Analysis

Code Red - business in China after the WTO

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The business climate in China following its ascension into the WTO is beginning to become clearer as doors of opportunity open to foreign and domestic drinks producers. But as Rupert Dean reports, plenty of caution is still being shown by the more experienced players in the market.

The Chinese market is still experiencing a radical amount of change since the agreement with the World Trade Organisation last year.  In this environment there are plenty of conflicting interests influencing the market, such as national and provincial politics, protectionism and the ever-present red tape.  However it is interesting to see how the major domestic companies are performing in the market, what opportunities are being exposed and which direction the Chinese themselves expect the market to follow.

Wine Business
In the wine sector many exporters to China still seem to be adopting a slow and cautious response to China's entry into the WTO, which is, however, influenced by a bright long-term view of the future.  As the market is still susceptible to speculative domestic businesses looking to make a fast buck, it is no surprise that several major international wine companies are taking this step-by-step approach. However their slow progress in compounded by the fact that no-one will invest in consumer education on wine.

Distribution for these exporters is still the key to a successful presence in the market. But the change into a western-style wine market is still very evolutionary because of the vast number of obstacles, such as politics and bureaucracy.

This however, is less of a concern for the domestic producers, who have, over the last four years, started building their own distribution systems, navigating inter-provincial regulations as best as possible and aggressively targeting the non-premium end of the market.  Many of the successful domestic producers are very keen to encourage a quick implementation of the WTO agreement, as this will increase the flow of foreign technology, knowledge and investment and lead to an increase in domestic quality.  The domestic industry has witnessed considerable growth in the last ten years (due to substantial investment led by France) and many industry figures believe that the effects of foreign competition will be significant especially in the area of quality. 

Gabriel Tam, executive director of Huadong winery in Qingdao, feels that "this agreement will not alter the dominance of the local wines in the market for a very long time.  This is due to the future increases in quality domestic production, the increasing use of varietal and vintage on Chinese wines and the complete lack of knowledge that the Chinese consumer has about foreign wines, brands, regions, countries and wine culture. 

"However for the premium Chinese producers, this agreement will increase the value of vintage and varietal labels with the consumer and as a result quality will improve.  As China continues to plant premium varietals, new legislation will be required, tightening up production and labelling to Western standards and this can only benefit the industry and the consumer."  Tam also added that, "in the long run the wine sector itself will become more efficient and healthier than before."

The Beer Market
It is generally accepted that the beer market will be subjected to less upheaval than the wine market and although the WTO agreement may encourage an influx of imported beers, the domestic producers should regain the upper hand and proceed with their consolidation strategies leaving the three largest producers in a good position.

Many commentators have suggested that compared to the wine industry, the activities of the imported beers in the 1990s has already "trained" the local breweries in how to protect their local market.  Tsingtao Brewery has certainly recently regained its dominant position though good positioning and projecting a quality image. Both Tsingtao and the Beijing Yanjing Beer Group (the leading domestic brewers) are now in a much more powerful market position than they were almost ten years ago and should be well equipped to handle any aggressive foreign competition.

As another commenter in China remarked "not one imported label yielded profits from their local productions in China.  As a result of this experience I would think that the WTO impact would only help major players like Tsingtao and the Beijing Yanjing Beer Group to become even stronger in the market."

The Spirit Market
In the spirit market the WTO agreement offers new opportunities to foreign exporters at the expense of protection to the domestic spirit industry (the Baijiu producers).  Interestingly, the spirits tariff will eventually be lowered to only 10% on CIF value (from 55% in 2001, 186% in 1991 and 225% in 1987) compared to 15% for wines. The leniency shown to foreign spirits is a result of the low number of imported spirits in the market and because only a moderate increase in consumption of whisky and brandy is predicted over the next two years.

As with wine, it is the younger more affluent and westernised segment of the population that is of the most interest to the drinks companies. As such, more marketing spend in luxury outlets such as nightclubs is expected and will be necessary to attract this particular consumer.

It has also been mentioned by Chinese specialists in the trade that following these dramatic reduction in tariffs, there will also be a steady growth in aged whisky (anything from 12 years up and above) and aged brandy (X.O. quality and above) as the more wealthy consumers resume interest in these products

Expert Analysis

Wines & Spirits in China 2001
Detailed data on all wine & spirits sectors in China. Data from 1990-2010.

Beer in China 2001
Comprehensive coverage of the market, with data from 1995-2005.

 


Distribution
Maybe the biggest changes sparked by the implementation of the WTO agreement will be on the drinks distribution system and on drinks retailing as the government continues to relinquish control of state-owned distribution companies to Chinese private business. In the end, China could be left with a three-tier model of wine distribution with a handful of dominant distributors in each province connected by agents in major city ports. This will be a result of the protectionist tendencies shown by the provinces and the industry regulatory bodies. For beer and spirits, the distribution changes are less complex.

The other major impact could well be on the retail sector, which is currently undergoing a rapid transformation.  Retailing was an area that underwent sweeping reform by the WTO agreement, with a much more rigid timetable of implementation and foreign company benefits. A few years ago, hypermarkets were viewed as un-Chinese by many experts and seen as unlikely to work in this market. However, the huge growth of Wal-Mat and Carrefour has disproved these concerns as their hypermarkets continue to open up and down the more wealthy coastal regions. Meanwhile,  Jusco from Japan, and the UK's Macro and Tesco threaten to join in the competition.  Domestic retailers are already feeling the squeeze and consolidation is ripe amongst the domestic retailers with the large drink sellers of Hua Lin in Shanghai and Xin Dan of Beijing merging.

One further more short-term effect of the WTO will be to increase business travel, entertaining and therefore demand at the very top end of the market.  Whether this is sustainable or not will depend on several economic factors, but this surge in demand could help fuel the speculators and spark a mini rush to export into the Chinese market.

Finally, it is important that business people be aware that there will be times when Chinese authorities (despite the WTO) will act to protect their own interests and these actions will favour the domestic industry.  However, exporters must also bear in mind that the Chinese government has invested a lot of time and energy into these domestic and joint-venture drinks industries, believing that wine and beer in particular can be major future export earners, so rocking the boat too hard is probably out of the question.


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