- Until the imposition of huge tariffs, China was by far Australia’s most valuable market. And it was growing.
- That door has now closed.
- A new FTA with India offers the possibility of increased exports to the subcontinent.
- But the Indian market is far smaller, and far more complicated.
China mattered a lot to Australian producers. When, on January 1st 2019, the Chinese import duty on their wine was totally removed as the last stage of a Free Trade Agreement, the effect was dramatic. In value terms, their share of the giant market’s bottled wine imports jumped from the previous year’s 28% in 2018 to 37%. In 2020, with just 27% of volume, Australia had an extraordinary 41% in value – more than France and Chile, the next two largest exporters, combined.
In terms of Australia's own exports, China was the second biggest destination – after the US – in volume -with 77ml, and the most valuable. The average price per litre shipped to China was AU$11.59 ($8.61), compared to the AU$4.22 ($3.12) and $AU4.53 ($3.68) paid by the USA and UK respectively.
Closing the Door
On 26 March 2021, however, China effectively closed its doors to Australian wine by introducing tariffs of 116.2% to 218.4%.
How far will the new Indian trade agreement go towards replacing what has been lost?
The good news is that India’s wine market is growing - from a million litres per year in 2001 to over 30m litres in 2019. This figure, however needs to be compared with China’s total of 1.24bn litres. The total Indian wine market is estimated to be valued at US$150m, around a third of which is represented by imports from all countries.
In other words, India’s total imports are worth around $50m. Even if they grow by the predicted maximum of 25% per annum, by 2025 this figure will be worth less than $125m. Australia currently has 42% share of Indian imports. Even if this were to grow to 50%, the value of these shipments would be little more than a tenth of the $535m worth of wine Australia was single-handedly expecting to be shipping to China by that time.
The Indian and Chinese wine markets are really not comparable.
Two decades ago, when Jim O’Neill of Goldman Sachs came up with the idea of lumping the emerging nations of Brazil, Russia, India, China and South Africa as BRICS, it was commonplace for economists and industry executives in a wide range of fields to compare the two giants of this group and to try to guess whether India or China would ultimately be the larger, more successful economy. Many people in the west found plenty of reasons to wish that the subcontinent would take this prize.
After all, they argued, India is a democracy with laws that owe much to its time as a British colony. And, for the same reason, its educated classes speak English and the broader populace enjoys the same sport – cricket – as those other former parts of the British empire, Australia, New Zealand and South Africa.
In 1990, judged by GDP, the two countries were almost neck and neck with India appearing to edge ahead. But, after slipping into the lead, China then leaped ahead. Three decades later, in 2021, the nominally Communist state's GDP was just under five and a half times larger than the capitalist democracy.
Beijing Loves Wine
But wine was not just one of many beneficiaries of China’s financial success; it was the recipient of particular the encouragement from Deng Xiaoping’s reforms in the 1980s. These not only opened the previously closed Chinese market to French investment and imports, but also sought to encourage a shift in consumption away from the ubiquitous Baijiu spirit to this 'healthier', lower-alcohol beverage.
Chinese efforts to help the wine sector included the development of Ninxia as a wine producing region, investment by state-owned producers like COFCO (owners of the popular Great Wall brand), the use of wine at banquets and as part of the culturally-crucial tradition of gifting, and the complete removal of tariffs in Hong Kong soon after its return to Chinese control.
China’s rapid growth of E-commerce was also crucially important, as was the absence of any barriers to wine shipment across this huge country.
In India the picture was, and remains very different. In the Indian constitution, article 47 of the ‘directive principles of state policy’ unequivocally says that "the State shall endeavor to bring about prohibition of the consumption except for medicinal purposes of intoxicating drinks and of drugs which are injurious to health". This aim has yet to be achieved for the nation as a whole, but alcohol prohibition is in force in the states of Bihar, Gujarat, Mizoram, and Nagaland, collectively home to around 200m Indians. Elsewhere, there are regular ‘dry days’ when alcohol may not be served.
Whisky not Wine
In direct contrast to China, locally produced whisky and rum are far better treated than wine. Indeed the cost of a domestically produced wine can be twice as much as one of local spirit.
To further complicate matters, every state within India can regulate alcohol in its own way. In Tamil Nadu, for example, there is a state monopoly with some 6,000 outlets. Elsewhere retail and wholesale licenses are obtained by bidding at auction. Wines have to be registered individually each state, and local taxes vary widely. So introducing new wines is far from straightforward – even for Indian producers wanting to sell their wines in other parts of the country.
Retail sophistication is improving, but far less wine is sold in the air conditioned outlets that are commonplace in China. Storage and shipping conditions are also not always ideal either. E-commerce is forbidden.
The relationship between Chinese consumers and Australia is important too. In 2019,1.4m visitors travelled to Australia from China - a million more than arrived from India. There were over 200,000 Chinese students in Australia, compared to just 35,000 Indians.
India’s wine industry is small. Its annual production of 18m litres (2m cases) may still be small by global standards – around twice the size of the UK, and a fortieth of the size of China's, but it is growing and helping to build interest in wine in the subcontinent.
Wine professionals who visit India are meeting a new generation of more widely-travelled citizens who are embracing wine rather than the whisky their parents would have drunk. There is no question that, over time, India will become an increasingly valuable market for Australian and other countries' wines.
With or without import tariffs, however, this won’t happen nearly quickly enough to begin to fill the hole China has left in the Australian wine industry.
Read more about the situation in Australia here.