China

In 1996 I was part of the first US Congressional Wine Delegation to China. A lot has changed since then, with China growing into one of the largest producers of wine in the World. Many of my impressions from that visit still hold true. Following my essay is the official Congressional Report.

For some time before the trip I was asked repeatedly if China even had a wine industry.

I had heard of one wine, Dynasty, but had never tried it. I can now say that yes,

There are wines made in China!

Dynasty is by far the most successful, but it is not the only winery. In fact there are some 100 wineries in China. The problem is that many of these wineries only produce brandy or traditional Chinese alcoholic beverages and medicines. Jiu is the Chinese term for all alcohol, and they tend to lump them all together in their minds, whether it is grape wine (putao jiu) or beer (pi jiu) or liquor (jiu), they refer to them interchangeably. This is one of the most important insights to the Chinese wine industry.

Premium cork finished wines made from vinifera grapes (such as Cabernet and Chardonnay) are still a minority. The wines (and from here out I will refer only to European style wines) tend to be very light although reasonably well made.

There are two major problems plaguing the Chinese wine industry. The first is getting the farmers to let the grapes ripen. Almost always the grapes are picked early so the farmers have no fear of rot or other harvest dangers, and this leads to wines that must have a great deal of sugar added to them to produce table wines. The second is economics. A bottle of wine can sell for no more than $3 a bottle to compete in the market, and the Chinese $3 bottles of wine are not unlike our $3 bottles of wine.

The immense potential of a country with 1.2 billion people (and 300 Million of them are sophisticated city dwellers) has led foreign (primarily French) investors to set up Joint Ventures with the Chinese, such as Dynasty Winery (Remy-Martin). There will come a day when the wines of China are commonly found in Chinese restaurants around the world, and the wines of the world are found in China.

The Chinese Wine Market an Industry Analysis

China has a 6,000 year history of grape growing, and a 2,000 year history of wine making, and yet until this century the wine that was made in China was not of a style that would be recognized in the West.

I can not over stress the importance of the fact that in Chinese the word for alcohol "jiu" is used to mean all types of beverages, from beer 'pijiu" to liquor of all sorts (just called "jiu") to grape wine, called "putao jiu", literally, "grape alcohol". This lumping together of all intoxicating beverages gives us great insight into the traditional use for alcohol, intoxication. Even in modern China alcoholic beverages are generally classed by the general population by how much intoxication it delivers for the money. From this point of view table wine is at the bottom rung of the consumer preference list, with brandy being much higher.

This has not escaped the official notice of the Chinese government who in 1987 began to encourage the Chinese people to drink grape wine over the sorghum based "baijiu" (almost a pure alcohol white liquor). This would switch public consumption from grain based to fruit based beverages, very important in a country struggling to feed its masses; as well it would bring down the average ethanol content consumed in the market. This program has met with limited success, but what success it has found has been in the younger markets, which bodes well for the future.

The desire to embrace western products is the single most important driving force in the adoption of wine as a viable import in China. Alas economics, as usual, is the final arbitrator. With a 750 ml bottle of beer costing around US$.60 it is difficult for the Chinese consumer to spend even the $2- $4 that a bottle of Chinese wine fetches. Imported wines with their average price around US$10 a bottle and up, is far beyond the reach of most consumers. As the cost of living and the economic growth of China continues to skyrocket, there will soon come a day when this price resistance is less dramatic.

The Chinese people have a sense of brand loyalty that almost borders on the fanatic. Once a brand name is established, anything with that name is sure to do well. Coca-Cola is often held up as the perfect model for breaking into the Chinese market. First established in the early 80's, Coke could not at first be given away, although that is exactly what they did. In time the Chinese began to develop a taste for Coke, and now, more than 15 years after its introduction, Coca-Cola has a stronghold on the Chinese market. Any wine brands in China would do well to follow a similar model.

Alcohol related regulations, as far as distribution and labeling, are almost non existent; although the bureaucracy in China being what it is, this may change at any given moment. This climate of relaxed standards is a mecca for unscrupulous importers and bottlers, and it should be considered that legitimate concerns will have to compete with falsely labeled and adulterated wines as this market explodes.

One of the single greatest barriers of exporting wines to China is the duties. As of spring 1996, the last time I had a meeting with the Chinese government, the duties for wines imported into China were an exasperating 70%, down from 80% the year before. This high duty makes it especially difficult to compete at the under US$5 retail level, where most wine is now being sold.

The distribution system for wines in China is currently chaotic. Once the domain of the government, distributors have now found themselves out on their own with no support from the central government, who still expects their cut. There is no such thing as a wine cellar or refrigerated storage in China, a major obstacle. In fact Seagrams who's failed attempt to market fine wines in China point to the lack of proper facilities and distribution as their main cause for failure. It can also be pointed out that Seagrams entered the Chinese market early, looking for quick returns. Because of the lack of regulation, any new wine venture in China would do well to consider their own distribution system. This system is unheard of in other countries and so is slow to be adopted in China.

The main competition for imported wines in China comes not from the Chinese wines, but rather the other forms of alcoholic beverages. The French Cognac houses, who are the main players in China, usually in the form of a joint Franco/Sino venture (e.g.,. Dynasty and Great Wall Wineries), have discovered that brandy, and not table wines are the current top sellers in China. Because the consumer is looking for the effects of the ethanol, rather than the taste of the beverage, the lowest grade brandy's, most of which would be below the regulations of most nations, are in the greatest demand. These brandies, when produced or bottled in China (bringing in bulk alcohol, adding caramel color and water, and calling it brandy, is a successful model in China), often sport such terms as VSOP and other designations that have no legal meaning in China and therefore are only used as means of recognition, not a designation of quality.

By far and away the most compelling aspect of the Chinese market is the demographics. While there is not currently any portion of the market that would be likely to drink table wine on a regular basis, the shear numbers are staggering. If each of the 1.2 billion people of China bought a single bottle of wine a year, they would outrank most of Europe as consumers. Even when you take just the upwardly mobile youth of the cities, the traditional wine market of other countries, you are talking about a population of over 300 million, more than 10 time the potential market of the US and many more times that of other Western countries.

In summary any venture to export wines to China must be prepared to establish their brand over a long and potentially unproductive period. They must be able to price their product, after paying 70% duties in such a way as to compete with other alcoholic beverages, especially beer. They must be willing to create or support a distribution system in each major urban area. They must create not only their own storage facilities, but help their customers learn about storing, and even opening bottles of wine. With perseverance, and deep pockets, the potential to market wine to 1.2 billion people is a staggering concept with great potential for profit, in the long run. Education above all else is required before the Chinese people will become a wine drinking nation of even the most meager sort.

From the Congressional Record:

AMERICAN WINE DELEGATION CONTRIBUTES TO IMPROVED UNITED STATES-CHINA TRADE

DIALOG -- HON. GEORGE P. RADANOVICH (Extension of Remarks - September 28, 1996)

[Page: E1776]

---

HON. GEORGE P. RADANOVICH

in the House of Representatives

FRIDAY, SEPTEMBER 27, 1996

* Mr. RADANOVICH. Mr. Speaker, Government colleagues and friends in the

United States wine industry, earlier this year, at the invitation of

the People's Republic of China, the first official American delegation

of viticulturists and enologists since 1949 completed a 2-week

consultative tour of the Chinese wine industry.

* The trip, under the sponsorship of the People to People Citizen

Ambassador Program, has resulted in broadening the scope of business

and market contacts in China and in identifying new opportunities for

trade and joint venture activities.

* As I was consulted during the planning stages of this trip, I was able

to lend it my full support and would have joined the delegation had

scheduling permitted.

* The delegation report, I feel, will serve as a valuable source of

information for anyone in the United States business community who is

interested in doing business in China now or in the future.

* I wish to commend the delegation, led by Gordon Murchie, president of

the Vinifera Wine Growers Association, for its professionalism in

representing our country in this important factfinding and trade

relations trip.

* It gives me great pleasure in making excerpts of the delegation's trip

report a part of the Congressional Record:

China, a nation of 1.2 billion people, has a history of grape growing dating

back to the Han Dynasty (121-136 BC) and of grape winemaking dating from the

Tang Dynasty (618-907 AD). Vitis Vinifera wine production, however, is a

more recent 20th-century innovation.

While only about one-fifth of China's current grape harvest is made into

wine, the potential for wine production and consumption is enormous.

Importing and exporting wine is gaining the attention of the newly emerging

economic structures of China and foreign investors and partnerships. Both

Chinese government and private-sector wine interests are eager to welcome

and learn from American viticulture and enology techniques and

methodologies.

Thus, with an invitation from the Government of the People's Republic of

China and through the sponsorship of the Citizen Ambassador Program of

People to People International, our Viticulture and Enology Delegation of

one French and eleven American wine experts, representing all sectors of the

wine industry, visited China, April 14 to 27, 1996.

This was the first official U.S. wine Delegation to travel to China since

1949. A previous Viticulture and Enology Delegation was cancelled the day

before departure in June of 1989 due to the Tiananman Square incident.

* the mission of the Delegation was to meet with counterpart contacts at

all levels of the Chinese wine industry; exchange information; discuss

topics of mutual interest such as vineyard management, winemaking

technology, viticulture-enology research and training, sales and

marketing strategies, government regulatory oversight, foreign

investment and joint venture opportunities, import and export

potentials, and tariff rate issues; establish ongoing professional and

business relationships; and, generally, assess the status of

development and growth potential of the wine industry in the People's

Republic of China.

* The tip itinerary, which included site visits in Beijing, Tianjin,

Yantai and Shanghai, provided the Delegation an opportunity to make

contacts throughout the whole of the alcohol beverage industry in

China. It included meeting the leadership of the PRC Government's

oversight ministry, product control and distribution organizations,

research and educational facilities, import and export companies, and

visits to government, quasi-government, and joint venture wineries and

distilleries, and farm vineyard sites.

* As wine is truly an international language, the Delegation feels that

an overall objective of the Citizen Ambassador Program to make friends

and promote greater understanding among professional and concerned

individuals internationally, in this case between the wine communities

of the United States and the People's Republic of China, was in a good

measure achieved.

* The Delegation wishes to express its collective appreciation to all the

American and Chinese organizations and individuals which contributed to

the planning, arranging, conducting, hosting and support of what the

Delegation views as a successful professional exchange experience for

all concerned.

* Our thanks go to the Citizen Ambassador Program People to People

International, United States Congressman George P. Radanovich, His

Excellency Li Daoyu, Ambassador of the People's Republic of China in

Washington, D.C., the U.S. Embassy in Beijing, China National Council

of Light Industry, China National Research Institute of Food &

Fermentation Industries, China National Cereals, Oils & Foodstuffs

Import & Export Corp., the Tianjin, Yantai and Shanghai Foodstuffs

Import & Export Corporations, Shanghai Sugar, Cigarette & Wine Corp.,

Beijing Agriculture University, Shanghai Academy of Agricultural

Sciences, Beijing Pernod Ricard/Dragon Seal Winery, Tianjin Remy

Martin/Dynasty Winery, Yantai Chang Yu Winery, Shanghai Remy

Martin/Shenma Winery, Mr. Wang Kefa, Town Leader for Longkou vineyards

(Penglai), Mr. Scott R. Reynolds, Director, U.S. Agricultural Trade

Office, Shanghai, Mr. Peter Chang of Mandarin International Travel and

his colleagues (program arrangers), Mr. Jiang in Yantai, Mr. Yan in

Shanghai, and especially Mr. Zhao Ying Kong who was the Delegation's

guide and mentor throughout the entire trip.

* Finally, our special thanks go to Anita Murchie who recorded and

maintained additional notes on all Delegation meetings and site visits,

transcribed the hours of tapes, and typed and edited this 75-page

journal report. The full report is

available by contacting by VWGA, P.O. Box 10045, Alexandria, Virginia 22310.

The following is a general list of pluses, minuses, and other considerations

that any individual, winery, wine consortium or allied business interested

in doing business in China should take into consideration.

They are not intended to be conclusive, but to serve as a basic check list

to be used in developing any business strategy to establish trade,

investment, joint venture and/or production and marketing relations with the

People's Republic of China.

American Products have edge:

+Historical and cultural connections.

+Chinese view of U.S. on world stage is that it remains a major

international economic and political power.

-Continuing political contentions between the U.S. and the PRC.

-Established and growing foreign competition.

Market potential is there (1.2 billion population):

+Western products and styles have appeal.

+Youth and young business classes are change-minded and looking for a more

prosperous and comfortable life style.

+Whole nation is undergoing a building-construction boom, further promoting

change. More wage earning employment is increasing public desire for more

consumer gods.

-Established cultural identification with tastes of traditional products,

i.e., sweeter, heavy bodied, high alcohol content and flavored wines.

-Higher prices and limited availability of foreign products.

Lessening of PRC government's monopoly control of distribution systems of

major products, i.e., grains, oil, sugar and alcohol:

+Government entities are freer to establish direct business contacts with

foreign companies.

+Small private sector businesses are present everywhere, adding a stimulus

to the development of alternative distribution and marketing systems within

the country.

-Government bureaucracy, out of date regulations, paperwork, etc.

Business and trade considerations:

Patience and long-term commitment are necessary.

Include overseas Chinese connection in PRC business arrangement.

Joint venture connection with government or government connected

organization best for near future.

Establishment of dependable distribution and warehousing system is key.

Capital investment is offset by inexpensive labor costs.

Targeted advertising strategy is essential, building product identification

and product appeal.

Networking international hotels and restaurants.

Developing wine expos and other public wine education/appreciation events.

Current alcohol beverage market:

Distilled spirits traditional, brandies and cognacs are king.

Beer is being brewed locally in all cities. Beer popularity and consumption

is growing rapidly throughout the country.

Wine: Table grapes and vineyards for 6,000 yards. Wine grapes and wine for

2,000 years, but always in limited quantity. Rice, plum and other fruit

flavored, sweet and heavy-bodied wines are traditional and remain popular.

Late 1800s and early 1900s began foreign influence and production of

European styled dry wines. 1892 Chang Yu Winery was the establishment of the

first commercial plant in Yantai, China.

Bottom line: If there is money to be made by Chinese involved individuals

and/or businesses in marketing and selling an American product (wine),

success will eventually happen!

Plan and conduct a series of Chinese wine expos in several American cities

with large Chinese populations. Hold trade and public wine tasting events to

improve the marketing and sale of Chinese dry wines in the U.S.

Establish a cost sharing exchange program between the PRC and the U.S.

agricultural universities and institutions for viticulturists and

enologists--short term teaching, study and research grants.

Recommended American consultants for short working assignments with China's

alcohol beverage industry:

1. Alcohol beverage trade association consultant.

2. Alcohol beverage consultant on warehousing, distribution systems and

marketing strategies.

3. Consultant team from the U.S. Bureau of Alcohol, Tobacco & Firearms to

advise on: (a) Establishing national regulations and standards for the

Chinese alcohol beverage industry; (b) Label and formula approval; (c)

Compliance matters; (d) Laboratory research and testing procedures; and (e)

Product taxing and collection.

Increase incentive for foreign wine importation and joint venture activity

by further lowering the tariff on wine considerably below the present 70%

level. Increased sales of American dry wines in China will correspondingly

increase the popularity and sale of Chinese dry wines.

Gordon W. Murchie, Delegation Leader and President, Vinifera Wine Growers

Association, Alexandria, Virginia; Anita J. Murchie, Delegation Reporter,

VWGA; Albert A. and Donna M. Oliveira, Basport Vineyard, King City,

California; Tony K. Wolf, State Viticulturist, Virginia; Wilbert E.

Rojewski, President, Alasco Rubber & Plastics Corp., Belmont, California;

John R. Pramaggiore, Director of Fine Wines, Service Liquor Distributors,

Inc., Schenectady, New York; Tomas F. Rodriguez, President, La Provencale

Cellars, Reston, Virginia; Stephen D. Reiss , Buyers & Cellars Wine

Consultants, Aspen, Colorado; Anne V. and Roger W. Webb, Apponagansett Bay

Vineyard, South Dartmouth, Massachusetts; and Robert J. Boidron, Director,

E.N.T.A.V., France.