China wine boom? Not likely

Wines & Vines, Nov, 2000 by Kevin Sinclair

There's a common notion, held widely and optimistically, that when Washington eventually gets around to signing the World Trade Organization (WTO) agreement with Beijing, there will suddenly emerge in China 1.3 billion people, all holding out glasses to be filled with Zinfandel.

A nice idea. Unfortunately, it's not true. As the inevitable date for China's entry into the WTO draws closer, a little bit of reality has begun to dawn. Suddenly, those 1.3 billion winelovers have begun to fade into the paddyfields.

There will be a boom in China, certainly, especially in business travel. Hotels expect a gold mine, as businessmen rush into the country seeking opportunities, and then as they are followed by families (to settle as expatriates) and by friends (to visit). This increase in tourism will certainly mean an increase in wine sales, but those visions of tens of millions of Chinese all wanting to swig down a nice Chardonnay are largely wishful thinking.

Growth will be slow, steady but at times uncertain. Young Chinese are getting a taste for wine and as disposable incomes grow, more wine will be sold. But growth will be in the double-digit regions, not explosive.

A healthy by-product of WTO is that it will put indirect pressure on Hong Kong to reduce its own taxes. That would be great news for the market in the Special Administrative Region, which although now part of China jealously guards its own taxation policies.

Research in Hong Kong, Shanghai and Beijing by myself and reporter Prudence Lui Lai-kuen show several interesting facts: * Beer now carrying a 70% tax, will be tax-free by 2005;

* Spirits, including bourbon, whisky, rum and vodka, now carry 65% which will be cut to 10% by 2005;

* Wine, also now 65%, will be cut to 20% by 2004.

Distribution services in China are now restricted for foreign companies. But over three years after the agreement, free distribution will be allowed throughout the nation.

A Fight for Market Share

Don't be carried away with enthusiasm, however; China is considerably larger than the continental USA and rail, road and air services are not as advanced. Also, existing distribution networks are not going to roll over and play possum; they are going to fight for their market shares, just as would any American businessman threatened by outside competition.

Most Hong Kong agents seem very cautious about the change. They adopt a wait-and-see approach.

Guillaume Roy, trade attache for Agro-Food Products at the French Trade Commission in Hong Kong, says WTO will see the gradual disappearance of the biggest trade barrier for the wine industry. Taxes will be reduced progressively from 65% to 14%, he says. It will be higher--20%--if shipped in bulk and double that for must.

"We consider this very positive, since it contributes to a more qualitative approach," he adds. It gives a strong advantage to the better products.

At least as important as the tax deductions is market liberalization in terms of import and distribution, he says. That's essential if trade in wine is really to be free. There might be protectionist reactions from local wine producers because imported wines will be more competitive.

China's big internal sellers--Dynasty or Great Wall--wholesale at about US$3.50 a bottle. But, as anyone knows who has been to a Chinese banquet, these are not great in terms of quality, but consumption in China is still largely price-driven.

Roy explodes the great myth of the 1.3 billion thirsty consumers just waiting for WTO so they can buy premier vintages. Not so, he stresses. "Consumption is incredibly difficult to assess," he notes. "And most Chinese people will not even get exposed to the products over the next five to 10 years."

Problems: Storage and Logistics

Nick Pegna, sales manager in Hong Kong of the old established British house of Berry Brothers and Rudd, says WTO will initially make little difference.

"The problem that most suppliers have in China is storage and logistics of handling wines in such a vast expanse of country," he points out. "This will not be changed by WTO. However, the possible ease of import restrictions certainly will help. Currently, importers must provide invoice, packing list, bill of lading, certificate of origin, certificate of bottling date, analytical reports which include ethanol content, sugar level, and wine specifications for all wines being imported into China. These are time-consuming, costly, and a real headache," he says.

The trade commissioner for a leading European producer asked not to be named. He said: "Nothing will happen. Oh, well, something will happen, China will lower its tariffs, there will be a bit more transparency in import procedures, we will see less smuggling of wine which means official import figures will rise and less counterfeiting (possibly). But all this will happen with or without WTO. It's part of the dynamics of the Chinese economy.

"Will Chinese drink any more wine? That's a tricky question. Are all those thirsty people eager to snap up bottles of good (or average, or lousy) red? The main problem with sales in China is not tariffs, or barriers, or price. The main problem is lack of throats. And WTO will not fix that problem. Perhaps only indirectly, through more openness and higher living standards in China, WTO will have a significantly positive effect on wine.