing a taste for the grape and are starting to expand into other countries wines.
  • Chinese investors are looking at methods to spread out their wealth and are investing in distribution, plantings and wine producers over the world and in their own backyard as you can see in picture at left where this facility is hoped to be the largest bonded warehouse for wine in the Southwest of China.

What you can say is things are changing. Given my youthful look I probably shouldn’t have first hand experience … so I must have got this from history class…………anyway … I wonder how China got to this place in the world economy because most people who have a little gray hair remember when the Chinese were really Communists, living behind a wall and carrying little red books. You can debate what they are now if you like, but nobody will argue China is the same as it was in 1971. That’s when Former President Nixon’s Ping-Pong Diplomacy forever opened the world to the Chinese and their people, and their people to the world. Interestingly, if you ask a person on the street in Beijing about that event, they point to America’s sponsorship of China in the world as being a galvanizing point for their country. They are grateful for our part and even teach about the positive impact President Nixon had. They see him in a very positive light.

On the other hand, that event for Americans is a dimming part of history made even more murky by sentiment about the circumstances surrounding President Nixon’s departure from office. Forty years later, most Americans still wonder who is the Chinese consumer, and for wine producers: Is there a market for US wine in China?

That’s why about 4 years ago I jumped at a chance to join the Napa Vintners Association in an Asia Trade Mission where we spent time in Hong Kong, China, and Japan. As is often the case, when you put a face on any preconceived ideas and meet the people, you will come away with a changed view and I was certainly changed. They understood about as much of the US Fine Wine Industry as I understood about them.

China is a unique mix of Socialism and Capitalism, so it was with great interest that I read all the current changes to modernize, open to trade, and consume wine. More interesting to me from a social perspective – the Banks in China are now being given latitude in their very controlled banking system, to make choices about the rates they charge and offer customers. That is a very big deal to see and its another move away from strict government control. Why the actions? Probably many reasons, but a look at the chart at the top shows one of the main ones: The Chinese economy is cooling off. Europe is sneezing and the world is catching a cold including the Chinese.

When we put the puzzle together of a faltering Europe, a slowly improving US climate, and the continuing evolution in China, what I see is both opportunity and threat. Its an opportunity to begin building wine brands in China with an emerging wine consumer there and potentially a weakening US dollar over time relative to the Chinese currency. At the same time there is a threat from Europe, Chile, and Argentina with wekening currencies. The wine exporting countries want our counsumer and they are supported in that with weaker currencies. China has a weaker currency, but is rapidly strengthening even if its being artificially held back.

Both a Threat and An Opportunity

I don’t think we will see much change in exports from the US Fine wine producers to China in the intermediate term. Why? Because while we are interested in the Chinese, we are preoccupied with our own markets. We sell all our own wine here and with an emerging grape shortage, we aren’t going to notice the increasing imports from the EU. But what happens 7-12 years from now when supply catches up with domestic demand? Will US producers just be slaves to our own market, or will they emerge from behind our own walled off thinking with a world view and be ready to move US Fine Wine into the mainstream of world consumption?

Its the Wild West these days in the Far East. There is opportunity but its buyer beware given the wholesale change in consumers, regulation, the leadership, economy, etc. There is so much upside given the growth in their consumer palates and the size of the populace, but how can you predict anything? In my mind, its time to seriously dip a toe given the shift I see, but its hard to say the water is fine.

SVB on Wine

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