Is China's influence on Napa Valley in decline?
By Tim Carl
NAPA VALLEY, Calif. — In the early 2000s the United States commanded a 10% market share of China's wine imports, but by 2022 that number had dwindled to less than 3%. California, being responsible for 85% of U.S. wine production, bears the brunt of this contraction. The evolving Chinese market landscape — from its aggressive foray into wine production and consumers, to its current decline in consumption to a tilt toward more affordably priced wines — creates a conundrum for the wine and tourism sectors of the region. While there have been hopeful forecasts and renewed diplomatic efforts between the two countries, ongoing economic volatility, global instability, travel restrictions and trade disputes present considerable obstacles.
This article delves into the history of wine culture in both nations, the rapid changes in China's wine market and its impact on California, and it raises critical questions for Napa Valley's community and industry stakeholders.
At one point China seemed on track to dominate global wine production and consumption, a prospect that now seems increasingly unlikely. As highlighted in Jiayang Fan's March 12, 2018, New Yorker article, "Can Wine Transform China’s Countryside?" in the early 2000s the Chinese government embarked on calculated initiatives to stimulate both wine consumption and production. Even in their nascent stages, these initiatives showed transformative potential. China had acquired nearly 40 million new wine enthusiasts in a relatively brief time span and had aggressively expanded its vineyards, surpassing all other nations in acreage dedicated to wine-grape cultivation except for Spain. Additionally, China had risen to become the world's seventh-largest wine producer. However, today this initial momentum has stalled.
A bit of historical context
In the mid-18th century Thomas Jefferson became enthralled by the wines of Burgundy and Bordeaux during his time in France. In contrast to the prevailing American taste for stronger spirits such as Madeira and port, Jefferson became a proponent of French and Italian wines. He envisioned a future where the United States could “make as great a variety of wines as are made in Europe, not exactly of the same kinds, but doubtless as good.”
Jefferson believed that cultivating wine would demonstrate the United States' cultural sophistication, akin to European nations where wine had been integral to culture for thousands of years. However, despite his aspirations, he couldn't overcome challenges such as vine diseases and unsuitable weather conditions, making wine production at his Monticello estate largely unsuccessful.
In the 1880s California's emerging wine industry began to realize Jefferson’s vision, earning both renown and critical acclaim. A notable landmark was Inglenook’s Bordeaux-style red wines receiving gold medals at the 1889 World’s Fair in Paris, a pivotal achievement in the annals of American wine.
Despite its early triumphs, however, the California wine industry faced numerous obstacles. From vineyard pests to shifting attitudes toward alcohol in anticipation of Prohibition and multiple economic crises, the industry underwent a collapse and remained dormant for nearly a century. It wasn't until the 1960s that California’s wine sector began to recover and flourish.
Meanwhile, across the Pacific China has experienced a condensed but dramatic history with wine. In the mid-1990s, Li Peng, China’s fourth premier, publicly praised the virtues of wine. During a toast at the 1996 National People’s Congress, Li heralded the health and societal advantages of red wine as an alternative to stronger spirits like baijiu. This public endorsement led to an astonishing surge, albeit from a low base, in wine imports to China — an increase of 26,000% from 2000 to 2011.
The rapidity with which China has adopted wine culture stands in stark contrast to the United States' centuries-long journey in viticulture and oenology. Leveraging its robust economy at the time and centralized governance, China was able to swiftly scale its wine endeavors. The ambition was not merely to match but to surpass established global wine cultures, setting audacious aims of positioning China as the most comprehensive and influential wine culture on the global stage, all within a relatively brief period.
A transformation in China's wine vision
Born in 1953, Xi Jinping has been an influential figure in Chinese politics for decades. He joined the Communist Party in 1974 and climbed its hierarchical ladder, which culminated in his appointment as the party chief of Shanghai in 2007. This role served as a stepping stone to his joining the Politburo Standing Committee and subsequently becoming the general secretary in 2012.
Xi's governance style is characterized by a methodical — some say brutal — consolidation of power, both within China and on the international stage. He initiated an anti-corruption drive soon after taking office. His efforts aimed not only to root out corruption within governmental frameworks but also to marginalize and silence potential political competitors. The abolition of presidential term limits in 2018, followed by Xi's re-election in 2023, has cemented his grip on power.
Xi, who rarely consumes alcohol, diverged from his predecessor's vision of wine as a transformative cultural element, seeing it rather as a strategic tool. His personal choice adds an extra layer to this strategic realignment, with some reports fearing he might enact strict limits on consumption.
Xi's anti-corruption measures reverberated through global markets, especially affecting the importation of high-end French wines commonly used in unauthorized gift-giving by government officials. This hit the premium Bordeaux and Burgundy markets in France especially, compelling them to restrategize their approach to the Chinese market. On the other hand, countries such as Australia, New Zealand and Chile rushed to negotiate free-trade agreements with China, thereby erasing import duties on their products. French vintners adapted by investing in educational and developmental initiatives in China, such as sharing expertise in viticulture and enology.
In the United States, particularly in California, recognition of China's potential wine market came on strong in about 2010. By 2014, a Visit California report emphasized the spending power of Chinese tourists, noting that they spent an average of $6,000 per person per trip to the United States, more than any other international tourist group. A Visit Napa Valley presentation from 2014 touted that only 1.7% of visitors to the region were from China, projecting significant growth and accompanying focus. Tourism bodies from around the state ramped up their investing in marketing campaigns, and businesses prepared for an anticipated influx of Chinese visitors by hiring interpreters and translating materials into Mandarin. However, a variety of obstacles, from trade conflicts to rapid market expansion, hampered initial growth prospects.
In 2018 the U.S.-China trade war escalated import duties on American wines to a staggering 79%, virtually terminating most wine exports to China. Australia initially filled the vacuum but subsequently suffered its own setback when China imposed retaliatory tariffs on Australian wines after the country called for an investigation into the origins of COVID-19. This action led to a 97% decline in a market once worth $800 million to Australia.
Does California even make wine?
Emerging Chinese vineyards, despite adopting Western-sounding names such as Grace Vineyard or Silver Heights and wine shops with names like Napa Reserve, haven't translated into widespread recognition of American wines in China. A review of U.K.-based Decanter's China website as of Oct. 16, 2023 highlights this disconnect. Under its "wine regions" tab, the United States, let alone California, is conspicuously absent, while countries like Canada and Moldova are featured.
One rare acknowledgment of California wines in a Decanter China article about the 2013 Cabernet vintage is telling:
"The 2013 vintages demonstrate that Californian Cabernet Sauvignon stands at a juncture. While Chardonnay and Pinot Noir have evolved towards elegance, Cabernet has remained static. This stagnation, although profitable domestically, curtails the wine's global reach and may soon be discordant with evolving domestic preferences. An imminent shift in direction warrants close scrutiny."
This article lumps Napa Valley in with other California regions such as Sonoma, Mendocino and Paso Robles, diluting the diversity of the Californian wine landscape. This points to a larger issue: the marginalization of the American wine industry in the Chinese market.
Is the Chinese wine market even relevant anymore?
Long before the disruption brought on by the COVID-19 pandemic, statistical analyses of China's economic trajectory pointed toward its emerging role as a significant player in the global wine market.
However, signs of strain were evident as early as 2016. Influenced by factors such as market oversupply and natural disasters such as droughts, vineyard diseases and sandstorms, China's wine production saw a precipitous decline. Specifically, production figures fell from 1.32 billion liters, equivalent to 147 million cases, in 2016 to just 660 million liters or 73 million cases by 2020, as reported at the time by the Wine Spectator. A Financial Times article recently characterized the Chinese wine industry as fraught with increasing investment risks, citing challenges such as extreme weather, labor shortages and water scarcity.
On the demand side, imports have flattened, while consumer sales of wine in China have followed a downward trend since peaking in 2017, dropping 30% since. The decline has been accentuated by a heightened sensitivity to pricing, as consumers increasingly opt for more affordable wine options.
This downturn has not occurred in isolation. Policy initiatives like Xi’s anti-corruption measures have played a role, as has his strategic repurposing of wine from a cultural entity to an instrument in trade negotiations. These shifts in policy, alongside evolving consumer tastes, have compounded the existing difficulties in the wine sector.
Additionally, indicators from China's broader economy signal underlying weaknesses. Although a brief recovery was observed in early 2023, key economic markers such as stagnant GDP, falling exports and decelerating imports suggest it is short-lived. Other stress factors include looming deflation, as suggested by the consumer price index, a rapidly depreciating yuan relative to the U.S. dollar and a turbulent real estate market. Moreover, the unemployment rate for urban youth surged to 20% in June — before the cessation of public reporting — while a demographic trend toward increased saving over spending is becoming apparent. China is experiencing an unprecedented decline in birth rates, even as its older demographic continues to expand and its younger population contracts. The imposition of strict travel limitations further impacts industries reliant on tourism, including the wine sector.
In addition to the economic challenges, political tensions between China and the United States have escalated over recent years. Trade disputes have expanded to encompass a wide array of sectors, ranging from aluminum to semiconductors. Moreover, China has maintained its support for Russia following its invasion and subsequent war in Ukraine. China has also refrained from condemning Hamas' recent violent attacks on Israel, executed increasing military incursions into Taiwanese air and maritime zones, and is actively obstructing supplies to a stranded Philippine vessel in the disputed South China Sea. Last Thursday, it was reported that China's former Premier, Li Keqiang, who was one of the country's last market-friendly reformers, died suddenly at the age of 68. Collectively these actions have exacerbated the already strained geopolitical relations between China and the United States, thereby diminishing prospects for bilateral cooperation and any resurgence in tourism.
Diplomatic efforts to improve relations between China and the United States — or at least keep lines of communication open — are intensifying, marked by California Gov. Gavin Newsom's recent weeklong visit to China and Xi’s s upcoming trip to California, which precedes the Asia-Pacific Economic Cooperation summit in San Francisco to be held in November, when Xi is widely expected to meet President Biden. However, the potential influence of these diplomatic endeavors on China’s wine consumption and tourism remains ambiguous at best.
Contrastingly, a report from Visit Napa Valley anticipates a considerable increase in Chinese tourists by 2024, an outlook that appears overly optimistic, given the multifaceted challenges at hand.
A central question is whether wine can help improve diplomatic and economic relations between the two countries, bringing benefits to both nations as well as to Napa Valley, or if it's simply subject to global politics and economics that are unalterable.
To answer this question, the following areas warrant detailed investigation by stakeholders and policymakers:
Market environment: An exhaustive evaluation of the market size, growth projections and future potential for Napa Valley wines in China is essential. A meticulous cost-benefit analysis accounting for tariffs, marketing expenditures and expected revenue should be conducted to assess the financial feasibility of entering or expanding in the Chinese market.
Consumer perception: Detailed investigation into the causes behind the declining interest in Napa Valley wines among Chinese consumers is critical. These could be economic, regulatory or rooted in changing consumer preferences. Identifying these elements will provide insights into market-growth opportunities, possibly through localized marketing strategies or strategic partnerships.
International competitors: A review of how other wine-producing countries, such as France and Australia, have adapted to the dynamic conditions in the Chinese market can offer valuable insights. This should encompass both their successful strategies and setbacks to present a well-rounded understanding of effective approaches. Market research and consumer engagement methods specific to China's digital environment should also be explored.
Stability and future prospects: An evaluation of the long-term viability of targeting the Chinese market for Napa Valley wine producers is warranted. This should involve analyzing market stability, long-term growth forecasts, and forthcoming economic or regulatory shifts that could influence future prospects.
Confronted with China's intricate internal economic and societal landscape, Napa Valley and the larger U.S. wine industry must exercise due diligence in strategizing their market engagement. As diplomatic interactions between the nations amplify, the crux of the matter remains: Can the Chinese market and its consumer behavior offer a sustainable foundation for optimism concerning its relevance to Napa Valley's financial landscape?
Now we want to hear from you. Pick one of the options below and share your thoughts in the comments section.
Tim Carl is a Napa Valley-based photojournalist.
I learned much about the Chinese action with Californian wines in this broad coverage.
Brilliant! Thanks so much for your comprehensive reporting.