So Australia and China have just signed a free trade agreement (FTA), which because of the wide diversity of industries that operate between the two countries, is one of the most exhaustive and detailed of its kind. Its arrival is a genuine achievement, just for that alone. But how will this agreement affect the lives and prosperity of Australian wine producers? Is it a panacea that will change the lives and prosperity of our wineries?
With sales of 44 million litres valued at A$242 million, China is currently Australia’s third largest wine export market, behind the US and the UK. But in China our competitors are lining up in the rear view mirror. Several significantly greater institutional spending budgets and some actually have FTAs already.
On the surface of it, any agreement that levels out the playing field between wine importers into China – and Chile and New Zealand already have FTAs in place – will surely help Australian producers. The tariffs on Australian wine exports to China, being 14% for bottled and 20% for bulk wine, will be reduced to zero within the four years after final ratification of the FTA in China.
With every one of these years, Australian wines will become more competitively priced within China, which is without question of great value. But will it line up our prices against the cheaper Chilean wines currently flooding the China market? No – the price differential is already too great. Our bottled sales to China below A$5 per litre are around 24 million litres – still a far cry from our main competitors in this less profitable space.
Australia has fortunately positioned itself as a purveyor of quality wine in China – we export just 5.4% of our wine there by volume, but achieve 11.8% of our export income from that amount. Bottled wine exports to China are valued around A$7.50 per litre, making China the number one destination for premium Australian wines. Australia’s are the highest average-valued wine exports to China of the 10 largest suppliers to that market. That’s the position we need to defend and enhance – and that’s where the FTA can provide real benefit.
FTAs also make the processes of doing business easier from perspectives such as compliance and regulation. So, once fully implemented, the costs to our wineries of doing business in China will reduce – so therefore will profitability increase. An example is the decision to allow settlement of renminbi (RMB) transactions in Australia, making it easier for local companies to receive and send RMB and maintain an account in this currency in Australia. It will be cheaper for Australian wineries to transact, easier to manage their currency exposure and easier to access Chinese markets. Transactions will no longer need to be settled via Hong Kong.
However, all this is perfectly useless if Australian wine producers do not give Chinese consumer what they want. Wine sales in China recently tipped back past the level they were prior to the central Government’s crackdown on ostentatious consumption and governmental excess. And this time around, Chinese consumers are actually buying what they’re drinking – they’re not being gifted it. So we have better data than ever before.
And no FTA will alter the fundamental rules of engagement with China. Business relationships – which are essentially trusting and personal relationships – take time to nurture. There is no avoiding this process. Success in Chinese business depends upon long-term strategic partnerships and a key understanding of who the customer is, what the customer wants and is prepared to pay. Nothing foreign there!
Different cities and provinces might just as well be different countries. China’s tiered system of cities is today an accurate reflection in many cases of the sophistication or not of their wine markets. There’s something of a self-fulfilling prophesy at work here.
Change is the norm – not the exception – and its pace will always confront you. China’s regulatory environment can change abruptly, with no or little notice, so the ground rules never stay the same for too long. China is no overnight solution, but if worked hard with (local) knowledge and intelligence, it could make the difference between success and failure for Australian wineries.
Just imagine if our wineries enjoy the same post-FTA success as NZ’s dairy exports to China, which in the first five years after its FTA rose from $NZ500 million to almost $NZ5 billion! While that result is beyond possibility, it shows what happens when people get it right.
An interesting outcome and one almost certain to impact on Australian wine is the likelihood of significantly greater Chinese investment in our wine industry. In itself, that will help the connectivity between the two countries and Australia’s export opportunities.
The new FTA will indeed make it easier for Australian wine business in China. But if Australian winemakers now think they can take their foot off the pedal in China, their business will slow down so quickly it will look like it’s going backwards.
