CHINA’S INVESTIGATIONS INTO AUSTRALIAN WINE – A DETAILED LOOK

The emerging Chinese domestic wine industry is struggling. Compared to the imports of countries like Australia, too much Chinese wine fails to compete on the bases of quality, price or image. It also remains a mystery why lower-tier Chinese wine is as expensive as it is. And while things are slowly changing, Chinese people still harbour a deep distrust of food and drink grown and made in their own country, especially if an affordable international substitute is at hand. 

Having tasted many hundred Chinese wines, I am entirely confident in the country’s potential to deliver quality at a range of price points. But this won’t happen overnight. 

Deeply aware of these issues and via China Alcoholic Drinks Association, the Chinese wine industry has appealed to its relevant authority, the Ministry of Commerce (MOFCOM) for assistance. In doing so, it seeks to blame a third party for the problems it’s facing. Its major competitor: Australia.

On August 18 MOFCOM initiated dual investigations into Australian wine exports into China, surrounding both anti-dumping and unfair government assistance. In doing so, it has put the wind up the Australian wine industry, whose billion-plus dollar China trade now appears in jeopardy.

But is it? 

Seeking meaning in language and timing

Detail is always more important than headlines when dealing with China. That’s why it’s wise to look a little deeper for the meaning behind MOFCOM’s submissions. It’s undoubtedly wise for Australian wine to take the allegations seriously. But at time of writing – a week after the announcement of the investigations – it’s far from certain that Australian wine will be singled out for serious treatment by China. 

China has chosen to take an entire year – or more if needed – to engage with representatives of Australian wine and work through the issues it raises. Contrast this approach with China’s well-documented history of implementing significant trade-related measures without warning but with immediate effect. While Australia has taken more than 100 anti-dumping investigations against Chinese products, this is just the second, after barley, that China has initiated against Australia. And if facts are the only things that matter a good outcome for Australia is very achievable, since the numbers presented in the Chinese case are very ropey and the case short in accurate detail. 

It’s indeed likely the new investigations have little to do with Australia and even less to do with wine, as Australia attempts to steer an independent course between the US, its major defence ally, and China, its major trading partner. While much coverage has been given to the increasing hostility of Chinese rhetoric over recent years, recent weeks have seen a significant tone-down in the commentary from Chinese officials towards Australia. 

There’s also no doubt that Beijing wants to support and straighten out is own wine industry. On August 10, just eight days prior to these investigations, Natalie Wang reported in Vino Joy News that China’s Ministry of Industry and Information Technology (MIIT) had abolished regulations requiring companies to meet strict requirements before setting up wineries, making it far easier for Chinese to invest in domestic wine production. The MIIT encouraged wineries to ‘play a more active role in self-discipline, maintaining market order and guiding the healthy development of enterprises’. These are strong words. Timing and language are everything.

What China alleges

China claims Australia has unfairly treated and damaged its domestic wine industry through a combination of unfair Australian government support and Australian companies selling their wine in China at prices considerably lower than they do in this market.

MOFCOM claims that from 2015 to 2019 its domestic wine industry lost market share from 74% to 50%, lost sales revenue from 466 billion Yuan (around $90 billion AUD) to 145 billion (around $27 billion AUD) and saw profit reduced from 52.1 billion Yuan (around $10 billion AUD) to 10.6 billion Yuan (around $2 billion AUD). However, the entire Australian wine industry has a turnover of less than $10 billion AUD and any suggestion that in 2015 the Chinese wine industry was more than nine times this size is fanciful at best.

It also claims the domestic Chinese wine industry declined in size from 116 million litres in 2015 to 45 million litres in 2019. However, these numbers are out by a facto of 10, since Vino Joy reports that according Chinese research institute Chinabgao, based on data collected by the institute and from China’s National Bureau of Statistics, China’s wine production was 10.01 million hectolitres in 2017, 6.29 million in 2018 and 4.51 million in 2019. By comparison, Australia’s production in 2019 was 1.73 million tonnes, which would conservatively produce 11.2 million hectolitres.

However, as pointed out in 2017 by Jim Boyce (Grape Wall of China), a Beijing-based wine industry observer and writer, China’s wine industry used to habitually double-count much of its wine production. China’s statistics counted volume in the province of production, as well as the province of blending and bottling. Boyce estimates that China’s actual production in 2017 was around half the claimed total. In other words, 10% higher than China’s claimed production in 2019. Perhaps China has resolved its double-counting issue, at least in significant part?

By adding dubious figures of total Chinese wine production with more robust numbers of total import volumes, MOFCOM devised an ‘apparent consumption’ of wine in China. This is a key number in the case against Australia, and the case claims it declines by a massive 41% from 1,528,582 kl in 2016 to 904,527 in 2019. This number is little more than a house built on sand. Strangely, MOFCOM’s submission also recognises that the OIV rates China as ‘one of the countries with the fastest growth in global wine consumption’. This would appear to be in direct contradiction to the submission’s own claim.

Central to MOFCOM’s case are claims that the price per litre of Australian exports to China declined by 13.4% from 2015 to 2019, while wine from unspecified ‘other countries’ apparently declined by just 2.9%. The case also claims that by adopting a dumping margin of 202.7%, Australian wine is broadly being sold in China for one-third of its usual price. While there are indeed individual cases of discounting in the market, there is nothing remotely approaching this industrial scale.

MOFCOM’s claim lists ten companies for investigation. In addition to most of the large players (except Pernod Ricard, owner of Jacob’s Creek), this list includes a small maker in Pemberton, WA that sells moderate to highly priced wines and truffles to the domestic market that has not exported to China for the last 5 years. Another is a small high-end maker of wine in Tasmania that has not exported in this period, while another is a domestic Australian wholesaler that does not export to China.

Are Australian and Chinese wines interchangeable?

Key to the anti-dumping claim is that they are. Led by companies like Penfolds and its own largest producers, wine is strongly promoted to Chinese people. Beijing actively encourages Chinese people to select wine ahead of traditional spirits on the basis of health. But since MOFCOM’s case proposes – and actually depends upon – Australian wines and Chinese wines being interchangeable to Chinese wine buyers, how are sales of Chinese wines in decline? 

MOFCOM states that ‘there is competition and substitution between each other (Chinese and Australian wines) and that there is ‘no substantial difference in customer groups’. The fallacy of this argument is obvious to anyone who has worked in the China wine industry. Otherwise Chinese wines sales would surely be booming.

It’s not that the market is saturated. Chinese people are significant users of alcoholic beverages but consume only 0.6 litres per head of wine against a global average of 3.2 litres per head according to the MOFCOM submission. There is a huge latent wine market still to be tapped in China.

Chinese citizens actively pursuing a program to gain a visa to or residency in Australia are responsible for around 55% or thereabouts (my figure) of the value of Australian wine exported to China, largely through very cheap buyer-owned brands. If indeed all wines are interchangeable in the China market, these sales could also be seen to compete against Chinese wine producers, which of course they do. But it in no way are these wines being dumped or supported by unfair government subsidy.

It’s through marketing, branding and quality that Australian wine is seen as an entirely different product in China to domestic Chinese wine. The love shown by Chinese people for Australian wine is also deeply related to shared travel, education, culture and media, both social and traditional. 

China’s claims of unfair Government support

MOFCOM claims that via a range of financial measures, Australian State and Federal Governments actively provide unfair advantage to wine producers selling wine in China. The list of these measures, numbering some 40 in total, includes land conservation projects, research and development tax incentives, sustainable water and drought-related grant and loan projects, energy investment and employment projects, sustainability funds and irrigation projects. 

Special mention is given to the one-off $50 million market development grant from the Federal Government to the wine industry. This grant was managed by Wine Australia, which might be flattered to learn that according to MOFCOM, its activities ‘interfered’ with the China wine market.

Similarly, the development of various wine industry strategic plans, export market development grants and the National Landcare Program are identified, along with all things, the rebate from the so-called Wine Equalisation Tax, whose very existence helps to retain Australia at the top-taxing level of significant wine producing countries.

What outcome is likely? 

Observing the more moderate recent tone from Beijing towards Australia, I don’t perceive an intention to inflict long-term damage to either Australia or its wine industry. On 26 August, The Australian’s Glenda Korporaal reported the speech delivered by Wang Xining, China’s Deputy Ambassador to Australia to the National Press Club. He said: ‘We could serve as a classic case of comparative advantages that, if working well, would make Adam Smith chuckle in his grave. We could and should make it work the best.’ Then, using a woodworking analogy, he said ‘The two economies fit each other like tenon and mortise.’

These are not fighting words. 

Perhaps this is a message that Australia might spend time and effort to work on the long-term relationship with its largest customer. In its turn, that customer might actually answer the phone when our ministers call. 

Did Australia put its best foot forward recently by preventing the $600 million-dollar sale of Lion Dairy from a Japanese owner to a Chinese owner? Was this smart timing? How will China interpret the meaning behind our Government’s actions? 

It’s too early to say, but here’s a possible scenario. There is a provision for China to impose a tariff on Australian wine after the first 60 days of the investigation. An amount of say 20% would enable MOFCOM to demonstrate to the Chinese wine industry that it has been heard and its claims have been taken seriously and would hurt, but not cripple Australian wine. After a period of time, this could be reduced or eliminated. 

With wine, for the time being at least, China has left the door well and truly open.