More liberal legislation in the light of China's historic signing of the WTO Trade Agreement means more foreign companies could be granted licenses to import and export spirits in the country. Robin Lynam reports.

Like the leaders of every other industry, the world's major distillers of branded spirits are watching China carefully to see what will happen after its WTO accession. Many, however, have past experiences of the market which may predispose them to a cautious approach.

"A lot of people seem to have forgotten the cover up that took place in the late 1980s and early 1990s when the multinationals were stamped on by the Chinese authorities for smuggling branded spirits into China," observes Richard Paine of Hong Kong-based wine and spirits importer Fine Vintage Ltd.

"There are various rumours about the combined losses to the industry, but the figure I remember hearing most often was $9m-$10m US dollars. Of course nobody wanted to talk about that."

The victims of the crackdown remain tight-lipped on the subject, but memories are long on both sides. For many years imported spirits went through China via "unofficial channels" which by-passed tax and the state monopolies - with the tacit approval of the southern Chinese authorities. Then came the smuggling crackdown, and the police and customs agents, both of which had turned a blind eye to the trade, started raiding warehouses.

"Everybody across the board was affected, because what happened was that the authorities seized the smuggled spirits. It's got an uncanny resemblance to what happened 100 years ago with opium," says Paine.

Even if the crackdown had not taken place the industry already had plenty reasons to be wary of what had at first appeared such a vast and promising market. The warehouses were full because the cases of spirit - mostly Cognac - weren't moving at anything like the anticipated speed.

A decade later tastes have changed. The Chinese are now more inclined to drink wine than Cognac, and although the prospects are brighter for whisky, and increasingly for white spirits thanks to a fast growing bar culture in the big cities, the volumes being moved are still relatively small.

According to the Scotch Whisky Association (SWA) China bought just £1.2m pounds worth of Scotch last year through official channels, although the consumption of smuggled and parallel imported spirit is thought to be much higher.

Scotch and other whiskies have long been the imported drinks of preference in northern China. Cognac traditionally held sway in the south, and although bottles of Remy Martin - the market leader - continue to be served in the karaoke bars of the southern Special Economic Zones (SEZs), Cognac sales appear to be in an advanced stage of irreversible decline in relation to imported red wine.

Whisky sales however are growing, and the SWA anticipates a "significant increase" in official exports when the Chinese reduce import duty from the present 65% to 10%, as has been agreed with the European Union. On location, however, the industry is not holding its breath.

"The tax break is said to be coming up in three years - perhaps three to five. I don't think any of us can get too excited at the moment," says Richard Huck of William Grant and Sons which sells both Grant's and Glenfiddich in Hong Kong and on the Chinese Mainland.

"Stock levels are a lot lower than they've been in past years because people haven't been as active shipping into the market. We continue to promote in the on-trade and we're still well distributed in the off-trade," he observes.

Huck believes that the prospects for imported spirits in the long term are bolstered considerably by the rapidly evolving bar cultures of the big cities. Most foreign spirits sell on premise, and bars continue to be the focus of promotional activities on the part of drinks companies competing for market share.

"In Shanghai and Beijing a tremendously exciting bar culture has sprung up for all types of liquor. Competition is fierce. At the moment there's no consumer loyalty because people are so active on the promotional side," says Huck.

One result of this is that interest is growing in other imported spirits suitable for mixed drinks such as gin, white rum, vodka and in particular Tequila.

"Sales are taking off over the border because customers say it resembles their own local distilled spirits," says Dennis Lim, regional marketing manager for Jose Cuervo International, adding hastily "but, of course, our Tequila is better quality and tastes a lot better".

Lim claims that Chinese sales rose 180% last year, albeit from a modest base. Young drinkers apparently enjoy the novel ways in which Tequila can be taken, such as slammers and the old fashioned way withsalt and lemon.

Although beer currently accounts for 67% of all alcoholic drinks consumed in China and wine consumption is increasing rapidly, the country's white spirit production is nevertheless considerable, and probably excessive.

Changing market conditions, inspired in part by increasing consciousness of the health risks associated with hard liquor coupled with a perception that red wine is a health tonic, are compelling the industry to restructure. Some analysts are predicting a decline in sales of domestically produced liquor in China by as much as 50% over the next few years.

The China Liquor Commerce Association (CLCA) has warned that Chinese liquor sales have been in steady decline since 1996 when production reached an all time high of 8m tonnes. Factors influencing this trend include the proliferation of low quality "fake" spirits and the presence of foreign competition in the hotels and bars of the big cities.

The industry is also badly fragmented, with too many small concerns with a limited local market falling foul of the difficulties of wider distribution in a country with a still badly underdeveloped transport infrastructure. China currently has more than 40,000 companies distilling spirits.

Liu Jinlin, vice-chairman of the CLCA, has called for the industry to diversify and in particular to concentrate on lower alcohol drinks which may be more acceptable to beer or wine drinkers.

For the foreign multinationals the consequences of WTO accession remain unclear. None is currently licensed to sell its products in the country without going through the Chinese state monopolies. With the clamp down on smuggling still very much in force the market is effectively closed to them by duties which make the products unaffordable.

Maxxium China Ltd, as Remy Martin's Chinese operation is now called, has maintained its presence in the country largely through its wine making activities, and notwithstanding the smuggling issue has retained its dominant share of Cognac sales, even with falling volumes, through legitimate channels to the still protected Chinese market. Seagram's, by contrast, once so bullish on China, opted to move its regional centre of operations from Hong Kong to Singapore.

Richard Paine does not believe that WTO accession will necessarily open the China market to the big international spirits concerns very much further than at present.

"There is some doubt as to whether the government will grant them licences to officially import liquor after WTO. There's all this hype about everybody being able to enter the market but it's very unclear who's going to get the licenses. I would say that China is not at all interested in having the big international spirits companies dominating the domestic market after WTO. The Indians haven't let it happen - they've been very clever at keeping the multi nationals out - and I suspect China will attempt to go the same route."