China’s impost of crippling import tariffs, ranging from approximately 107 to 212% on all Australian wine, is expected to cause the high-margin, fast growing Chinese market to dry up overnight and indefinitely.
Having navigated the impacts of COVID-19 on supply chains and distribution channels, Australian winemakers are suddenly faced with a potentially more severe challenge to sustain viability. Whilst the Australian wine industry is not poorly placed to deal with challenges, nor unaccustomed to it, the sheer size of the Chinese export market to the Australian wine industry and the magnitude of the tariffs imposed will see significant industry rationalisation, felt from the vineyard through to the boardroom.
To put this into perspective, Wine Australia recently reported 62% of all wine produced in Australia for the preceding 12 months (with a total value of approximately $3b) was exported by 2,763 active Australian exporters. By value, China is by far the largest market accounting for wine export revenue of $1.26b, or 42% of total export revenue generated by Australian winemakers.
In the short to medium term, the impacts on Australian wine industry participants will inevitably include:
- lost sales and a significant reduction in cash flow;
- diversification to domestic and alternate international markets at lower margins, and requiring renewed capital investment;
- softening demand for fruit and falling grape prices for vignerons across the country; and
- significant asset impairments, including vineyards, wine stock and winery infrastructure.
On China, former Prime Minister Malcolm Turnbull told a forum hosted by McGrathNicol in Sydney this week that he believed the current trade crisis would pass, and implored the current government and business leaders to “hold its nerve” and “not give in to bullies”. “Once China sees the (trade) pressure is not working they will try something else,” he said.
Time will tell whether the current tariff measures will pass and China’s participation as Australia’s largest wine export market will resume. In the meantime, Australian winemakers are faced with a sharp and immediate reduction in revenue, and more than ever will need to be nimble to:
- recast financial forecasts and understand the impending financial impacts to clearly set stakeholder expectations and garner necessary future support and accommodations;
- re-negotiate with lenders, landlords, growers and key suppliers and stakeholders to mitigate cash flow and bottom line impacts of a demand shock of this magnitude;
- restructure operations, reset cost structures and re-size to restore stability and sustain viability; and
- consider the benefits of implementing measures such as (i) the safe harbour regime to protect directors from personal liability during uncertain times (automatic safe harbour protection is due to expire on 31 December 2020), and (ii) formal restructuring processes to re-organise and rehabilitate corporate operators who might now suddenly be experiencing financial distress.
Early action by Australian winemakers (large and small) to understand the short and medium-term financial impacts of China’s sudden trade sanctions will be paramount to effectively responding to the immediate demand shock striking the industry. Early action to address financial distress (and consultation with specialist restructuring experts where necessary) facilitates better planning and ultimately better individual and collective outcomes.