Growing Demands For Wine Exports Economics Essay

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Through our analysis we will explain the growing demands for wine exports in china due to the progressive changes in taste of Chinese consumers.(insert statistic trend). We further look into production within Europe as well as the current issue of harvesting and shortages in production, and on a larger scale the developing production of wine locally in China. In addition we will evaluate how this affects the prices of wine over the years. Lastly the future development of this market is evaluated with respect to emerging trends.

The supply of wine in China can be divided into two sections, the domestic production and the international production. Currently, local wineries in China are having difficulties catering to Chinese consumers due to the recently developed preference for sophisticated wine tastes, which are arising as a result of the increase in wealth emanating from economic development as well as a new found lifestyle change where wine is seen to contribute to better health.

With respect to the international supply, which accounts for ……% of wine consumption, up until this year when supply fell to its lowest in the past 37 years according to Bloomberg. European exporters such as Spain, Argentina and France are currently experiencing a drawback in production due to unfavourable weather conditions such as drought and hail causing severe damage to the vineyards.

The market for wine can be classified as an oligopolistic market due to a selective number of larger suppliers who dominate the market. The biggest firms importing are the ones based in France, Italy and Spain. The top selling imported brands are Castel Freres and Rochemazet from France and Felix Solis from Spain, France possessing key dominance with more than 70% of the market share.

Statistics show that the worth of imported wine in Beijing in 2011 was $93.6 million and the figure is expected to increase by 20% in the next few years. The wine consumption in 2011 was around 828 million litres which is more than 1.1 million bottles of wine annually. Domestic wine producers also play an important role in the market. Although their price and quality differ from the imported ones, there is still a majority of Chinese people who consume these products. The main dominant domestic producers are Zhangyu, Great Wall, Dragon Seal and Tunghua who dominate 60% of the market (Jing, 2006). The domestic wines are able to compete with the imported ones in price. Prices for domestic wines are lower therefore they are preferred to the expensive prices of the east. China's economy is growing fast and there are 2 extremes of income which are very rich and very poor individuals. It is commonly found for domestic wines to be accessible in supermarkets whereas imported wine are less accessible and can be consumed in restaurants and hotels. As the tastes of Chinese consumers develop, aspects such as origin of production, price and brand become more significant when it comes to consuming foreign wines.

In the past few years the Chinese government have decreased their taxes and tariffs making it easier for foreign competitors to enter the market and so hindering the success of domestic wine producers as well as their ability to be competitive. It may therefore be that there is much risk involved for an infant industry to enter the market as the government does not have strong protectionism policies for their domestic businesses and so potentially reducing the chances for success. This therefore encourages international trade allowing firms to enter the Chinese market without many difficulties when doing so.

Vintage wines tend to be produced in low quantities in order to maximize the quality of the wine output and for this reason, excess demand tends to be an incessant characteristic of the wine market. The introduction of a vast number of wealthy Chinese buyers into the market has created an even greater shortage of wines.

Foreign Vintage wines are seen as a sign of class and status and for this reason demand for vintage wine is extremely elastic with regard to income. Consequentially, Chinese wines are a relatively inferior good. [Insert Engel curve]

China's ever- increasing demand for imported wine was fuelled by the conditions of China's entry into the World Trade Organization in 2001 where it was ordered to reduce its import tariffs. By 2005, the tariffs were reduced from 65% to 10%. This resulted in a fall in price, which in accordance with the income effect increased real income, thus accelerating the demand for imported wines as shown below:

In an attempt to gain access into the World Trade Organization, diminish friction with trading partners and reduce the pressure on its resources, China reduced import tariffs from 65% to 10%.

As shown in diagram, [ insert number/ name] prior to the removal of the tariff, Qt barrels were being demanded at the price Pt. Once the tariff had been lifted the price falls to P, and at this lower price, quantity demanded rises to Q.

Alongside the changes in tastes of Chinese wine consumers, the demand for foreign vintage wines is also being driven by the relatively low-risk investment opportunities that wine presents. The fact that the taste as well as the value of vintage wine appreciates over time means that investors buy the wine now and sell it at a later date for a profit.

[Insert diagram]

As the populous nation of China becomes wealthier, the shortage of vintage wines will become more severe, consequentially having an upward pressure on price. For those who invest in wines, the bandwagon effect also will come into play. As prices rise, people will demand more as the prices will only rise even more in the future. Such speculation generates demand with perpetual consequences as shown below:

[Insert diagram]

In an attempt to increase the demand for (China's sunrise wine industry) domestic wines, China could run nationalistic marketing campaigns that highlight the connection between importing and unemployment and the effect this could have on the growth of their economy.

The effectiveness of such an approach is questionable. This is because foreign wines are popular for due to conspicuous consumption and so people may not feel as though their affluence is sufficiently shown by purchasing a locally produced wine. This method will definitely be ineffective in the case of those demanding wines for investment purposes.

China could also generate demand for local wines by placing quotas on imported wines. However, it is important to note that, as with other forms of protectionism, retaliation from the exporting party is a possibility.

Regulation of practices in wineries can help to boost demand. For instance, Chinese wines are known for mixing small quantities of their produce with imported wines in proportions that means that they are only barely considered to be of Chinese origin. By gauging such practices, domestic wine makers will be forced to acquire the expertise they lack and thus improve the quality and reputation of their wines.

The demand in the worldwide wine market is based on a simple 100 point rating system developed by famous wine critic Mr Robert Parker, a rating system upon which the price as well as the prestige of a wine is based. Parker's influence on the perception of Chinese wines have worked against the local wineries in the past. However, recently a few Chinese wines were rated as being

Although domestic wine businesses in China aren't doing as successfully due to the result of the Chinese developing sophisticated tastes and so losing out to foreign competitors, in the coming years the future of these domestic producers could change. The market for wine has its many opportunities for potential new entries for China as they have the ability to become dominant suppliers of wine as they have the appropriate workforce and funds to successfully implant and develop this business, as a result of their rapid economic growth. With time, domestic Chinese businesses can research the relevant procedures they need to take in order to advance themselves competitively. This can be by developing harvesting skills or finding the grapes that will allow for them to produce wine that are up to the standards of the European wines and so making them more competitive in their market as well as being able to cater for customers locally. China digital times reviews experts from the 310 year old British wine merchant, Berry Bros. & Rudd's insight on what they predict for the future of China's wine industry. Written in the article follows "According to their future of wine report: Already the world's sixth largest wine producer and number four in terms of area under vine, China, Berry predicts, will be the world leading producer of volume in wine by 2058. Berry believes Cabernets an Chardonnays of real promise will be made. With the right soil, low labour, costs and soaring domestic demand, China is set to take the world of wine by storm".

The market for wine is still very much profitable as it is becoming highly demanded by consumers worldwide and still has scope for new improved products and in the case of wine this may be improved quality or quality at an affordable price. This allows for China to become more competitive as there is still room for growth within the market creating opportunities, however it is important to consider that the market for wine is growing quickly and that there are dominant producers for this product and so efficiency is key in order to keep within competition. Therefore it may be that these opportunities are more appropriate for existing wine businesses within China who have had experience in this field. Whether or not these businesses have been competitive or profitable, their experience puts them ahead of businesses that have started from scratch and so opening a new business may be risky due to the competitive and quick paced nature of this business. However, not only do China have domestic businesses that they can improve on to become more profitable in the future, but the Chinese have begun to taking over French vineyards where "only in Burgundy, Chinese millionaires have bought about twenty vineyards and are not going to stop there. Now, Chinese business men turned their eyes to the Bordeaux region". China now possess what is seemed to be the "fertile lands of France" according to Russian newspaper Pravda (27/09/2012), and so making China more competitive within the wine market as they will not only gain insight to successfully operated vineyards which they can then use to their benefit as a way to improve their domestic wine businesses but even more so that they will gain power within the wine market as they own an increasing amount of land and vineyards of one of the world's biggest and most dominant wine producers and suppliers. Since we don't find that opening a new business is a sensible move in this market due to the concept of establishment of businesses, competition and the risks involved with entering this market, profit making opportunities are more attainable for existing firms within this market. As previously mentioned there are many available profit making opportunities within this business as the market's demand is still increasing and is growing throughout the world and so improvements in quality of products or new technology involved with the production process of the product can allow for increasing profits within the market. China being one of the world's main suppliers for a range of products are experts in efficiency of production and so with further examination of the wine market we foresee China massively improving their production in wine domestically and according to the independent UK "Asia, particularly China - including Hong Kong and India, have become key growth markets for the world's wine and spirits industry" this may be that China can become one of the world's dominant wine suppliers especially with consideration to the growing market for wine in Asia and Australasia.