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How to Invest in the Booming Chinese Wine Industry

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By Janis Miglavs

 

With a population of 1.3 billion, China is the largest potential market for wine in the world. At the moment, the Chinese don't drink a lot of wine—about.5 liters annually per capita, as opposed to 55 liters in France. But that's changing fast: the yearly growth rate of Chinese wine consumption is about 15 percent. Worldwide, it's roughly 1 percent.

 

For a foreigner, taking the plunge and investing in a winery in China is not easy. Here are 12 tips from those who have done it.

 


 

Have Deep Pockets

 

Don’t expect cash flow from your new winery for at least six years. After planting the vines, it takes four years to get the first decent harvest, then a minimum of another year or two to produce the wine. During that time you are also building a winery. Investing in an existing operation—including updating equipment, refining the wine-making process or expanding production—is likely to be more limited in scope and cost.


 

Know the Wine-Making Process


If all you know about wine is how to drink it, start reading books, Google “enology” and “viticulture,” get familiar with details like trellising methods and fermenting techniques.


Then visit with winery owners to understand the big picture of vineyards and wine-making. You don’t have to know as much as your winemaker, but you have to know the fundamentals.



 

Determine your Vision

 

Will you build a new winery, invest in an existing operation or enter a joint venture with a Chinese partner? Chris Ruffle, a Shanghai-based money manager for Scottish firm Martin Currie, built a full-sized Scottish castle in Shandong province with the goal of making the best wine in China. On the other hand, Steve Clarke, after years of manufacturing clothing in Asia, invested in an existing winery intending to export his product. The best way to discover investment opportunities? Talk to the owners and operators of Chinese wineries. It’s all about making connections.




 

Decide How to Market Your Wine


Will you target the 310,000 millionaires and 106 billionaires in China, for whom premium wine is the prestige drink of choice? Or will you aim at the volume market, competing with dozens of local wine factories and the ubiquitous backyard-made baijiu (a rice wine that tastes like diesel)? Each target, of course, requires a different marketing and distribution scheme. One boutique winery sells to the upscale hotels. Paul So, former marketing manager for one of China’s premier wineries, recommends recruiting a knowledgeable sales-channel partner.




 

Location, Location, Location


The grape-growing regions are scattered from border to border (China is about the same size as the United States), and are not well-established, distinct areas, explains Judy Leissner, president of Grace Vineyards, based in Shanxi province. “It’s still hard to pinpoint exactly where to grow and what to grow.” Clarke researched for years before staking a claim in an existing winery and vineyard in the desert far west, near the ancient Silk Road. “They’re on the same latitude as Napa and could grow the popular western varietals to make the wine I wanted to export,” he explains.




 

Know the Competition


The 500 or so wineries in China satisfy the majority of the domestic market (for now), but most don’t measure up to international quality. The handful of well-known brands— such as Great Wall, Dynasty and Changyu—are huge operations; Changyu is the world’s 10th largest wine producer. Foreign companies, especially the French, have been in joint ventures with Chinese wineries for about a decade and are now building their own facilities.




 

Seek Sources for Quality Vines and Supplies


The import of vines is restricted; Lafite Rothschild, for example, couldn’t import all of its cuttings from France for their new operation. Another winery had all of its Italian plants burned at customs. But if you buy one-half of your vines from the local supplier, you can import the rest. Or you can get European cuttings from those with established vineyards in China. Sourcing quality materials is also an issue; bottles made in China tend not to be standardized, resulting in stopper malfunction.




 

Expect Frustration


Ruffle recommends having a stubborn streak combined with a sense of humor for when things go wrong. “You need an ability to entertain yourself, as the Chinese countryside at night is very quiet,” Ruffle says. “You also need an understanding spouse.”


Know the Relevant Laws & Restrictions


For example: All land in China is “owned by the people,” which really means the government. Wineries generally get a 50-year lease. Most don’t consider this a problem, as long as they maintain good relationships with the officials. Other considerations include the local tax structure and how to get your money out of the country.


Establish Relationships with Local Government Officials


Nothing happens without their blessing, so these official allies must be continually wined and dined. “You need a good liver for drinking gallons of the local baijiu, and a strong stomach, for eating local favorites like sea slugs, donkey and camel’s paw,” Ruffle explains. Some investors have hired local officials as consultants, hoping to get an inside track.


Get Expert Advice You Can Trust


The American Chamber of Commerce in Shanghai or Beijing is a good place to start. “They are well networked and can get an individual investor started,” says Steve Clarke. Then hire someone with experience and connections— like a government official turned businessman— to walk you through the byzantine bureaucracy. But be forewarned: Everyone wants a piece of the action. Even China-savvy Clarke discovered that his local translator was cutting deals for himself while on the American’s payroll.


Learn the Culture


Study how American firms, like Starbucks, navigated the culture barrier into China. But know that, for the Chinese, bigger is better (probably a hangover from shortages during the Cultural Revolution), more expensive means superior, the color red means fortune and happiness (the government’s favorite color) and, to the wealthy, wine means French. Know also that most Chinese, even winery owners, don’t bother nosing the wine or examining the color. It’s pour and “ganbei,” or bottoms up.

 

This article originally appeared in the August/September 2011 issue of Worth.

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