Late last year Beijing began imposing crippling tariffs on a number of Australian goods – sanctions that could see the price of their wines double or even triple in China. Will South African wines benefit from Australia’s woes?
As if debilitating lockdowns and economic downturn from the Covid-19 pandemic weren’t enough, Australia has also been left reeling from its political fallout. On 27 November 2020, the Chinese Ministry of Commerce announced preliminary tariffs on Australian wine packaged in containers under two litres on the back of investigations into anti-competitive “dumping”.
China is by far Australia’s largest trading partner, and Australian wines have until now enjoyed a dominant position bolstered by government investment and the China-Australia Free Trade Agreement (ChAFTA) which provided for tariff reductions on wine in 2019. As a consequence, Mainland China accounted for 39% of export and 4% of growth in wine by value during 2020, amounting to AU$1.2 billion (R134 billion) according to Wine Australia. Higher end wines led the charge, with the premium (mostly red) wine segment (AU$10 per litre) increasing by 11% during 2020.
“Going from 0% tariffs for the past few years to the vast majority of wines now facing between 160% and 212% tariffs has created a pretty chaotic situation for most wine businesses here,” says Marcus Ford, country manager for Wines of South Africa (WoSA) in Asia. The Australian Government now forecasts lower prices especially for Australian red wine grapes and significantly reduced wine exports to China.
These provisional tariffs will technically only be imposed for four months, with a possible extension to nine months, but another seemingly symbolic salvo of tariffs that followed shortly after, on 10 December, seems like a strong indication the situation won’t be resolved soon, according to Marcus.
“Essentially, the impact of the tariffs has made packaged Australian wine not viable for most businesses here,” he says. “Having spent time with distributors and importers [in Beijing] over the past several weeks, it seems that some will exit the wine category and focus on other liquors.”
At the same time, WoSA predicts China’s market for imported wine will double by 2030, although prospective importers face an increasingly crowded space. “The wine business here has become increasingly competitive over the past few years, with a trend of consolidation in the wine trade,” says Marcus. “The effects of Covid-19 in 2020 and the impact of the effective Australian ban will only accelerate this process.”
Chile is Australia’s main competitor in the market, and the country stands to benefit most since it already has a free trade agreement in place with China. “Major Chilean brands have been active in China for over 15 years and have teams on the ground to support them hence they should see a significant uplift in their business here,” says Marcus.
But as one of the largest consumers of premium wine in the world, China is always thirsty for quality at accessible prices. “I think there will be more opportunities for South African producers, especially those who have been in market for some time and have been marketing effectively in China,” says Marcus.
“At a domestic level, retailers, restaurants, bars and hotels will need to re-think their offer to the consumer, and those producers who have wine in China already should see some benefits in the coming three to six months,” he adds. “Equally I think that there will be opportunities for South African wines with specialist wine importers who will diversify away from the Australian category in the months to come; we are already seeing enquiries on the rise, especially in premium and boutique categories.”
Gun Bay is a local producer who have made recent inroads into China. Headed by Andrew Ing, Gun Bay’s wines were officially launched at the Hong Kong Wine and Spirits Fair 2019 (and well-received, apparently, since ‘ganbei’ is the Chinese equivalent of ‘cheers’). Andrew does see an opportunity to increase South Africa’s market share, yet from a very low base. “To put it in perspective, South African wine by value accounts for only 1% of wine imported by China, whereas Australia has nearly 40% of this market,” he says.
South Africa is at a serious disadvantage without free trade agreements such as those in place with Chile and Australia, and is unlikely to rise to prominence without well-coordinated high-level negotiations. “But even in the absence of an FTA, and even if the tensions ease somewhat in the near future, the quality of South African wines and the value for money in the branded and premium segments gives us a great opportunity to gain more market share,” says Andrew.
“It is crucial that instead of just selling wine, local producers build their brands and aim their marketing efforts in branded territory, rather than the messy entry level arena,” he advises. “It takes time, money and patience to build a brand, and especially so in a market such as China with its cultural differences and subtle nuances in conducting business.”
“So, the door to the vast Chinese wine cellar has just opened a little more, and after a horrible year, the ultra-resourceful South African wine producers and exporters will find ways to slip in and get more of our great wines onto their shelves.”
Quality takes time
Regardless of the opportunities, South African wine businesses have to consider whether opportunism is wise. “Every successful producer in China from Penfolds, Lafite, and Casillero del Diablo to Yellowtail – has succeeded by creating legitimate and sustainable consumer demand for their brand,” says Marcus. “Creating consumer demand in China must be the singular long-term goal of any brand owner.”
Mike Ratcliffe, chairperson of Stellenbosch Wine Routes, fully agrees. “We believe firmly that brand-building is a considered long-term endeavour. Any potential short-term gain created by the Chinese and Australian stand-off should never supersede the serious job that we have of establishing our wines based on their superior quality proposition.”
“The key for Wines of South Africa and our activities here is to increase our visibility and relevance both the trade and the consumer in China,” says Marcus. “Our recent roadshow in October and November was a great success, we reached almost 1 000 members of the trade and media across ten cities, showcasing 20 producers with masterclasses – both offline and via livestreaming.”
Don’t forget to call
Marcus has some advice for producers in the short term: “China does not take a break in December and January, so please stay in touch with your Chinese partners or potential partners via Wechat and email over the festive period back home,” he says. “China will be closed for most of February due to Chinese New Year so it’s important to understand the calendar opportunity.”
“Developing a brand in China takes time and you must really have the appetite to work with a partner here over the long term. This takes time and resources to succeed.”