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TWE’s plan to make Chinese Penfolds faces doubts from China

The Australian wine giant Treasury Wine Estates (TWE)’s plan to make Chinese Penfolds to bypass China’s punitive tariffs on Australian wine was met with doubts and skepticism from Chinese analysts and industry insiders, in a recent article published by state-owned media. 

The Australian wine giant Treasury Wine Estates (TWE)’s plan to make Chinese Penfolds to bypass China’s punitive tariffs on Australian wine was met with doubts and skepticism from Chinese analysts and industry insiders, in a recent article published by state-owned media. 

TWE’s strategy to make wines directly from China using Chinese grapes for its flagship brand Penfolds came amid the rising tension between China and Australia, which severely hit Australia’s wine exports to China, the most profitable market for TWE.

Tim Ford, Chief Executive at TWE (pic: TWE)
Tim Ford, Chief Executive at TWE (pic: TWE)

The idea was first floated by the wine group last November when an interim 212% tariff the tariffs was announced, but it was again underscored by its Chief Executive Tim Ford in a recent interview with Australian Financial Review.

He revealed that the company has already spent six months in China to secure grapes from Chinese vineyards and work out a local Penfolds product. “Over time, I’m convinced that we’ll make a Penfolds in China,” he said.

He also sang praise of Chinese wine, adding that the Chinese wine industry was producing wine that is “a hell of a lot better and quality and style than what anyone in Australia realises”.

Apart from the above, TWE will export a limited amount of its highest quality Penfolds wine to China in the coming months. It is also scaling up the sales of Penfolds wine made with grapes from Bordeaux and Napa Valley, which are not subject to the harsh tariffs.

Before the tariffs, China was formerly Australia’s largest market in value and second-largest in volume in 2020, according to an Australian government report

TWE was among the top wine importers in China with 25% of its top-quality Penfolds range exported to the country. For the financial year of 2019 to 2020, its Asia division contributed 45% of its earnings and the profit generated surpassed its America division.

After the official implementation of the 218% punitive tariffs in March this year, Australian wine exports to China from January to June in 2021 dropped to AU$13 million, down from AU$419 million of the same period in 2020.

Moreover, woes for Australian wines compounded as Australian wine also ranks the highest among “unqualified imported wines” rejected by Chinese customs in the first nine months this year. Over 3,000 bottles of Penfolds were blocked for labeling issues previously, as we have reported.

Warnings from Chinese wine experts

Penfolds in China (pic: file image)
Penfolds in China (pic: file image)

Given the challenging environment for Australian winemakers to maintain their market shares, TWE’s CEO remained optimistic about TWE’s position in China, “The brand is still incredibly strong in China and there’s no consumer impact from the political issues at all,” Ford said.

Nonetheless, China’s state-owned newspaper Global Times had given a sharp warning to what it calls TWE’s “tariff-avoiding tactics”, and reported the dim perspectives from Chinese analysts and industry insiders with concerns towards the feasibility and policy risk.

A Guangzhou-based wine trader surnamed Lin told the Global Times that it is not very advantageous for TWE to build production facilities in China, especially for high-end wine. “The production level of domestic wine is generally not high, while the production cost is relatively higher than the international level,” Lin said.

Meanwhile, TWE is not the only winemaker trying to surpass the high import tariffs. An anonymous official from China’s famous winemaking region Ningxia told the Global Times that some Australian wine companies had visited the region and contacted some local wine makers.

However, the unsolved political tension between Australia and China adds uncertainty into any winemakers’ efforts to sustain their market share in China, especially if they are not familiar with policy changes. “Their communication might be restricted to the field of business cooperation, and we cannot pay too much attention to it or make any interference,” the official said.

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