German Wine in China: Overcoming Historic Barriers [1/2]

By Richard Hoffmann, ECOVIS Beijing

Foreign connoisseurs often note that Chinese consumers are not educated in the art of drinking wine. Nonetheless, the German Wine Institute, the global marketing organization for German wine, estimated an increase in demand by 170 percent in merely six years leading up to 2011. Although this upwards trend is gradually reversing, China is expected to become the largest market for wine worldwide by 2016. Domestic production in China is concentrated in North-Eastern provinces where the climate most resembles that of Mediterranean Europe – home grown wine accounts for roughly 80 percent of Chinese consumption leaving the remainder to be imported from abroad.

 
View of river Rhine in Rheingau (left) and grape harvest in Rheingau, Germany (right)
Pictures provided by the German Wine Institute (www.germanwines.de)

China has become the 5^th largest import market for wine worldwide and almost half the imported wine – over 50 percent – is sourced from France alone. France is followed by Australia with a market share of around 15 percent and Chile with just under 10 percent. Germany, however, lags notably behind its competitors in and outside of Europe, providing a mere 1 percent of wine exports to the Chinese market. Although renowned amongst European vintners and self-proclaimed connoisseurs for its quality in production and taste, German wine remains mostly unknown within China. ECOVIS Beijing has discovered the following major reasons for this position of German wine in China.

1. Lack of government support and extensive German bureaucracy

During the early 90s, wine was discovered in China as a popular drink to complement food and as a gift to close friends or amongst officials. As the market began to expand, Southern European countries such as France, Spain and Italy jumped on this chance to exploit the market potential of the rising upper and middle classes in China. In Germany, however, the Federal Ministry of Food and Agriculture (BMEL) offered comparatively little encouragement in form of financial and strategic assistance. Although a support program for agricultural exports (www.agrarexportfoerderung.de) was set up early on, it is known for its bureaucratic and exclusive nature.

Up to 50 percent of a company’s overall costs and expenses in setting up its export business with China can be covered by this federal support programme – this includes the costs of conducting market studies or organizing business trips to China. However, this financial support is only granted to associations of at least 5 companies which must initially finance the entire venture themselves. As the German wine sector is mainly composed of small and medium-sized enterprises (SMEs) – roughly 45,000 German vintners in total – the majority of these wine growers are dependent on federal support to overcome the financial and operational risks inherent to doing business in China.

 
Wooden barrels in wine cellar (left) and stainless steel tanks in German winery (right)
Pictures provided by the German Wine Institute (www.germanwines.de)

2. High production and sourcing costs for wine in Germany

The area under vine in Europe declined by over 10 percent during the past decade alone. Together with unfortunate weather conditions, the German wine industry is currently being squeezed: its capacity decreased by over 20 percent since its peak at 10 million hectolitres in 2007 and the results are higher than usual prices on German wine in China. Additionally, a luxury tax is levied on all wine sold in China at rates from 10 to as much as 30 percent, further raising sales prices. Although German wine is marketed as a premium product, Chinese consumers are largely unable to understand or even recognize its quality and are therefore unwilling to accept high shelf prices.

In light of this barrier, Chinese importers are forced to reduce their expenses by shipping their products in bulk from container ports in either Bremen or Hamburg. However, due to overall low demand on any one type of German wine, importers must source various types of wine from different vineyards across the country in order to fill one standardized container and maximize its utility. Ocean shipping may be less expensive than air freight and transportation costs from Germany to China may therefore likely be reduced. However, this sourcing practice increases logistics costs within Germany which the importer again simply passes on to the consumer.

 German vintner examining his vine (left) and white grapes ready for harvest (right)
Pictures provided by the German Wine Institute (www.germanwines.de)

3. Finding the right regional market and distributing agents in China

The Chinese consumer market is well-known for its heterogeneity – regional differences also apply to the market for wine in China. Although northern cities such as Beijing or Dalian prefer a dry and heavy-bodied type of wine and Southern cities like Shanghai and Guangzhou mostly consume a sweeter and fruitier kind, one commonality amongst all regions is their preference of red over white wine. According to the German Wine Institute, roughly 85 percent of all wine consumed in China is red, the remainder being mostly white. This sets German exporters at a clear disadvantage as the majority of wine produced in Germany – an estimated 65 percent – is based solely on white grapes.

The decision on which region to target is closely tied to the choice of importer or distributing agent in China. Ideally, this partner will manage a strong sales network of clients throughout the country. German vintners must, however, be cautious: many of the almost 4,000 licensed importers of wine are not as proficient and connected as they pretend. Luxury goods including watches, jewellery and also wine offer high profit margins and attract a great number of inexperienced Chinese importers in search of quick returns. The process of finding the right distributing agent in China can therefore cost more time and resources than most German vintners are willing to invest.

Coming soon to Focus China: In our next article on German wine, we present detailed solutions for the above barriers to entry and determine best practices on setting up a sales network in China.

	Richard Hoffmann is a Partner at ECOVIS Beijing China. Richard obtained an honor’s degree in law and worked in Germany, America and China for various prestigious law firms prior to joining ECOVIS. He has published more than fifty articles in international magazines, frequently speaks at high profile events in China and abroad and is often invited as a legal expert by international TV. Contact: richard.hoffmann@ecovis.com
Ecovis Beijing is the trusted tax and legal advisor of several embassies and official institutions in China. It specializes in mid-sized international companies and focused on tax & legal advisory, accounting and auditing. If you’re interested in finding out more about tax and legal, don’t hesitate to sign up to our Newsletter or give us a call  +86 10-65616609 (ext 811/806)   or contact us directly via Beijing@ecovis.com