The result of more than 30 years of engagement with China by the company, and more than a decade of researching and trialling wine making in the world’s second largest economy, TWE’s move has the political advantage of encouraging the domestic wine making industry in China which will stand it in good stead in the long term as the market continues to grow.
While the world has focused on political tensions with President Xi’s administration and his global ambitions, the Chinese economy is still the second largest and one of the fastest growing in the world, with an increasingly sophisticated middle class population.
As long as the brand conscious Chinese consumer sees the locally made Penfolds as a similar product to the foreign one (which now comes in from California and will come in from France later this year), it gives the company a seat in one of the largest wine markets in the world.
TWE chief executive Tim Ford, who spent some time travelling in China after joining the company in 2011, before becoming CEO in June 2020, says he is confident the company can produce Penfolds in China in a way “that maintains the distinctive Penfolds house style (with) uncompromising quality”.
Last year Chinese consumers drank more than a billion litres of wine, making it the seventh largest market in the world.
By next year, TWE estimates that China will become the world’s second largest wine market with an estimated 52 million regular wine drinkers – more than double the size of the entire Australian population.
The country’s wine industry is developing in areas such as the Ningxia region in northwestern China which last year approved a 15-year wine industry development plan following a visit by Xi in June 2020.
Other areas include the Shangri-La region of Yunnan province (a fertile province in southwest China also selected by the ASX-listed Costa Group for making blueberries) and Shandong province on the east coast, between Beijing and Shanghai.
TWE will be starting its Penfolds China release with wine from Ningxia, which it says will involve an “initial modest size allocation for distribution to local consumers”.
It joins French wine and luxury goods company LVMH (which makes Moët & Chandon, Krug, Veuve Clicquot, and Hennessy) and Lafite, in producing wine in China (LVMH in Shangri-La and Lafite in Shandong.)
While Penfolds is a premium-priced wine, TWE plans to start the Chinese-made wine at an “entry level” price to this sector.
Over the long term, launching a Chinese made Penfolds gives TWE a new or alternate source of wine which is protected from future import duties on wine from any country.
TWE has the advantage of being a global business, sourcing in Australia, the US, Europe, South America, southern Africa and soon in China.
Eighteen months ago, the local wine industry was dealt a harsh blow when China first announced plans to put tariffs on Australian imports. The move, which followed the imposition of tariffs on Australian barley in China, was seen as yet another sign of worsening political ties between Beijing and Canberra.
The subsequent confirmation, in March last year, of tariffs of up to 200 per cent on Australian wine, has all but killed what was the industry’s biggest single export market, worth more than $1.1bn at its peak in 2019.
At the time TWE, Australia’s largest wine maker, had been riding high on sales of Australian wine into China, producing a good growth story and a strong ride for its previous CEO Michael Clarke.
The news of tariffs on its China market was one of the first major issues that his successor, Ford, had to deal with. Far from retreating, Ford was not prepared to let decades of hard work fall away.
Since then, Australia-China relations have got even worse and the Chinese economy has been slowing, with the world watching how it is handling its Covid zero policy, but TWE has maintained a commitment to the market.
It responded to the tariffs by moving to sell Penfolds made in California to China and now Penfolds made in France at the top end, and at the lower end exporting Rawson’s Retreat from South Africa and Chile.
Its Penfolds brand continues to be run out of China by Shanghai-based executive Tom King at a time when many expats are leaving as a result of the tough Covid lockdowns.
TWE has been prepared to take risks on the China market, including launching two products mixing wine with Chinese baijiu which have had a mixed reception.
James Laurenceson, director of the Australia China Relations Institute at UTS in Sydney, described TWE’s plans as “an example of the creative ways that Australian businesses can mitigate geopolitical risk and maintain deep connections with the lucrative Chinese market”.
“TWE is not alone in this creativity (which) explains why the Australia-China economic relationship in aggregate is more resilient to the ongoing spat between Canberra and Beijing than many commentators might have imagined,” he said.
But “while it’s certainly a positive for TWE’s employees and shareholders, let’s also not forget local grapegrowers who continue to suffer from Chinese tariffs”.
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Treasury Wine’s decision to make its up-market Penfolds wine in China is an ambitious move which gives it an inside track in the growing China market at a time when other Australian wine makers are all but shut out.