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Where to now for the Australian wine industry?

Opinion

The recent announcement of harsh Chinese tariffs on Australian wine imports will devastate South Australia’s huge wine industry. But the magnitude of the blow could have been significantly reduced if Australian producers had pursued greater diversification in their export strategies, argue Flinders University Professor Roberta Crouch and Dr Nathan Gray.

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The announcement on November 27 that the Australian wine industry would face countervailing tariffs of between 107 -212 per cent on wine exports to China will cripple the sector.

China took this decision due to determining that Australia has been dumping wine into the Chinese domestic wine market and their domestic wine sector has suffered because of it.

World Trade Organisation anti-dumping regulations stipulate that in the first instance the aggrieved country launches an investigation and can make an interim judgement that can hold for 12 months from the start of the investigation (August 2021). The Australian government can negotiate with the Chinese government during this time to come to a resolution, if this isn’t possible, Australia can appeal to the WTO arbitration tribunal – as has already been done in the case of a similar determination for Australian barley. Arbitration through the WTO is likely to also take at least another year.

Clearly, the Chinese government is employing these strategies to punish Australia – and even if the tariffs are ultimately removed, our current Chinese importers and drinkers of Australian wine would by then have got used to drinking substitutes, either derived locally or from unaffected wine exporting countries.

This is a hyper-competitive market. The entire world is selling wine to China, or trying to. Australian competitors like Chile produce many wines of great quality for their price, while the French and Italians have made critical investments to maintain their positions at the premium end. The reality is the Australian wine sector, which is heavily reliant on exports, is now faced with finding profitable alternative markets to China for at least the next few years, if not longer. However, new markets take time and research to develop, as well as finding appropriate product mixes and determining effective marketing and distribution strategies. This work needed to be started some time ago, but it wasn’t.

The narrowing of market diversification over past 10 years has put us in this position

The Australian wine industry has benefited significantly from export growth in the Chinese market over the past 5 years, since the signing of the China Australia Free Trade Agreement. Most wineries have explored export opportunities to China, and Wine Australia has advocated and supported the prioritising of this market, resulting in record growth. Bottled wine exports to China rose from less than $15 million in 2005 to $1 billion in 2019.

While the Australian wine sector has been riding high through extensive research and investment in China, with growth propelled by an expanding Chinese middle class over the past five years, it appears this has been achieved at the expense of maintaining exports to Australia’s long-established wine markets in the USA, UK and Canada.

In 2007, the Australian wine industry was also doing well in these markets, with bottled wine exports to the UK and US totalling more than $1.6 billion, demonstrating the substantial success of our export programs at that time. The GFC (Global Financial Crisis) in 2007 and 2008 had a profound impact on exports to the US in particular. Importers were short of funds and had their credit facilities revoked overnight. Australian exporters and US and UK importers all suffered. Economies and credit environments have recovered but our ability to sell back into these markets above value-oriented price points has not.

In the past 13 years, Australian wine exports to both these markets have collapsed, as this country’s bottled wine exports have become less diversified and strongly focused on China.  The UK is now just a seventh the value of what it was in 2007, while the US is around one third of the value. What the Australian wine industry has gained in the export growth in China has been lost in our formerly strong UK and US markets, not to mention Canada and the lack of selling efforts in Japan.

comtrade.un.org: accessed Dec 1, 2020

(comtrade.un.org: accessed Dec 1, 2020)

What has Wine Australia’s export program delivered?

In 2018, Wine Australia launched a $50 million wine export program. This assistance package funded a business education program where those in the sector could attend short workshops and view webinars about wine exporting and wine tourism. Money was also available to fund a range of regional projects, for helping to grow wine tourism and exports. The metrics for what is considered success for these programs isn’t clear.

Another key focus of the package was to grow awareness of premium Australian wine in important export markets. Wine Australia’s response included a commitment of $1.5 million dollars from the package to an advertisement introducing the second generation of Crocodile Dundee to US wine consumers. That ad featured a scene at a winery where Chris Hemsworth as ‘Croc Junior’ praises the high quality of Australian wine to a US audience. This investment aside, most of the rest of funding was focused on projects aimed at the Chinese market, and this door is now firmly shut.

The Australian wine industry will need to quickly adapt and pivot attention to other markets to recover some of the immediate loss of market share in China. The value of the webinar and short workshop training to develop full export plans should now be clearly evident.

Wine Export Diversification is Necessary and Urgent

The Australian bottled wine exports graph shows there are clear opportunities for the Australian wine sector to once more return to traditional markets in the USA, UK and Canada. In these three markets, Australia has lost US $1billion in export value over the past 15 years, and that is not accounting for inflation!

The Australian wine industry will need to build in some resilience. A review of how all research funding is allocated should be undertaken. Rather than guaranteeing funding to a selected few organisations, a return to the competitive grant environment would reinvigorate the research agenda of capable competing research providers and ensure that the most commercially promising, innovative and exciting ideas lead by the most competent researchers get funded.

Business knowledge capacity must be substantially improved through legitimate international business and exporting education. Growth in new higher value wine exports will require strategic planning, product adaption, well-informed marketing strategies and an absolute commitment to conveying quality in the Australian national wine branding story to compete in today’s hyper-competitive global wine markets.

We have largely ‘lost’ our competitive position in many markets and will have to fight hard to regain lost ground. In our absence, strong competitors, such as Chile, have been busy and have earned respect and success.

There is also still substantial unrealised potential in emerging Asian wine markets – in Japan, South Korea, Vietnam and India. There is no single market that can replace the Chinese market, but through targeted market diversification the Australian wine industry will be able to survive and prosper into the future. It won’t be easy, but it’s entirely achievable.

Professor Roberta Crouch is a Professor in Management, College of Business, Government and Law at Flinders University. Dr Nathan Gray is Managing Partner, AsiaAustralis.

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