The perils of investing in a boutique winery in China

To decide to buy a winery in China today, thinking it offers rich returns, is not the reasoning of a sober person.

“Opening a vineyard is the easiest way to go bankrupt,” jokes KK Cheung, a Hong Kong manufacturing and real estate businessman who owns Puchang Vineyard in Turpan, an arid city that once served as a trading point along the Silk Road, in the western Xinjiang province.

“Wine is a luxury product. It takes a long time to cultivate,” he adds. Like many small winemakers in China, Cheung made his fortune during the country’s economic boom before turning to wine. He used his wealth to finance the huge upfront costs of establishing a winery.

After acquiring the vineyard in 2008, Cheung soon discovered the many challenges facing the Chinese wine producer. First, they must battle tempestuous weather, which grows more erratic with the advance of climate change. Each wine region has its own problems: Ningxia growers bury vines in mounds of soil to protect them from winter frosts and bitter winds; in Shandong, farmers shield vines with plastic sheets to prevent the grapes from growing mould during the summer rains.

Even after wrestling with nature, winemakers face spiralling labour costs as the twin forces of urbanisation and the ageing population drain the Chinese countryside of its agricultural labour.

Then there is the stubbornly elusive question of who will buy the wine. Despite improving in quality over the past decade and winning acclaim in international competitions, Chinese wine still struggles to compete overseas with new-world alternatives on price and old-world ones on reputation. Meanwhile, domestic drinkers with a penchant for regular consumption remain in the minority.

Cheung’s vineyard is nestled in a desert depression in the Turpan Valley, where the dry climate means the winery can forgo pesticides to make organic wines, which are growing in popularity in China. This is not an option for winemakers in humid and pest-filled provinces to the east.

Cheung followed in the footsteps of wine pioneer Zhang Bishi, a businessman and government official who more than a century ago in the late Qing dynasty, established the country’s first wine company in Shandong’s Yantai, blending imported and native grapes.

It was not until the end of the Cultural Revolution that the wine industry began to develop in earnest, at first dominated by state-owned groups such as China Great Wall Wine, seeking to mimic Bordeaux by planting acres of Cabernet Sauvignon, Merlot and Cabernet Franc vines.

Over the past two decades, smaller, privately owned wineries have grown their market share, propelled by the proliferation of international restaurants and high-end hotels seeking premium local wines for curious clients. But strict quarantine restrictions on importing vines have limited winemakers’ choice of grapes, and the country’s harsh climate means thin-skinned varieties such as pinot noir have little chance of thriving.

“Growing grapes is like doing business in China. You need to be thick-skinned,” says Chris Ruffle, a fund manager and owner of Treaty Port Vineyards in Shandong. He is sipping the winery’s rosé while video calling from the Scottish-style castle built for guests staying in Qiushan County, a burgeoning wine-growing area that is now also home to Château Lafite Rothschild’s Long Dai winery.

The domestic wine industry was booming before president Xi Jinping took power in 2012. The country was quaffing millions more hectolitres of wine each year, and a rising tide of nationalism was pushing customers towards domestic products. Investors poured in, foreseeing exponential growth in consumption. But the party ended with Xi’s anti-corruption campaign, which took a sledgehammer to domestic winemakers’ main revenue base: government officials.

“Wineries used to sell directly to local governments or state-owned enterprises. They didn’t need to cultivate private clients,” says master of wine Edward Ragg, who also co-founded the Beijing-based Dragon Phoenix Wine Consultancy. Since the crackdown, Ragg says domestic wineries have struggled to identify their target consumer.

After the government sales dried up, wineries turned to individual buyers. But the niche market of regular wine drinkers has “traditionally not drunk Chinese wine”, says Ragg. Consumers balk at the high prices of Chinese wine, which have no historical investment data compared with old Bordeaux and Super Tuscans. “They don’t feel like they’re necessarily getting value for money,” he adds.

The one exception of Chinese wine that has become a collector’s item with resale value is from Ao Yun, a Yunnan winery owned by French luxury group LVMH and established by the renowned Australian winemaker Tony Jordan. A bottle of its cabernet sauvignon sells for roughly £250 in Hong Kong.

To add to winemakers’ woes, young Chinese, with notoriously fickle consumption habits, are increasingly shunning wine in favour of cocktails, sake and craft beer. According to the International Organisation of Vine and Wine, the country has consumed 2mn hectolitres less wine each year since 2018.

Despite its large population, the number of regular Chinese wine drinkers remains small. Wine Intelligence estimates that only 2.5 per cent of all adults drink imported wine at least once a month. “To put this in context, China’s monthly wine drinkers are roughly equivalent in size to the monthly wine-drinking population of the UK, or a third of the same population in the US,” writes the report.

Chinese winemakers have not had much success exporting overseas. The country exported 10mn litres of wine in 2016, which fell to 3mn in 2022, with Hong Kong and Singapore its main markets.

“Chinese wine is a buzzing topic. Consumer interest is increasing, considering recent improvements in quality and marketing. But it has not yet fully translated into purchases,” says Adriano Albanese, sales manager at EMW Fine Wines in Beijing.

He adds that the UK has also become a target market because British drinkers are “more open to trying new things. It’s a mature market”.

“Establishing a vineyard is extremely capital intensive. You need several years before the vines are producing grapes ready for production. It is very hard to get a decent return on investment,” says Ragg. Chinese wine production has been in decline for the past decade and fell by 29 per cent last year to an estimated 4.2mn hectolitres as the pandemic restrictions hampered production.

Lacking a Mediterranean climate conducive to producing large volumes of healthy grapes, Chinese winemakers must compensate for the environment, each step adding costs and reducing the vineyard’s output. Notably, vine burial — covering the plant in soil to protect it from the harsh winter temperatures — requires intensive manual labour and, on average, adds between 20 to 30 per cent to production costs, Ragg says. The vines have to be spaced out sufficiently to be bent over for burying, thereby reducing the plot’s efficiency. And the plants do not like being submerged underground for several months. 

“We’ve lost vines in the winter. Every time you bend the vines, it can hurt them. The other problem is when you unearth the vine, the temperature can suddenly drop and bring a spring frost,” says Judy Chan, head of Grace Vineyard with operations in Shanxi and Ningxia.

China’s climate hampers volume, but it does yield unexpected results for grape varieties habituated to a drier environment. Winemakers in the humid eastern province of Shandong produce single varietal bottles of Petit Verdot, typically used in bordeaux blends to add tannins and deep colouring but rarely seen on its own.

“It’s like having a child born in one country and then moving them to another. They adapt to the environment and turn out quite different,” says Rita Kung, head of Mystic Island Winery, a new winery in Qiushan.

Mystic Island planted Petit Verdot, intending to use it as a blending grape. “When we tried it on its own, we realised that it was a star on its own. The thickness of the grape [skin] means it can combat every situation, including the rainy season,” says Kung.

Costs are exacerbated by stringent domestic regulation, which requires vineyards to own and operate their own machinery, including expensive bottling lines. By contrast, much of the wine-growing world has adopted the co-operative model of pooling production costs, which was pioneered in Europe in the 19th century after a phylloxera epidemic ravaged much of the continent’s grapes. Chinese winemakers also complain of high taxes, which inch up costs compared with Chilean and Spanish alternatives.

Then there is the issue of rising labour costs. Tending to the grapes requires expertise, which is increasingly in short supply in the countryside. Grace Vineyard’s youngest grower on its Shanxi plot is 62. “Even if young people are returning from the cities to the villages, they don’t want to be farmers,” Chan says. Similarly, Puchang’s Cheung says his labour costs have tripled over the past decade.

Water shortages are increasingly plaguing winemakers. “Everyone needs water at the same time. Every year, we have a harder and harder time fighting for labour and water,” says Chan. Industry insiders fear water scarcity could be exacerbated in Ningxia, China’s top wine-producing region, by the local government’s plans to double the area of grape-growing plantations by 2025.

With spiralling costs, a worsening climate and falling demand, some winery owners have been rethinking their investment. Asked if Cheung would open a winery in China if faced with the choice again, he replies, “No, I would just drink the wine.”

This article is part of FT Wealth, a section providing in-depth coverage of philanthropy, entrepreneurs, family offices, as well as alternative and impact investment