mercredi 29 janvier 2014

The Australian wine sector: the new El Dorado for Chinese investors?

Article by Louise CURRAN, Toulouse Business School, France & Michael THORPE, Curtin Business School, Perth, Australia

We have recently started a joint research project which seeks to better understand the extent of Chinese investment in the wine sector, as well as the motivations for that investment and its impact. We approach the question through a comparison of the situation in Western Australia (WA) and Bordeaux. In December, we undertook the Australian part of the research, speaking to winery owners and managers, real estate agents and local government in the WA region. Foreign Direct Investment (FDI), particularly from China, is a political issue in Australia. There have been quite extensive investments in the raw materials and agribusiness sector which have led to some concerns about negative impacts on Australia’s long term potential to control its natural resources. In fact Australia has a historical reliance on foreign investment in agriculture (including from UK, US, Japan and Canada). In addition, as highlighted in a recent report by KPMG, only 1% of Australian agricultural land is Chinese owned. Thus fears are certainly exaggerated.

The region in which our research was focused is a relatively small one in terms of output, but provides some of Australia’s best premium wines – especially in the Margaret River region in the South West of the state. Chinese investment was generally welcomed in the region. Although it is so far limited to a few vineyards, all actors we spoke to expected a big increase in the near future, as three has been an increase in interest in recent months.

The most well-known and high profile of the existing investments, is in Ferngrove

A medium sized producer of 250ha the company represents between 5-7% of the state’s output. A Chinese investor - Mr Ma, whose main business is in the metal sector – now owns 88% of the company. The investment has been very successful and has received positive reports in the media

We spoke to the Managing Director – Anthony Wilkes – who is also a shareholder. He was very positive about the motivation and willingness to invest of his Chinese partner : ‘ We need to stop talking about ‘foreign’ investment and just talk about investment’. Investment in Ferngrove did not stop at the winery, but includes 60 dedicated shops in China. Although the company continues to sell in Australia, they are now much less dependent on the home market. 

Mr Wilkes was particularly appreciative of the ‘generational view’ taken by Mr Ma, in terms of his long term perspective. He also underlined that having their own distribution system is becoming more advantageous, as the number of actors in China expands and the system becomes more competitive and difficult to navigate. 

 Ferngrove's Bottles for the Australia Market

One complication related to their entry into the Chinese market, has been the need to adapt their labels and bottling techniques. They had to redesign the label to be more ‘traditional’ and install corking machines, where they have always used screwtops for the home market. The effect is to make their wines look more French.

Although Mr Wilkes was very happy to discuss his experience of partnership with a Chinese investor, others were less so. We spoke over the phone with the Chinese manager of another winery – Three Oceans – which has been in Chinese hands since the original company Palandri, went bankrupt in 2008. Their investment is mainly oriented towards the Chinese market, although he indicated that they also export to other Asian countries, including Singapore and Thailand. They don’t have their own distribution system, but sell through agents. Another local winery – Palinda – is now owned by a Chinese investor and seems to be completely oriented towards the Chinese market. Finally a large Chinese food company – Grand Farms –bought the Amelia Park winery three years ago and is looking to expand its investment into other vineyards.

The motivations for seeking Chinese FDI are similar to those in France and reflect the difficulties of the sector. The Australian wine sector has been hit by ‘a perfect storm’ of a high dollar, falling demand in the two key markets of the UK and the US and overcapacity. Many vineyards are losing money. The need to reorient their market and reinvest is evident, but the local banking system sees the sector as too risky – in terms of vulnerability to the weather and the sectors falling global competitiveness due to the high dollar. In this context, the potential to access foreign capital is clearly motivating for many in the sector.

The motivations for Chinese investors are similar to those found in France, well summarized in a recent article on this blog. Securing supply for the home market, as well as ensuring the authenticity of that supply are key issues. The status symbol of owning a vineyard was also mentioned, although as one estate agent put it ‘We don’t have the ‘wow’ factor that France has’, either in terms of architecture, or in terms of global renown. Diversifying interests, including through investing outside of China, was also mentioned. One motivating factor specific to Australia, is a special visa system for investors above a certain threshold. This ‘Significant Investor Visa’ provides a route into permanent residency in Australia for investors over $5m. Real estate agents in the region reported increasing interest in buying wineries in Australia as a result of this initiative. One commented: ‘ Its a big component. I’d go so far as to say its 50% of the interest.’ Another factor is price. The price per hectare in WA is about $50,000 a hectare in the Margaret River region, although it can be as low as $15,000 in other, less prestigious, regions. Compared to the ‘Hollywood prices in Bordeaux’, WA vineyards look cheap.

Our objective now is to supplement our work in Australia with similar research in Bordeaux, We are therefore looking for actors within the wine industry – production and distribution - to discuss the evolution of the sector in terms of markets and investment, but also the specific issue of Chinese investment and its likely impact on the short and long term evolution of the region’s vineyards. If you are willing to help us in our work, please contact in English or French.

The Authors:

Louise CURRAN is a lecturer and researcher in Toulouse Business School. She teaches International Business and her research focuses on international trade and investment flows, with a focus on the EU. She is an Irish national.

Michael THORPE is an adjunct professor and former Head of the Economics Department in Curtin Business School in Perth, Australia. His main research interests are in International Trade. In Curtin he is responsible for a MOOC (Massive On-line Open Course) on Australia China Trade.

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