As China-Australia ties thaw, critics score Penfolds' first made-in-China wine, but is it worth US$100 a bottle?

Top executives at Australian wine producer Penfolds recently sat at a long table full of the company's bottled offerings with local government officials and guests, seemingly oblivious to the beautiful scenery of Shangri-La surrounding them in southwest China's Yunnan province.

Instead, their focus was locked on the three Australian critics who were gently swirling wine in their stemware.

For managing director Tom King, it was a defining moment, as Penfolds' first wine made with Chinese grapes, but using Australian techniques, is rated for the first time.

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King and his team have been shouldering the task of tapping into China's vast market, including 400 million middle-class residents who are willing to spend big bucks on items such as French perfume and German cars.

But it has been a particularly arduous task over the last couple of years, after Beijing slapped heavy tariffs of up to 218.4 per cent on Australian wines in March 2021 - one of the punitive measure taken in retaliation for Canberra's call nearly a year earlier for a probe into the origin of the coronavirus.

Over the course of several months, Beijing inflicted trade restrictions on Australian products such as barley and wine.

But one of Penfolds' secret weapons, unlike many of its Australian competitors, is business diversification. Like it did 20 years ago - when the company took vine cuttings from Barossa Valley in South Australia and planted them in California - it plans to make wine in China.

"It's a new winemaking region, and the challenge for us is greater," Kristy Keyte, Penfolds' chief marketing officer, told the Post in Shangri-La last week. "We start from scratch."

Many Australian businesses - from iron-ore exporters to winemakers and dairy farmers - have been trying to keep a foot in the door to China's market amid their government's diplomatic stand-off with Beijing.

But since Prime Minister Anthony Albanese took office last year, tensions have eased a bit. Commerce officials from both sides have already met several times, discussing how to ease bilateral trade tensions. And Albanese has said he expects to set the date for a China visit at an "appropriate time", but it is unclear when that might occur.

Meanwhile, wine has been a touchstone of the recent diplomatic improvement.

The steep tariffs on Australian wine have forced winemakers to seek other markets, with China no longer an option.

Leading industry body Wine Australia said in April that Australian wine exports showed strong growth from Southeast Asia, but it was unable to offset the declining value to traditional markets, where "tough conditions continued" during the first few months of this year.

Information has been circulating among a small group of insiders in the Australian wine industry, indicating that the huge import tariffs to China would be removed by the end of this year, according to two owners of wine companies who spoke on condition of anonymity due to the sensitive nature of the issue.

"But no concrete changes have been seen on the ground yet," said one of the sources. "There are still uncertainties, given that the process of eliminating tariffs for barley has been delayed by one month."

Despite the positive outlook among industry insiders, another anonymous source with direct knowledge of Australian government matters said: "I think that this may be wishful thinking unless Australia delivers on China's investment requests."

Beijing called for a level-playing field for all sectors, based on the China-Australia free-trade agreement, as the Australian Foreign Investment Review Board recently blocked Chinese investments in Australia's critical minerals firms, the source explained.

China's anti-dumping review, which had led to import tariffs of 80.5 per cent for Australian barley, was supposed to be completed in July. But Beijing asked for another month to make its decision.

Barley could end up setting a precedent for wine, in terms of scrapping tariffs amid the thawing ties between the trade partners.

For Keyte, her concerns were put to rest as international wine judge Andrew Caillard gave the Chinese variant a score of 93 out of 100, saying "the Chinese wine has a lot of freshness" and was "much better than I expected".

The oldest family-owned Australian brand under the Treasury Wine Estates started working on its diversification strategy five years ago, which has helped it stand out among its peers and endure geopolitical headwinds.

Penfolds has arranged another wine-tasting event for its China-made wine, to be held in the United States next month.

"In the last few years, the pace of our development has accelerated," King told the Post in Shangri-La, referring to the company's cooperation with Chinese grape growers in Yunnan province and the Ningxia Hui autonomous region.

The pandemic, broken supply chains, and a generally weak wine market over the past few years presented the industry with "structural challenges" to generating growth, turning it into a "pretty significant period of adjustment", King said.

However, King pointed to recent data that suggests his brand's awareness in China "remains intact" at a consumer level, compared with 2019.

And he said Penfolds is "100 per cent" set on China being the next country where the company's wine is produced, along with the United States and France.

King, who called the reviewed variety a trial wine, did not disclose information about the volume of production, a sales target for the Chinese-made wine, nor whether a second variety may be coming soon.

However, the price tag of A$150 (US$100) per bottle for the Chinese variety, set for both Chinese and overseas markets, still raises doubts.

Master wine taster Caillard, with a specialist knowledge in Australian wine, said that "the Chinese wine made with the Penfolds' style" will help China get into the global markets, but "it will take time".

Referring to the acceptability of the Chinese-made wine back in the Australian market, Peter Gago - chief winemaker at Penfolds - said that "there's a lovely diaspora of Chinese" that the company will sell wine to, including the Chinatown communities of Melbourne and Adelaide.

"We're interested in Chinese people in Hong Kong. Chinese people in Australia. Chinese people in California," Gago said.

This article originally appeared on the South China Morning Post (SCMP).

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