Aussie wine icon Penfolds’ genius move amid brutal trade war with China

China’s brutal trade war with Australia has brought many companies to their knees. But one famous firm has managed to sidestep the drama.

The devastating Australia-China trade war has decimated countless businesses and industries, and wiped billions of dollars from the economy.

The relationship between Canberra and Beijing first began to sour in 2016, resulting in a diplomatic freeze – but things stepped up a notch last year, when around a dozen Australian goods exports were slapped with tariffs.

Coal, barley, beef, timber, lobster and wine have been among the casualties, and earlier this month, we learnt just how crushing the spat has been.

According to an eye-opening report from the Australia-China Relations Institute (ACRI) in early December, Australia’s exports across 12 key commodities impacted by Beijing’s sanctions plummeted by a staggering $17.3 billion in the first nine months of 2021, compared with 2019.

Professor James Laurenceson, the director of ACRI at UTS, told news.com.au many Australian brands and livelihoods had been devastated by the ongoing trade war.

“When you start looking to the longer term, a lot of the cost will depend on whether the Chinese market continues to outperform alternate markets as it has done for the past 20 years – for example, research shows that for the past 15 years, China has added 60 million people to the middle class every year, and that far exceeds anywhere else – India is nowhere near that,” he said.

The trade war has affected a huge range of industries. Picture: iStock

“So when we’re locked out of the Chinese market, diversification is all well and good, but all we can try and do is sell to smaller, slower-growing markets, and that comes at a cost.

“In 2017 an Australian government foreign policy white paper forecasted that China’s economy would add more new purchasing power than the US, Japan, India and Indonesia combined, and if that’s true, it does suggest the cost from being locked out and having that disruption to the Chinese market is going to rise over time.”

Aussie icon’s ‘clever’ move

Prof Laurenceson said the impact on some commodities such as coal and barley were less severe as sales were simply able to be diverted elsewhere.

But other industries like wine were beginning to “really struggle” – although he said some Australian brands, such as the iconic Penfolds, had taken some “really clever” steps to stay in the game.

“Penfolds is a flagship Australian wine brand, and guess what they are doing? They are still selling in China, and they are sourcing product in California rather than the Barossa Valley,” he said.

“So it’s an Australian brand going into China, but the product is not actually Australian – California grape growers are benefiting from that trade now, and we will see more and more Australian companies do things like that – and good for them, they are keeping the brand afloat, but it comes at a price to the Australian economy.

. but the wine sector has been hit particularly hard. Picture: iStock

“It’s a sad reality check on what’s been happening.”

While it is understood that work on the Penfolds California Collection began well before China’s wine tariffs were introduced, a spokeswoman from parent company Treasury Wine Estates said the company was adapting to that setback by exploring global opportunities.

“The effective closure of the Chinese wine market to Australian wine was significant for us and the Australian wine industry, but we have navigated through it with the implementation of our global response plan including reallocating product to meet previously unmet demand and accelerating investment to support future growth for Penfolds in key global markets,” the spokeswoman told news.com.au.

“As we’ve previously said, we remain committed to the China market for the long term and continue to invest in our team, our brands and our relationships with customers and consumers.”

It was a sentiment echoed by Treasury Wine Estates CEO Tim Ford, who recently told ACRI Adjunct Industry Fellow Glenda Korporaal OAM the company was determined to trade with China.

“When the tariffs (on Australian wine) happened, everyone said you have to take China off your game plan. But I was like, ‘No, it stays on there’,” he said.

“We remain committed to China, we are just going to work out a different way to achieve it … We continue to have strong engagement across the board with China.”

Meanwhile, Prof Laurenceson said it was a similar story with the rock lobster industry, which was locked out of China last November.

While the industry feared a looming disaster at the time, fishers simply started selling to Hong Kong instead, with the lobsters then smuggled into China via a so-called “grey route”, which meant that “sales have hardly been affected” by the sanctions.

The brutal Australia-China trade war is unlikely to end any time soon. Picture: AFP

No end in sight

Prof Laurenceson said sadly, he didn’t believe the trade war would be resolved any time soon.

“I see no reason for China to suddenly turn around and change tack – Kurt Campbell, Joe Biden’s Indo-Pacific tsar, said in a speech to the Lowy Institute recently that he expects in time China will re-engage with Australia, ‘on Australia’s terms’, but why would China choose to re-engage on Australian terms?” he said.

“If anything, this deadlock would end with a mutual agreement, but this idea China would come with its cap in its hand begging to have us back is utterly ridiculous to me.

“China’s economy is ten times larger than ours, so not having Australian coal hardly makes any difference – I don’t see the incentive for Beijing to adjust its course, and also it would send a signal to other countries saying ‘hello everyone, we’ve failed’.

“The prospect of Beijing doing a 180 degree turn is almost zero.”

Prof Laurenceson said while many nations currently had issues with China, Australia was unique in the sheer range of sanctions it faced.

“New Zealand, Korea, Japan – what really sets them apart is … the way they manage diplomacy with more caution,” he said.

This photo, taken in Shanghai’s Xintiandi district in November, reveals the iconic Australian Penfolds wine brand is now sourcing grapes from the Napa Valley and California. Picture: Supplied

“If the Australian government was more cautious in its diplomacy we wouldn’t be in this situation. Plenty of countries banned Huawei, but no others are in the trade pickle we’re in.

“Plenty of countries would be looking at Australia as a lesson on what not to do – I don’t think a lot of countries would be looking to Australia as a model of diplomacy.”

Prof Laurenceson said if the political relationship between Australia and China worsened, education could be next on the chopping block, which would be a major blow to the Australian economy.

He said the problem could easily spread to other industries and businesses, as well as Australian businesses currently operating in China – although if Labor were to win next year’s federal election, there may be some thawing of relations.