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How Wine Is Helping the West Succeed in the China Market

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Western tastes are winning over the market.

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Over the past 20 years, Chinese consumer tastes have changed and developed immensely. One industry that has, somewhat unexpectedly, grown is the wine industry.

According to International Wine and Spirit Research, China has become the world's fifth-largest consumer of wine, and by 2015, is predicted to become the second-largest importer of liquor.

The volume of wine imported to China increased from 114 million liters in 2006 to 283 million liters in 2010. Over the past few years, Chinese people have become increasingly aware of and knowledgeable about wine and wine culture. In particular, the market share of imported brands has grown rapidly. Although China's imports of wine from several countries, including Australia, New Zealand, and South Africa, has increased dramatically, French wines have been the most popular in China. China is the third-largest market for French wines with an estimated value of 800 million euros. The value of the Chinese market accounts for nearly 30% of Bordeaux's total wine exports, and in 2010, China passed the United Kingdom and Germany as the largest export market for Bordeaux wines.

Adapting to the Chinese Market

To succeed in China, you must adapt to the China market. While the consumption of wine is growing, wealthy Chinese people are also using it as an investment vehicle since there are minimal investment opportunities in China and growing inflation. The overall return for luxury wine in China even rivals gold, according to a China Daily report.

Beyond just personal investments, the government is also getting involved: The Dinghong Fund is a private equity fund focusing on wines from Bordeaux and Burgundy. The Shanghai government also set up the Shanghai International Wine Exchange a few years ago. Furthermore, well-known Chinese financial institutions Bank of China (HKG:3988) and China Merchants Bank (HKG:3968), also have wine-related financial products.

The Shanghai International Wine Exchange is an Internet platform that aims to bring together consumers and investors with wine producers from around the world. Its intended purpose is to educate Chinese consumers and investors, help deal with the wine-counterfeiting problem, and provide a regulated channel for wine investments. The government, via insurers, will underwrite the wines.

Intellectual Property Protection Through Wine

China's appetite for Western wines is also helping to shape the country's intellectual property laws. Take for example, the Chinese pirating of Bordeaux wine, which sparked one of China's top Intellectual Property cases in 2011.

The case involved French wine manufacturer Societe Civile De Chateau Lafite Rothschild suing Shenzhen Jinhongde for trademark infringement and unfair competition. The courts recognized that the Chinese translation of Lafite corresponded to a specific name for a famous commodity, what we refer to as "well known" trademark status. This recognition provided a solid legal basis for further IP protection under the Lafite trademark in China.

Unlike much of the rest of the world, China's trademark registration is a "first-to-file" system and not a "first-to-use." The failure of many Western brands to consider their trademarks in China has led to numerous bad faith registrants, including many versions of the Lafite Rothschild trademark. In that case, Lafite did not register its Chinese trademark or name in China, leading many profit-chasing firms in China to register similar marks. However, the popularity and recognition of the brand from Bordeaux allowed it to receive this protection, but most wine makers will not have the recognition to receive the same.

Recently, wine makers from France's Champagne region scored a big win in China as Chinese authorities have registered Champagne as an official label, limiting the use of the name to sparkling wine made in France's Champagne region. This action by the Chinese authorities will prevent the problem faced by Champagne makers in the United States, by preventing other sparkling wine makers from labeling their wine as "champagne" unless it was actually produced in the region.

Wine Opportunities

However, as a result of the extensive importation of wine, many local brands are suffering.

Local wine producers have complained to the Commerce Ministry to investigate the import of European wines into China, making accusations of dumping and subsidies. Interestingly, the Chinese government may take steps to push this investigation in response to a number of anti-dumping probes brought against Chinese products exported to Europe.

While wine sales are only a fraction of the overall imports from the EU, the move raises the risk of more punitive trade actions. If the EU does go through with its plan to impose duties on Chinese solar panels, and China responds in kind on EU wines, it will create a tremendous opportunity for wines from other regions to gain market share against the dominant French brands.

In general, there is huge potential for the wine industry in China, and like other industries, it may be worthwhile for investors to consider entering the Chinese market via second- and third-tier cities. Importantly, the wine industry in China is still relatively immature, and there is plenty of room and opportunity for new exporters to establish a niche.
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