Jan 06: Australian wine exports to China are expected to see substantial growth this year, after its principal export market China reduced import tariffs to zero last Tuesday (1 January), according to their Free Trade Agreement which has resulted in a duty reduction on 1500 products, making Oz producers putting pressure on their government to have a similar Free Trade Agreement with India as well, a highly unlikely scenario in the short to medium term, feels Subhash Arora
This means that the import taxes on Australian wines are now at par with a few of the 5-star hotels in India, which pay no customs duty based on their export records but pay the normal excise duty and VAT as it will continue to be paid in China. Of course, the normal customs duty in China has been only 14% compared to 150% in India.
Many optimists believe that with no duty and the Australian government giving an incentive package of A$50 million to increase export, the country may soon surpass France as the current biggest exporter to China. According to a Report in DB Australia is currently China’s second biggest exporter of bottled wines with an export value of more than US$682 million in 2017, behind France’s US$1.05 billion.
Andreas Clark, CEO of Wine Australia does not necessarily share that optimism though. ‘Growth momentum for Australian wine exports is expected to continue, but the high-speed growth rate will likely slow in the coming years as its base gets bigger. The market has already adjusted to the tariff reductions; fundamentally we are placed for long term sustainable growth here. The strong growth we have achieved is not going to continue forever. It’s sheer mathematics that when your base gets high, it’s going to be hard to grow,” he warns.
The biggest exporter of Australian wines, Treasury Wine Estate’s Penfolds brand already carries a lot of inventory amongst Chinese consumers and traders; French wines still remain the first choice irrespective of the quality. This competitive disadvantage is hard for Treasury or any other exporter to change over the medium term, without spending a lot of money on the marketing expenditure to sway the market away from the French wines as a brand.
In fact, their shares saw a drop of 4.4% on the day the markets opened after New Year’s when the duties dropped to zero. Treasury Wines’ shares have been down around 29% since the high in September. The company was in the news for a couple of months in the middle of last year when they complained unusual delay at Chinese ports which the Customs pooh-poohed away by saying that it was the new rule that were enforced in early 2018 for all the imports and Treasury would have to bear the procedural delays, if any.
There as apprehension amongst a section that China’s big spending middle class may be slowing down. Recently consumer goods giant Apple Inc. warned that iPhone sales in China had collapsed due to general weakness in the country. Australian goods exports to China had ballooned to $106.3 billion in 2017/2018, marking an 11.27 per cent increase on the previous year. Total Australian wine exports to China are now almost 3 times the value of shipments to the US, which still holds the No.2 export destination. Total wine sales from Australia to China including Hong Kong and Macau, increased by 55 per cent to $1.12 billion and as reported earlier in delWine, represents about 40% of the total exports. Total wine exports were 20 per cent higher this year. China overtook the US as the biggest export destination for Australian wine in 2016. The spectacular growth has largely been driven by the largest exporter to China, Treasury Wine, through its Penfolds brand
Based on the expected increase in sales, the Australian producers have started pleading with their government to push for a similar FTA with India as they find it a very lucrative market, but difficult due to high taxes.
One hopes they do not spend too much of energy and money for the cause because the Indian government is averse to any duty reductions unless the barter is a lot more profitable. The similar efforts by EU failed 4 years ago and after the fresh elections in 2014, no progress has been made and the earlier 6-7 years’ of efforts came to a naught. Even then the zero duty was never on the cards for imports since wine and spirits are cash cow for the government.
They can hope for a bigger share of the pie, riding on the back of Pernod Ricard which alone controls around 20% of total import; which is still miniscule at 105,000 cases in 2017-18, despite of a decent growth over the previous year, thanks to the high duties to which are added excise duties and VAT, making imported wines very expensive in India.
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Genesis of Wine Export from Australia to China (Part 1)
Subhash Arora
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