Wine & Coronavirus: Assessing the Risks

virusConcern about the health impacts and economic effects of the novel coronavirus continues to grow. Although the health impacts are obviously most important, since lives are at risk, it is natural to also be concerned about how this potential pandemic might affect the global economy in general and the wine industry in particular.

I have been following the situation closely focusing for personal reasons on the U.S. (we live about 40 miles from the coronavirus infection epicenter near Seattle) and northern Italy (we lived in Bologna when I taught at the Johns Hopkins center there).

The Italian experience so far is noteworthy: some whole towns were initially locked down to contain the virus or slow its transmission, all schools and universities closed as a precautionary measure, and scenes of empty piazzas and tourist thoroughfares in Venice and Milan. Large areas of northern Italy, including Lombardy and its capital Milan, were later put under quarantine, which has now been extended to the whole country.

Closer to home, some schools and colleges, including the University of Washington campuses, have canceled physical classes in favor of on-line instruction. Several major employers, including Amazon, are encouraging workers to tele-commute if possible. Concern is likely to rise as additional testing kits arrive and the true picture of the epidemic emerges.

I’ve also been making some notes on wine and the coronavirus in order to try to think more clearly about the potential economic risks to the industry. I thought I would share them here even though they are necessarily incomplete and change daily — just like everything else about the coronavirus.

Here is a quick analysis of several areas of concern, starting with the most general and then narrowing. Use the comments section below to point out issues I have neglected or gotten wrong.

Recession Risk

Japan, Italy, and Germany were already teetering on the edge of recessions before the coronavirus outbreak, so it is not unreasonable to think that they will be sucked into economic downturn, potentially taking other countries with them through the sort of economic contagion that face masks and hand sanitizer are powerless to control.  This is a serious problem since there are also worries about slowing economic growth in China,  the United States, and the United Kingdom. Chinese exports were down 17% due to supply-side factors for the most recent period, which bodes ill for their economic situation.

Central banks have pledged to counter the economic impacts of coronavirus although they have so far stopped short of pledging coordinated action, which would be most effective. The U.S. Federal Reserve cut its key interest rate target by a half percentage point last week, but the financial market response was weak in part because this action had already been factored into investor expectations according to some observers. In any case interest rates are a blunt tool when faced with a specific problem such as coronavirus.

With interest rates already so low (and in some cases negative), the concern is that preemptive central bank strikes against coronavirus will use up all the ammunition left to deal with recession and economic contagion. The risk of a global recession, probably smaller than the global financial crisis of a decade ago and certainly different from it, is thus magnified by coronavirus.

The possibility of a recession with its impacts on income and employment both broadly and in the wine industry is thus a very serious concern. Recession risk: medium to high and probably rising.

Supply Chain Disruption

One impact of coronavirus has been to make us more aware of the inherent risks in international and global supply chains and associated just-in-time production strategies. Bottlenecks anywhere along the chain can potentially impact final production.

Some factories in China were either closed because of the coronavirus threat or slow to re-open after the Lunar New Year holiday, which has created parts shortages and headaches in many industries as well as reducing international trade flows. International shipping schedules and container availability have both been disrupted on some routes.

Wine is certainly affected by supply chain issues related to the coronavirus, although not as much as some other industries such as automobiles and electronics. Glass imports from China are one important concern and I am sure there are others.  Wine exports, which are of growing importance because of the domestic surplus, may also be disrupted.

How have supply chain issues affected your wine business? Please leave comments below. Current events seem likely to cause many firms to reconsider their supply chain strategies, shifting closer to home in some cases and relying less on “just in time” supplies in others.

Supply chain disruption risk: significant and rising as the virus spreads.

Travel and Tourism

Travel and tourism are down dramatically in many regions as people avoid airports and crowded situations in general where contagion might take place.  Soccer matches have been cancelled or postponed in Italy, for example, and a few games played to empty stadiums.  It is unclear how this summer’s Olympic Games in Japan might be affected.

Wine tourism is likely to be a victim of the general decline in domestic and international travel, although it is too soon to guess how great the impact will be on tasting room visits and sales. Direct sales to visitors have become a very important economic factor for  many U.S. wineries, so any decrease in wine-related travel would be important.

Airlines and cruise ships are also good wine markets for those who can secure their business and the sudden decline in flying and interest in cruising will necessarily affect those sales, too, as well as threaten the financial health of the air and cruise businesses themselves.

Business travel is affected along with vacation trips. Several large international wine gatherings have been canceled or postponed including ProWien in Germany, for example, and Taste Washington here in the U.S. Many people are asking themselves “is this trip really necessary?” when health risks are involved. The cancelled meetings are expensive both in terms of direct costs and potential lost business. The impacts continue to spread.

Travel- and tourism-related risks: High.

On-Trade and Off-Trade Impacts

China is one of the most important wine markets, especially for French and Australian wineries, and its wine demand has fallen significantly in recent weeks according to early reports as consumers have hesitated to gather in restaurants and other venues out of concern for the coronavirus. How long this situation will last and how much wine demand will rebound when the health scare has passed are open questions.

Restaurant wine sales are important outside China, too, of course, and so this is an important market to watch. News reports suggest that those who are concerned about contagion sometimes turn to home delivery of meals or groceries in order to avoid crowds. This is not advantageous for wine sales in many areas, including the U.S., where wine under-performs in home delivery sales relative to other products.

Wine market risks: Significant with a good deal of uncertainty.

The Bottom Line

The bottom line so far is that the coronavirus has many effects that are detrimental to the economy in general and the economy of wine in particular. Anyone in the wine business would be wise to ask themselves a series of questions that starts with “how well prepared is my company for a recession?” and continues down the list to supply chain disruptions, swings in consumer demand, altered trade patterns, tasting room strategies and policies, and so on. It is already too late to anticipate some impacts, but not too soon to think through others.

That said, the most important questions are probably the ones I haven’t asked here. The research I did in my other life as an international economics professor probing financial crises suggests that contagion doesn’t always stay in its lane.

We saw this on Monday when coronavirus-driven falling demand for petroleum sparked a price war that drove oil prices down dramatically. Some oil investors dumped equity holdings to cover their oil losses, sparking a global sell-off there, too. Corporate junk bonds — and there is a mountain of them out there — could be next in line. If they start to fall central banks will need all the resources they can muster to keep liquidity flowing.

Wine Book Review: Adventures on the China Wine Trail

chinaCynthia Howson & Pierre Ly, Adventures on the China Wine Trail: How Farmers, Local Governments, Teachers, and Entrepreneurs Are Rocking the Wine World. (Rowman & Littlefield, 2020).

I remember my first taste of Chinese wine very well. My university student Brian brought a bottle of 1999 Changyu Cabernet Sauvignon back from his study abroad semester in Beijing. It didn’t really taste much like Cabernet, but it was the smell that really got me. “Ashtray, coffee grounds, urinal crust” was the tasting note I found on the internet. Exactly. Quite an experience.

The second taste was not much better. Matt, another student, found a case of Dragon’s Hollow Riesling in a Grocery Outlet store in McMinneville, Oregon. He gave me a couple of bottles that I tried (but failed) to serve at a student tasting. The smell (something rotten?) got in the way of tasting and the wine went down the drain.

I learned two things from these tastings. First, maybe my students were out to kill me! And second, Chinese wine had a long way to go.

And a long way it has come, too, in only a few years. That’s one of the messages of Cynthia Howson’s and Pierre Ly’s fast-paced new book, Adventures on the China Wine Trail. Howson and Ly, partners in life as well as wine research, might have been initially attracted to Chinese wine by its peculiar taste and unexpected existence. But as they have immersed (I nearly said marinated) themselves in the wine, the people, the geography, and the culture they have discovered so much more, which they enthusiastically share with their readers.

Adventures on the China Wine Trail works on many levels. It is in part the record of the authors’ personal journeys and it is interesting to travel with them as they lug their seemingly-bottomless wine suitcase from place to place. The authors have an amazing mastery of the detail of the people and places, food and wine. It’s almost like being there.

In fact, the book works as a travel guide as well wine journey account, providing information of where to go, what to do, where to stay, and so on. But beware: Howson and Ly aren’t your typical tourists, so while they do take us on a walk along part of the Great Wall, this is only because they took part in a wine conference quite close by. They still haven’t seen the famous Terracotta soldiers despite spending time in that region.  They couldn’t pull themselves away from the wineries. Maybe next time, they sigh.

More practical advice appears in the closing chapters. Where should you go to buy or drink excellent Chinese wine if you visit China? They have recommendations for you. And when will you be able to enjoy Chinese wines (good ones, not the drain-cleaner stuff) at home? Sooner than you think, they say.

Some of the wines are already here, including the $300 Ao Yun that Pierre bought at a Total Wine in Washington State. But that is just the iceberg’s tip and if you are reading this in London or Paris you may know that Chinese wines are no longer the shocking discovery that they were just a few years ago.

And how are the wines? They vary in quality, just like wines from any place else. But many of them (more each year) are excellent and even distinctive. I know this both because Howson and Ly tell us about the wines and also because Sue and I have been fortunate to share some of their Chinese finds — including that luxury Ao Yun.

There’s a final layer to the story that I can’t forget. Howson and Ly are both professors and serious scholars. Although the book doesn’t read like an academic treatise, it has a serious purpose. The authors began their study of the Chinese wine industry wondering where it might lead? Could wine possibly be the basis of sustainable rural economic development? Or was it an alcoholic dead end in terms of a greater purpose?

Chinese wine’s journey has been anything but simple or smooth and continues today. It will be a long time, I suspect, before we know for sure how the story will end. But as for economic development, Howson and Ly have overcome their doubts. Wine in China is the real deal, whatever specific shape it takes in the future. All the hard work of the farmers, government officials, teachers and entrepreneurs we meet in the book has succceeded in building a viable industry.

So here’s my tasting note:  Adventures on the China Wine Trail is a fast-paced journey through the world of Chinese wines that will appeal to readers who love wine, China,  travel, or who just looking a good adventure yarn. Highly recommended.

Flashback Friday: Cracking the Chinese Wine Market

The news from my friends in Portugal is that exports to China are rising, which reminds me of the first time I wrote about Portuguese wine in China back in 2010. Here is a Flashback Friday reprise of that column.

Portuguese Wines in Beijing

President Obama wants to double U.S. exports within five years. With this in mind he recently sent Commerce Secretary Gary Locke to Hong Kong to sign a Memorandum of Understanding (MOU) on Cooperation in Wine-Related Businesses. The press release says that

The United States is one of the leading wine-producing countries in the world, and American wines have been growing in stature internationally for decades as people around the world have learned what American wine producers and consumers have known for years: American wines are outstanding,” Locke said. “Working with the Hong Kong government, we want to create opportunities to heighten exposure to American wines in Hong Kong and the region. This MOU will help do just that.

“Hong Kong and the region” … I think that would be code for China. Everyone wants to crack the Chinese market, something that is easier said than done. I’ve written about this problem before (see “Wine and the China Syndrome”). Sean, one of our recent graduates, wrote his senior thesis on the challenges and opportunities of exporting Washington wine to China. Sean identified a number of significant political, economic and cultural barriers that American wine exporters must overcome. He was optimistic regarding the long term, but very cautious about short term success. (Secretary Locke, you might want to give Sean a call.)

Cracking the Chinese Market

Everyone looks hungrily at China with its growing economy and expanding consumer base. But it is hard to break in. Bulk wine imports are substantial (imported wines get blended with local products and labeled “Chinese wine”), but at unsustainably low prices. No future there.

France and Spain have had better luck. The French have been able to leverage their reputation and the prestige of their finest producers to carve out a attractive niche markets for Bordeaux and Champagne as luxury products.

The Spanish achieved success through old fashioned hard work. They have partnered with Chinese wine producers in both production and distribution. If Chinese wines are improving in quality (and I understand they are) then this is at least in part due to technical improvements facilitated by joint ventures.

Miguel Torres has been particularly active in partnerships and ventures of all sorts. You might be interested in their everwines project, which was recently launched in an attempt to develop a western style Chinese wine culture. If you check out the site be sure to click on the Online Shopping link to purchase a variety of international wines in the $20 range and also Opus One for about $550 and a first growth Bordeaux for more than $1200.

Any Port in a Storm

The U.S. is obviously not the only wine producing country with China on its mind and  I was pleased to receive an invitation from ViniPortugal to participate in their recent China seminar program and tasting of Portuguese wines. Sixteen winemakers flew from Lisbon to Beijing to present and promote their wines. A good chance to observe this Old World wine country’s China strategy in action.

Beijing is a long way to go for an afternoon tasting, so I was represented by my crack China wine research team, Matt Ferchen (Assistant Professor of International Relations at Tsinghua University) and Steve Burckhalter (who works as a translator for the Chinese public relations firm BlueFocus). Matt and Steve are former students of mine at the University of Puget Sound and keen observers of rapidly changing Chinese markets.

Matt said that he was impressed with the wines he tasted.

The first wines I tasted, and the ones I ended up liking the best, were from a cooperative called Adega Coop. De Borba.  A couple of the wineries were family owned and there was a kind of earthiness to the wines that I really enjoyed.  I was especially impressed with the Portuguese whites, which were all very crisp and I think would go very well with spicy Chinese food.

I find that most of the wines available in Beijing, both foreign and Chinese, are expensive and mediocre or cheap and bad.   Across the board the price to quality ratio was just excellent and I really hope that some of these wineries can find distributors here … [but] …there was only one of the wineries that had any presence in Beijing.

So the product is good and a good value. But that doesn’t necessarily solve the Chinese market puzzle.

Most of the representatives seemed rather disappointed that the turnout at the tasting was quite small and that many of those who were in attendance weren’t in the wine business (i.e. they didn’t see many prospects for finding distributors even if they found possible retail customers).  I was asking some of the representatives why Portugal seemed so far behind Spain in terms of entering the Chinese market, especially given what seemed to me the outstanding quality of their product.  The answer mostly just seemed to me a question of focus, that somehow the Spanish wine organization was just more aggressive about getting Spanish wines to China and advertising.

Steve also commented on quality and value — and the problem of focus and establishing reputation.

The[seminar] speaker, who I believe was a Chinese man from Macau, noted the long history of wine making in Portugal, the long time presence and popularity in Macau (“We drink this all the time in Macau”), the diversity of wines they are able to grow thanks to the wide range of different climates in Portugal, wines unique to Portugal – such as a “green wine” they grow in the North, which he reasoned would do well in China, being ‘fruity and sweet’ – and finally he also stressed that “Nearly all Portuguese wines are reasonably priced. It’s hard to find any in excess of 2000 RMB.”

He also expounded on why Chinese outside of the Southeast regions don’t care for white wines, which I found interesting. As for the growers and the distributors, there was some diversity to be found in “Brand Portugal”. Interestingly, some were insistent on showing tasters how they straddled both New and Old World wine making (actually, the speaker also touched on this, going on about a vineyard that had invited Australian winemakers to teach them in the ways of new world wine). Others, however, were insistent that they were exclusively Old World – “Portugal is Old World. How can it be New World – that’s not us.”

In response to how they were looking to position their wines, one of the winery reps said that they were looking to focus on promoting, above all, their grapes: the varieties, why they grow so well in Portugal, etc. And their other edge (which I heard from several people) is in pricing, “what you get for X RMB in a Portuguese wine is better than what you get for X RMB in a French wine.” That tended to be the dual answer whenever someone brought up how Chinese people generally went straight for French or Italian wines.

A Wineglass Half Full. Red or White?

Based on Matt and Steve’s reports you can be either an optimist or a pessimist regarding Portuguese wines in China. The upside is that there are many potential advantages, cost being one of them. It is obvious that Portuguese winemakers would like to be seen as a “value” fine wine and avoid the cheap and anonymous bulk wine trap. Good thinking.

But then there is a bit of an identity crisis. Old World or New? Well, both – a harder sell. Focus on regions or grapes (or both)? That requires a substantial sustained education program.

Even the most basic question is problematic: red or white?  Westerners know that crisp whites like Vinho Verde taste great with Asian foods – great to westerners, anyway. But, as has often been said, the first duty of wine in Asia is to be red.

I’m cautiously optimistic about Portuguese wines in China, especially if they can settle on the right focus and sustain the education/marketing efforts. But they have a long way to go.  Steve reports that “I noticed at a store (targeting Western tastes) last night the only Portuguese wines (out of hundreds and hundreds) were four Ports. Haven’t been to Carrefour in a while, but I bet it’s the same deal.”

Good luck to Portugal – and to American winemakers, too, of course.  China is a key market for the future. But scaling the Great Wall is a real challenge and many will fail in the attempt.

Book Reviews: “Thirsty Dragon” and “A Decent Bottle of Wine in China”

Brief reviews of two new books on wine in China.

Suzanne Mustacich, Thirsty Dragon: China’s Lust for Bordeaux and the Threat to the World’s Best Wines (Henry Holt, 2015).

Suzanne Mustacich’s new book is rightly being hailed as one of the wine books of the year (the Financial Times named it one of 2015’s best business books). It is a great read and deserves both critical acclaim and your attention.

I have tried to follow the China wine scene closely over the last ten years, but I still found that I learned something new in every chapter. Mustacich deftly connects the dots and supplies depth and detail. The stories she tells are incredibly interesting and relevant. Each chapter reads like a New Yorker magazine investigative reporting piece — that’s meant as high praise.

In broad terms, you might say that Thirsty Dragon is a love story. First China discovers that it loves Bordeaux, then Bordeaux realizes that it desperately needs China whether it loves her or not, then finally China realizes that its lust for Bordeaux might have been a mistake. In the end we have Chinese-owned Bordeaux chateaux and French investments in China and, in a funny way, if is hard to know where one set of influences and dependencies stop and another begins. Bordeaux may never be the same after its China fling and China has changed a lot, too.pogo-we-have-met-800wi

Along the way we are introduced to many fascinating personalities, both the usual big time suspects and smaller players whose stories reveal a great deal.  This is the perfect book if you are interested in China or in Bordeaux or in wine or in how globalization is changing business culture. Highly recommended.

The subtitle suggests a “threat to the world’s best wines” and I struggled just a bit trying to decide what Mustacich meant by this. Is the threat due to fraud and counterfeit, which are analyzed in detail here? Is the threat the collapse of Bordeaux’s en primeur system, which is analyzed in detail. Or is it the of the rapidly growing Chinese wine industry itself, with its peculiar characteristics?

Certainly Bordeaux has reason to feel threatened by changing economic circumstances, but it is not clear who is to blame for that! Sometimes, as Pogo said, we are our own worst enemies.

I was fortunate to moderate a panel discussion of wine in China that featured Suzanne Mustacich and I asked her about the threat. Two threats, she said. The first is from the rampant fraud, which undermines the market for top wines. The second was the greed that drove China’s speculative wine bubble. I agree, that’s a real threat — one of those Pogo problems.

Thirsty Dragon is a must read if you want to understand how China is transforming the world of wine.

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Chris Ruffle, A Decent Bottle of Wine in China (Earnshaw Books, 2015).

Chris Ruffle is a Chinese-speaking Yorkshire native who specializes in finance. So it makes perfect sense that he would decide to plant vineyards in Shandong and build a winery designed on the model of a Scottish castle. His quest to produce A Decent Bottle of Wine in China is a very personal account of his ten-year castle-building, vineyard-planting, wine-making journey.

Ruffle writes that he began this book project intending to write one of those popular romantic ex-pat stories like A Year in Provence or Under the Tuscan Sun, but the business side of the winery just wouldn’t be left out. Indeed, much of the book follows the author and his family as they deal with pesky neighbors, inconvenient local officials and inefficient workmen and contractors in a very Year Under the Shandong Sun sort of way.

But the book this really reminds me of is Caro Feely’s excellent Grape Expectations: A Family’s Vineyard Adventure in France. Feely and her family moved from Ireland to France to follow their dream and the winery they restore is nobody’s idea of a castle, but otherwise there many similarities. Both books teach a lot about wine-growing, wine business, the clash of cultures that ex-pats experience, and the power of wine to overcome obstacles.

One big difference is that the Feelys went all in on their project. No day job safety net. Ruffle kept his investment fund job and it is a good thing. Ten years in and with enormous work and investment, his Treaty Port winery is just about breaking even (if, of course, you don’t count the value of his time).

But, and this is the point, he is by his own account finally making that decent bottle of wine in China and not losing too much money in on each sale! A fascinating story, full of great information about China, wine and life.

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These two books could not be more different, but because they are both about wine in China I kept waiting for them to intersect. And they did in at least two places.

Mustacich gives a good account of both Chinese wine investments in France and French projects in China. One of these is a vineyard and winery that DBR Lafite, one of the most famous Bordeaux names, has built-in Shandong. In fact the project is next door to Ruffle’s Treaty Port winery and the first Lafite Chinese vintage was actually made in Ruffle’s cellars.

This would seem to give credibility to Ruffle’s project, and it does, but I feel a little sad for Lafite because Ruffle reports all sorts of mold and fungus problems in the vineyards (not especially good news for nearby Lafite) and, just when it looks like things are getting better, the government decides to build a big highway through both the Treaty Port and Lafite vineyard properties. Yikes!

The award-winning Silver Heights winery is featured in Thirsty Dragon and it makes a cameo appearance in Ruffle’s book. Chris Ruffle and his wife make a trip to visit this highly regarded producer and, at the end, Chris’s wife turns to him and says she’s really glad they went. They are even crazier than you are, she says. Always good to put things in perspective, I guess!

Do you have to be crazy to make a decent bottle of wine (in China or anywhere else)? I will leave that up to you.

Thirsty Dragon? Symposium on the Wine Trade in China

Suzanne Mustacich’s new book about wine in China, Thirsty Dragon: China’s Lust for Bordeaux and the Threat to the World’s Best Winesseems to have captured the wine world’s imagination.

Jancis Robinson raved  about Thirsty Dragon in her regular Saturday Financial Times column. This is a bigger deal than than you might think because Jancis is generally too busy writing great books to take time to review them! Thirsty Dragon clearly is something special.

My copy hasn’t arrived yet, so look for a book review here at The Wine Economist in a couple of weeks. In the meantime some of you in the Seattle-Tacoma area can meet the author, learn more about wine in China, and taste Chinese wines.

Wildside Wine in Tacoma is hosting a program called Symposium: The Wine Trade in China on Monday, November 30 at 6:30 PM. The cost is $25 , which includes wine and h’ors d’oeuvres. The event is nearly sold out, but if you are interested check with Carol at  wildsidewine@comcast.net.

I will be there to add what I can to the discussion, but the featured speakers will be the  China experts: Suzanne Mustacich and my academic colleagues Pierre Ly and Cynthia Howson, who have recently returned from another fieldwork expedition to China to gather information for their own forthcoming book about the Chinese wine industry.  I’m looking forward to meeting Suzanne and learning more about the Thirsty Dragon!

Developing a Market for Chinese Wine: Tourism and Education

Here is the final post in the series on the Chinese wine industry by Cynthia Howson, Pierre Ly and Jeff Begun. It has been very revealing to see aspects of China’s wine industry through their eyes! Thanks to all three for so capably filling this space while I have been away. I hope to persuade them to give us brief reports of their future research fieldwork.

Developing a Market for Chinese Wine: Tourism and Education

by Cynthia HowsonPierre Ly and Jeff Begun

Like many sectors of Chinese economy, the wine industry is growing at breathtaking speeds and we were excited to spend a month finding out how it’s happening. Our last posts talked about how China is developing distinct terroirs and the arrival of world class wines, but there’s more to the industry than the best tasting wine. It’s not just the huge production (now 6th in the world), or the arrival of awarding winners like Jiabelan and Silver Heights. It’s the bevy of chateaux, wine museums, resorts and tourist activities that seem to be popping up faster than customers can fill them. Are there really consumers to justify the small European town at Changyu AFIP? What about the entire roads lined with just-opened wineries and resorts in Ningxia, where a long vine separates lanes and signs are shaped like wine bottles?china3a

Recently, Mike wrote about the “amenities gap” in Yakima, Washington, where some say there aren’t enough restaurants and hotels to attract visitors, but there aren’t enough tourists to attract investment. But in China, investors seem more than happy to tolerate some empty hotels and restaurants as they anticipate (and promote) future demand. Of course, each new business or infrastructure project helps provincial governments to achieve very high economic growth targets, so the environment for investment matters. But it’s not enough. The seeming promise of an insatiable and growing consumer market in China continues to draw investors from around the world. (The documentary, Red Obsession, shows a China passionate about buying and making expensive red wine and it’s easy to forget that most Chinese people never drink wine, and many others add Sprite).

An Insatiable Market? Developing a Taste for Wine

Industry experts and winemakers repeatedly told us that the Chinese consumer market is bigger than they can satisfy and it continues to grow. But, they are also concerned about marketing to average consumers, people developing a taste for wine when most still prefer spirits (baijiu) or beer and serious wine lovers tend to be biased toward imports. For the winemakers, of course, there are always concerns about a stable and consistent grape supply. High quality wine is a notoriously costly and long term investment, so it’s not surprising that young wineries are not yet profitable. The search to define a style that will distinguish a Ningxia cabernet sauvignon and the ability to coordinate wineries toward the development of appellations is still in the earliest stages. What is unusual in China is that there are resorts and wine clubs when the wines may be largely unknown or difficult to find.

Of course, many resorts and clubs are beautiful, but not yet full or profitable. The crowds have yet to arrive, but investors seem confident enough to continue building. So, what is binding construction companies, real estate moguls and foreign wine merchants in their faith in the Chinese wine market?

There is something to be said for accessing the largest market in the world. Indeed, the most famous wineries have no trouble attracting crowds for their tours and it is worth noting that the tasting at the end of the tour is not an important part of the experience. Some people skip it. Others seem to find it amusing. We appreciated the insight of one expert, who told us that when the tasting seems deemphasized, it’s probably not the best part of the tour.

The picture here is the Changyu Wine Culture Museum on a typical day. The museum is packed with tourists, attracted to the beaches of Shandong Province for the summer holidays. On another tour, we invited our taxi driver to join us. Although more of a beer drinker, he told us about the founder of Changyu Winery in 1892 and took his own pictures in the museum.   china3b

So, unlike other wine regions in the world, the infrastructure for wine tourism is appearing in China before the actual tourists. And, the tourists may be willing to come when they are not (yet) wine drinkers. We saw photo shoots with blushing brides and families learning about wine tasting, but what struck us was the number of people who were interested in wine even though they claimed not to like the taste of wine.

Of course, true connoisseurs aren’t left out. They will find wine clubs where they can not only blend their own wine, but actually pick and crush their own grapes before fermenting their own wines. Meanwhile, for families looking for something to do on the weekend, there are day trips where grandparents can play mahjong under a beautiful trellis and kids can pick grapes, run around, and at one wine chateau, they can even play drums or a game of foosball in the wine bar.   Indeed, wine tourism in China has something to offer for everyone.

Wine in China: Government Investment, Civil Servants and Hospitality

I’m still in Australia (soon to step aboard a flight to Tasmania) and, through the magic of the Internet, simultaneously in Mendoza, Argentina, where I am a member of a virtual panel of experts (or is that a panel of virtual experts?) addressing the competitiveness of Argentina’s wine industry at the IX Foro Internacional Viniviticola. I guess you can be in two places at once these days!

Last week’s column by  Cynthia Howson, Pierre Ly and Jeff Begun on the search for Chinese terroir generated a lot of interest. Here is the second part of their report. Come back next week for the final installment.

Government Investment, Civil Servants and Hospitality in China

by Cynthia HowsonPierre Ly and Jeff Begun

 In the last post, we talked about the diversity of Chinese terroir and how the distinctive features of each region might be developed. It’s no secret that the government is a major player in the Chinese economy and wine is no exception. Each winery we encountered depends on some form of support or relationship with local government officials, usually at the local level (town, county or prefecture). And each wine producing region has a provincial government that is committed to upgrading in some way, but the issues they face and the resources they can provide vastly different.

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In this photo, a couple poses at the “World Wine Walk”, a street in Yantai, Shandong, where city has built a beautiful space to highlight the wine industry. Presumably, wine shops or other stores will fill the vacant spaces, but for now, it is just a very pretty place to walk near the beach and restaurants.

The State as Public Investor, Institutional Facilitator and Quality Control Monitor

Crucial government support can come in the form of investment, cheap credit, infrastructure or institutional support, like facilitating contracts or coordinating farmers. Each of these is critical and is likely to affect the types of wineries that will be most successful in each region. For some wineries, relationships with farmers require careful, daily supervision. In one case, the village head provides much of the human resource management for a winery, coordinating day laborers and making sure the vineyard has the right workers at the right time. Elsewhere, a manager for a large corporate winery said it’s not so much about financial support as good policy, helping to coordinate with banks and institutions. “They don’t interfere,” he said.

In Ningxia, local governments encourage new wineries by providing electricity, irrigation, pavement, signs on the road, subsidies for imported vines and even funds to invite foreign consultants and prizes for award-winning wineries. In Shandong, local governments coordinate lease agreements with farmers so that a winery can establish a single vineyard and control its grapes even if dozens of different farmers control the small plots of land.

Interestingly, the role of government as regulator came up less frequently in our discussions, but it is one of critical determinants of a successful wine industry. Pollution, pesticides and food safety are all critical features of a healthy vineyard and are very sensitive topics in China. Indeed, a 2012 scandal over contaminated wine stoked concerns about the largest producers and whether food safety inspectors should become stricter about pesticides. We took this photo of a pesticide-laden cluster at a major state-owned winery (although this may be just a very large demonstration vineyard).

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Needless to say, this is not what the grapes looked like in most of the vineyards we visited, including those of small farmers.  However, several wineries expressed concerns about producers using pesticides that are banned in China (where regulations are already looser than in Western countries). This is a particular concern in Shandong, where humidity is most threatening and where, it’s worth noting, some farmers are hesitant to eat the skins of their own grapes. Here, efforts to tighten enforcement of environmental regulations could be facilitated by ongoing efforts to promote agribusiness over more diverse types of wineries.

Another Public Investment: Government as Customer

The most successful wineries benefit from government contracts for banquets and from civil servants as high end customers. Those sought after consumers are not just wine drinkers, of course, but collectors, and most importantly, those who purchase wine as gifts. It’s no secret that gifts are an important part of business negotiations in China. Some experts have pointed out that a market for extremely expensive Chinese wine has benefited from civil servants and business magnates who are looking for an appropriately priced gift. Such a gift need not be consumed. At other times, negotiations might involve fancy banquets or informal meetings, where the spirit of friendship is facilitated by a meal and a bottle. Indeed, most people we spoke with emphasized food and drink as part of maintaining good relationships with local officials.

But conventional wisdom has it that civil servants have seen their belts tighten, a trend that the new President, Xi Jinping, is eager to continue. The national government has made some public efforts toward curbing corruption in addition to increasingly strict monitoring of accounts. Of course, careful control of public expenditure sounds great to a political economist, so we were surprised when even a taxi driver called it a “disaster.” The “disaster,” we are told, is that when civil servants are constricted in their use of expense accounts, the entire hospitality industry is affected, including hotels, bars, restaurants, taxi drivers, and of course, wineries. Now, it’s important to keep in mind that our informal conversations are just that. We can’t say whether civil servants have actually changed their spending habits or if, for example, announcements in the media have stoked the rumor mill, but we did find it curious to encounter the same perspective from very different people in the hospitality industry and to note that it was echoed by Beijing Boyce. We asked a driver in Shanxi province whether he sees a lot of tourists and he explained how changes in government spending have hurt the tourism industry. We discussed the prices of Chinese wine with a foreign barrel merchant in Shandong province and he explained how changes in civil servants’ accounts are crushing the market for low quality, expensive gift wines.

If our barrel merchant and others are correct, there may be important changes in Chinese supermarkets. If wine drinkers seek out higher quality at the same time as consumers limit their purchase of exorbitantly price gift wines, we might start to see some of the delicious wines we tasted taking up more space at the supermarket. Actually, we are pretty optimistic that those delicious wines are coming regardless of civil servants’ expense accounts.