Grapes of wrath?

With little evidence that the Australian wine industry is dumping product on the Chinese market, it appears China’s Commerce Ministry may well have jumped the gun with its latest threat to slap tariffs on Australian exporters

21 August 2020 | Marcus Reubenstein

As Australia-China diplomatic relations continue to unravel, Chinese authorities may have been too quick to add winemakers to their export hit list.

Earlier this year China imposed an 80 percent tariff on Australian barley and suspended the import licenses of four major beef producers, affecting about one-fifth of Australian exports. In those two cases the issues raised by China had been floating around for some time and they were put on the table in the midst of rising political tensions.    

There doesn’t appear to be any background issue relating to these latest allegations, other than Australia-China relations being at an all time low.

The China Alcoholic Drinks Association (CADA), which prompted the Commerce Ministry investigation, has a vested interest in protecting China’s uncompetitive winemakers. It also has a history of lodging complaints with the Chinese government when facing competition from imported wines.

CADA filed an almost identical claim of dumping against European wine producers in 2012. After months of investigations, and negotiations with the EU Committee of Wine Companies, the Chinese government dismissed the claim.

Part of that bargain saw the Chinese government secure an agreement with European wine producers for them to spend two years advising Chinese producers on wine production and marketing.

The CEO of one of the ten Australian wine producers subjected to this anti-dumping investigation says, “It’s quite possible that Chinese authorities will not make an adverse finding against Australian producers.

“It will be very hard for them to find that there has been dumping because I just don’t think it’s going on.”

China’s muddled hit list

Australia’s four biggest wine exporters to China are now under investigation, they include Treasury Wine Estates (Penfolds), Australian Vintage Limited (McGuigan Wines), Accolade Wines (Hardys) and Casella Wines (Yellow Tail).

Yellow Tail has been named by Wine Intelligence as the most powerful global wine brand for three years in a row. It’s produced by Australia’s largest family owned wine company Casella Wines which was founded in 1969.

The company has not commented publicly on the investigation, however, an industry peer with significant business exposure to China says of owner John Casella, “He’s one of the most reputable winemakers in Australia, he’s not the kind of person who would dump product or manipulate markets. I doubt whether he’s ever acted improperly in his life.”

Such are the sensitives in relation to China relations, and the threat it now presents to the Australian wine industry, few are willing to speak publicly for fear of inflaming tensions.

Pernod Ricard, which owns Jacob’s Creek wines is the only major Australian wine producer not on the Chinese list, though an Australian brand its parent company is French.  

Penfolds Bin 389 sells for the equivalent of A$100 per bottle in China

One industry player has called the list of producers targeted by the Chinese investigation “quite random” and “it looks like they identified these companies by looking up names on the internet.”

Among the ten companies one is a bulk supplier which is clearly not dumping product in China as it does not sell wine into the retail Chinese market.

That company, South Australian Wine Group, sells bulk wine to a number of Chinese-owned wine labels but it does not own or market any brands in China.

Though peak industry body Wine Australia has not named the winemakers subject to China’s Commerce Ministry investigation, a list has been published on at least one Chinese website.

According to that list, there are some seemingly insignificant players, including a small winery and restaurant in Western Australia and small Tasmanian winery which apparently does not export to China.

Little evidence of widespread predatory pricing  

A lot of Australian wine is being sold through online channels like Alibaba Group-owned Taobao, TMall and JD.com; as well as product promoted by social media influencers, who are known in China as KOLs (Key Opinion Leaders).

Some Australian wines are being sold online for as little as A$6.50 per bottle, however, a Shanghai-based Chinese wine distributor who has reviewed online prices of Australian wine says, “In general, there is nothing out of the ordinary with the pricing of Australian wines, particularly in relation to the major wine brands, they’re being sold in line with international market prices.”

One South Australian wine producer says, “Every major Australian winemaker’s China strategy is built on superior quality and brand premium. It’s hard to think that they would start slashing prices on their premium brands, that sends a pretty poor message about your product to Chinese consumers.”

Citing the market leader of Australian wine exports to China, he says, “Penfolds is built on its premium pricing, the Chinese are gladly paying $100 a bottle for Bin 389 and that’s their market. It doesn’t work here, Australian wine drinkers know you can come to the Barossa and pick up a South Australian red that’s just as good for $25 or $30 a bottle.”

However, a 2018 investigation by the Australian Financial Review, outlined complaints from a number of Chinese wholesalers that, Penfolds’ owner, Treasury Wines (TWE) was pushing its lower value brands on to wholesale Chinese customers as a condition to selling them premium wines like Bin 389 and Grange Hermitage.  

Unlike privately owned wine producers, as a publicly listed company, TWE Limited faces added pressures because it has a large portfolio of globally marketed brands and has to keep its customers happy as well as delivering solid sales growth for its shareholders and institutional investors.

Premium pricing sees Australian wine surpass France

According to Beijing-based wine writer, Jim Boyce, premium pricing underscores Australia’s success in China which has seen it take over France to becoming China’s top imported wines for the first six months of 2020. By value Australian wines claimed 38.2 percent of the market compared to just 26.3 percent for the second placed French.  

As with most Australian agricultural exports, China is the market which pays the best price. Says Boyce, “When it came to volume [of Australian wine exports] China ranks third, with just over half as much as the UK. Again, the numbers underscore China as a lucrative market for Australia more in terms of value than volume.”

Sour grapes from Chinese producers?

In terms of its volume China’s wine industry is not insignificant, over the past five years it ranks as the world’s eighth largest wine producer outproducing high quality major players in Germany, South Africa, Portugal and New Zealand.

Whilst China is geographically vast it does not have ideal grape growing conditions and significant vineyards in regions like Shandong province, on the northeastern coast, face considerable risk of heavy rainfall or typhoons destroying crops.

According to one Australian bulk wine producer, some Chinese winemakers are perplexed by Australia’s ability to land reasonably priced bulk wine into China. “People who own vines in China are asking what’s happening? How can Australian wine arrive in China at half the price and three times the quality of Chinese produced wine?”

Whilst many input costs, particularly labour, are significantly lower in China, Australian wine production technology is far more advanced and Australia’s ideal growing conditions deliver a far greater yield from its vines.

Chinese winemakers toil for poor returns

Says Jim Boyce, “Remember, this investigation was triggered by a complaint from the China Alcoholic Drinks Association. Think of all the investment in wineries, nurseries, irrigation systems, access roads, administration buildings, trips, events [and] wages. And the result is modest sales.”

Boyce also points out that the volume of Chinese wine production is sometimes overstated if wine is produced in one province but bottled in another. He says some winemakers consolidate externally sourced wine, which has already been accounted for in another province, with their local production volumes.

This ‘double-counting’ distorts the market and makes local producers look less profitable whilst creating the false impression that it is importers who are distorting the market by dumping product.  

A source within Australia’s wine industry, tasked with formulating a response, says it’s possible this Commerce Ministry investigation may end up like the EU investigation six years ago and lead to greater cooperation. History shows tariffs don’t make for efficient industries.

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