It is a sign of a very different time for companies doing business with China that Australia’s largest wine company, Treasury Wine Estates, was quizzed in some detail by analysts about its readiness for a reopening of the China market on the release of its half yearly results on Wednesday.
Once a profit generator and one of the strongest sources of growth for the company, taking 600,000 cases a year of its upmarket product, TWE chief executive Tim Ford described the company’s earnings from its operations in China as “minimal to insignificant” at the moment.
It is now more than two years since the company was hit by the imposition of punitive tariffs on wine imports by Chinese authorities in late 2020.
TWE has reinvented itself under Ford, who accelerated plans to step up its international operations – particularly in the US and Europe – and began focusing more on marketing to Asian countries other than China.
The imposition of tariffs, formalised in five-year levies of up to 200 per cent in March 2021, was seen as part of a suite of sanctions imposed by China in the wake of deteriorating political relations.
Australian barley, loved by Chinese brewers for its great taste, was also subject to punitive tariffs, while exports of beef, lobster, coal and timber were subject to a variety of non-tariff trade barriers.
But now there is a very different atmosphere between Australia and China, with federal Trade Minister Don Farrell set to travel to the country soon, after a recent video chat with his Chinese counterpart Wang Wentao. Ford himself is set to make his first trip to China since pre-Covid in March, along with other business leaders, as relations improve and China opens its borders.
Ford said he had been in contact with Farrell’s office, but like everyone else he must wait on the outcome of talks between the countries to see if there is any chance of relief on tariffs.
To do so would require a dropping of Australia’s complaint against China in the World Trade Organisation over its wine tariffs, but with Australian coal now arriving in Chinese ports for the first time in several years it does not seem to be out of the question.
Analysts asked Ford if he had enough inventory on hand of the upmarket Penfolds brand favoured by Chinese consumers if the tariffs were dropped.
He was forced to deny suggestions the company was holding back inventory in case of the China market reopening.
While Ford admitted the company was devising strategies if things opened up, in the wake of the more “positive tone” in the relationship he was still in a wait and see mode.
As he said, when it comes to some Penfolds brands, demand is already exceeding supply.
The Chinese wine market has the potential to be the biggest in the world with its increasingly affluent middle classes now turning more to wine than cheap beer and traditional Chinese rice wine.
Ford has worked hard to keep the China fires burning.
TWE is now very much a global company with the Australian market and production playing a declining role. It has responded to the market closure by stepping up plans to export Penfolds and other brands from the US and Europe into China.
It is also working to help the development of the local China market including the recent release of a Penfolds wine made there.
The moves, with other global wine players wanting to access the China market – particularly the big French winemakers – are politically positive in the country and have allowed TWE to establish itself as having a long-term commitment to the market.
China President Xi Jinping made a point of visiting the nascent wine producing area of Ningxia in northwest China in 2020, giving his encouragement to the development of the industry. Moves to help farmers and rural areas also go down well in China.
China is the sixth biggest consumer of wine in the world and the biggest importer of red wine.
It has also become one of the world’s largest producers of wine, a move seen as giving further impetus to the development of the consumer market (40 per cent of the wine sold in China is now imported) as the middle class become more accustomed to drinking it.
Despite the political turmoil, TWE has not lost its focus on the China market, with a clear eye on its long-term potential.
But the closure of the market has also accelerated TWE’s plans to develop Penfolds as a global brand, which will stand the company in good stead.
Its half yearly results confirm the benefits of TWE’s commitment to premiumisation, or moving up the value chain.
The company now generates some 85 per cent of its global revenue from its luxury and premium wines, compared to only 50 per cent five years ago.
The same will apply in China where it can expect local producers will satisfy the demand for the cheaper product with imports focusing on the higher end brands.
Apart from the direct impact on Australian wine sales to China, there is the other impact of the opening up of China’s borders.
Chinese tourists have yet to re-emerge on a global scale but could well do so later in the year, providing another market for global wine sales including in airports.
No one quite knows what sort of China will emerge as it reopens after years of lockdowns and how far business and political ties between Australia and China will improve.
But, as always with China, there are some very big numbers at stake. The world is watching and things are changing.
For Ford, and others in the export trade to the world’s second largest economy, it is very much a case of watch this space.
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