Hit by trade war, California winemakers see their carefully cultivated market in China shrivel

Mark Magnier

Dylan Wang and Sherry Duan hold their glasses up to the light before tasting the Atlas Peak merlot and Howell Mountain cabernet at Duckhorn Winery's tasting room, overlooking acres of ripe grapes.

Wang, 39, an investment fund manager, and Duan, a 32-year-old lawyer, came here to California's famed Napa Valley from Shanghai to enjoy the wine, scenery and cool weather, and chose Duckhorn in part because president Barack Obama served its wine at his 2009 inauguration.

One advantage of travelling all the way from China: they're avoiding prohibitive tariffs. California wineries, already battling tough global competitors, rising costs and labour shortages, are increasingly fearful the US-China trade war will exact irreversible damage after years of cultivating China's market as carefully as their vines.

"California wine exporters are worried they may never be able to recover market share in China," said Jock O'Connell, international trade adviser with Beacon Economics, "which they naturally have long seen as a huge opportunity for profit."

Merlot grapes being harvested in California. Photo: Duckhorn Portfolio alt=Merlot grapes being harvested in California. Photo: Duckhorn Portfolio

California wine exports to China are wilting. The Golden State accounts for some 95 per cent of US wine production and exports, with China sales set to hit US$30 million this year, down from US$78.7 million in 2017.

Even as Chinese taxes and punitive tariffs on US wine have doubled to 98 per cent, a free-trade agreement Australia signed with Beijing has given that country tariff-free access to China's giant market.

Wine is hardly the only California agricultural export suffering a hangover. California almond exports have fallen by a third and US dairy exports, another major California product, fell 54 per cent in the first half of 2019.

While the Trump administration has handed out subsidies to compensate farmers for economic harm resulting from the trade war, some here say they are disadvantaged relative to Republican-leaning Midwestern wheat and soy farmers.

According to US Department of Agriculture data acquired by Associated Press, California has received some US$76.3 million in federal subsidies, a fraction of the US$8.5 billion doled out nationwide, despite being the nation's top agricultural exporter.

"We all get penalised on an equal percentage, but relief goes to other farmers," said Pete Przybylinski, Duckhorn Portfolio's senior vice-president of sales and strategy. "Trump is no big fan of California, so the likelihood of him helping us was very small."

Adding to frustration among wineries is concern that the trans-Pacific chest thumping hit just when years of hard work were starting to pay off. Their fear: growing suspicion of US brands will shape lifelong habits among Chinese consumers at a time when many are taking their first sip.

Duckhorn started selling to China in 2006, gradually growing its customer base and learning the market. But at Shanghai's ProWine trade conference in late 2018, an attendee shouted that he would never buy California wine given his dislike of Trump, Przybylinski said. "That was a year ago. You can imagine what it's like now."

Duckhorn Portfolio's senior vice-president of sales and strategy Pete Przybylinski. Photo: Mark Magnier alt=Duckhorn Portfolio's senior vice-president of sales and strategy Pete Przybylinski. Photo: Mark Magnier

Some 32.6 million Chinese drink wine regularly, up from 21.6 million in 2014, according to Wine Intelligence, a London-based data firm. The market is also maturing from the early days when Chinese quaffed largely for wine's reported health benefits or for status, mixing US$1,000 bottles of Chateau Lafite Rothschild with Sprite.

Wine experts say President Xi Jinping's 2012-13 campaign against conspicuous consumption inadvertently helped nudge consumers to become more discriminating.

Gus Jian Zhu " who recently became the world's first Chinese national Master of Wine, an exhaustive three-year training and original research designation dominated by Britons and Europeans " says growing interest is leading more wealthy Chinese to invest in California wineries, sometimes less for profit than to squirrel money out of China or earn bragging rights with friends.

China's wine market has good long-term potential, Zhu said. But not as much as some foreign wineries, mesmerised by China's massive population, might think, he added.

Wine is often served cold, while Chinese tend to prefer heated drinks. And wine must contend with China's 2,000-year, deeply entrenched history with baijiu, the powerful grain-based alcohol sometimes likened to jet fuel.

"Baijiu's already so wedged into our culture. People still use it as a social tool or a friend-making tool," said Zhu, "or to get drunk at business meetings."

One factor foreign wineries sometimes underestimate is the importance of finding the right Chinese script to represent their industry. The translation for the Spanish grape macabeo, 马家婆 (majiapo), can be read rather incongruously as "the old granny of the Ma family", while fume blanc is sometimes rendered as 白富美 (baifumei), a popular Chinese term describing a "white, rich and beautiful girl".

Those that do it right, however, can create names that sing " and pay off. The translation for sauvignon blanc " 长相思 (chang xiangsi) " literally means "long lovesickness" evoking imagery used by Chinese poet and literary genius Li Bai (701-762 AD). And the Australian winery Penfolds uses 奔富 (ben fu), which not only sounds like its English name but translates as "chasing prosperity."

"Of course it's selling well in China," said Zhu.

Despite the setbacks, wine industry groups say they will continue to invest in educating consumers and sommeliers.

"Even though we're in a challenging time, our hope is that this doesn't last forever," said Honore Comfort, vice-president of international marketing for the Wine Institute. "We want to be in a good position when this is solved."

Historically, China's alcohol culture was largely based on grain with relatively little, and largely localised, fermentation of fruit, other than in Xinjiang, where grapes are plentiful. Historians suggest small-scale use of grapes for wine may date as far back as the Han dynasty (206-220 BCE) or the Three Kingdoms period (220BC-265AD).

While Chinese palettes are becoming more discerning, prestigious labels remain hugely popular, helping drive the counterfeit market, especially for China's most famous foreign brand, Chateau Lafite Rothschild.

That has fuelled a spate of outright fakes and "lookalikes" such as Lafei Manor " Lafei is the Chinese pronunciation of Lafite " whose "2009" vintage label boasts: "This dry wine by adequate water and sunlight, making the wine more limpid harmony."

In 2014, Xinshi Li, president of the Chinese Academy of Inspection and Quarantine, claimed that at least half the Lafite sold in China was "probably made on boats moored along the Chinese coast, rather than vineyards in Pauillac", Quartz reported. That same year, a single house in Wenzhou was found with 10,000 counterfeit Lafite bottles.

Apparently deciding if you can't beat them, join them, Rothschild last month introduced a wine called Long Dai (瓏岱), a red blend from a vineyard in Shandong province, replete with references to lucky jade, sacred mountains and praying farmers.

It sells for around US$340 per bottle with an initial output of 30,000 bottles and includes heavy anti-counterfeit labels and foil with banknote-quality graphics.

One company that has managed to skirt rising Chinese tariffs is Gliding Eagle, a Napa company that ships higher-end wines directly to Chinese consumers, including vintages by Calera, ZD Wines, Migration and Dry Creek Vineyard.

Shipments are subject to China's lower personal consumption taxes, allowing for door-to-door delivery at about 60 per cent below the price of US wines currently transported commercially.

The company has also worked with WeChat and the California International Trade Office on a programme that translates menus and wine marketing materials to Chinese visiting Napa.

Chinese taxes and tariffs on American wine have doubled to 98 per cent. Photo: EPA-EFE alt=Chinese taxes and tariffs on American wine have doubled to 98 per cent. Photo: EPA-EFE

But the company is still feeling the chill, prompting it to diversify into some 30 other countries. "There's no doubt that the sentiment of the trade war hurts more than the trade issues themselves," said Adam Ivor, Gliding Eagle's co-founder. "All our countries are up 50 per cent year on year and China is down by at least that much."

While high-end wines get the spotlight, most California exports involve huge vats of bulk wine. "I get calls from Chinese saying they want a shipping container," said Peterangelo Vallis, executive director of the San Joaquin Valley Wine Growers Association.

"California has a premier sound to it, but they want the absolute cheapest they can get. The distribution channel is on bicycles in some areas."

Wine snobbery and artificially high prices have hurt California's long-term export prospects, Vallis says, leaving more room for Australia, France and Italy to swoop in. California shouldn't be apologetic about shipping low-end fruity wines befitting a culture accustomed to the sweetness of beer, rice and even baijiu, he adds.

"A lot of Chinese flavours are a combination of sweet and sour," Vallis said. "It comes down to what you're happy with."

As Przybylinski gazes over vines ripening in the autumn sun, he reflects on Duckhorn's future in China, vowing to soldier on despite the storm clouds. The winery is trying to keep prices steady despite the hit to profit margins, has hired a marketing representative in Hong Kong to be closer to the market and is testing gift boxes and different varietals to suit Chinese tastes.

"We're ready to go tomorrow if the trade war ended," he said. "I guess the good news for every US winery, it wasn't such a huge market to begin with, like with soy and corn. So the hit hasn't been so great."

He added wistfully, "It's going to take time."

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2019 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2019. South China Morning Post Publishers Ltd. All rights reserved.