China is both irresistible and maddening to western businesses. As massive as the market is and as much as it's grown in the last generation, its culture and government remain opaque to even the most sophisticated companies. Suzanne Mustacich offers a fascinating case study of the challenges of doing business in China in her new book Thirsty Dragon: China's Lust for Bordeaux and the Threat to the World's Best Wines. Mustacich, an American who lives in Bordeaux and reports on its wine trade for Wine Spectator, depicts both the frenetic unpredictability of life in China and the befuddlement of the Bordelais as their clubby world is overrun by people whose language they do not speak and whose motivations the do not understand.
Bordeaux, a city of 240,000 in southern France, is the center of one of Europe's most commercially sophisticated wine regions. Since the 17th century, the city has attracted wave after wave of immigrants who have established themselves as merchants exporting wine all over Europe and to the U.K. and the U.S. By European standards, there's an immense amount of wine for them to sell, and at the high end it's ranked by a classification system established in 1855 that helps wealthy customers navigate the often-confusing world of high-end wine. As Mustacich writes, "The classification had history, allure and a precise ranking of status. It was a gift-giver's dream."
For most of the 20th century, China was not an important market for Bordeaux. Very few Chinese could afford even cheap wine, for which even fewer of them had any affinity. But in 1996, Li Peng, then the Communist Premier, criticized the effects of baijiu on Chinese culture and extolled the health benefits of red wine. The unspoken motivation for his comments may have been to reduce the distillation of rice into baijiu, a high-alcohol distilled spirit, so that more of the grain could be used to feed China's massive population, but it also had the effect of increasing demand for foreign wine, since Chinese wine was all but impotable.
Foreign wine meant French wine, and French wine meant Bordeaux. China's growing upper class came to see wine as one more western luxury good, like Hermes handbags or Gucci shoes. Wine became part of China's gift-giving business culture. Chateau Lafite Rothschild, one of the five "first growth" wines at the top of the 1855 Bordeaux classification, became particularly popular in China, perhaps because the name is easy to pronounce in Mandarin.
Bordeaux's increasing popularity in China impinged on the French consciousness only slowly. The early 2000s were a time of popularity throughout the developed world, and wealthy consumers from the U.S. and Russia helped drive up prices for high-end wine. That ended abruptly with the financial crisis of 2008, and wealthy Chinese were poised to fill the void.
They did so aggressively. Prices of the first growths continued to soar, driven by Chinese demand. Chinese individuals of unimaginable wealth and unclear background started buying up estates in Bordeaux, many of whose 8,000 or so producers struggled to make wine without losing money. Chinese companies entered the wine trade aggressively and tried to eliminate the byzantine system of merchants who since the 1600s have helped move wine from producer to ultimate consumers. In China, aspiring merchants faked French labels with abandon, a practice the French were far too slow to recognize and attempt to stop. Mustacich details those half-hearted efforts in one of the book's best chapters, where she follows investigator Nick Bartman as he explores the illegal underbelly of the Chinese economy.
The bubble ended as abruptly as it began. In March 2012, Chinese Premier Wen Jiabao promised to clamp down on foreign travel, cars and banquets. Within weeks, Chinese started walking away from their orders for first growths and other high-end Bordeaux, behavior that angered and confused the Bordelais. Jiabao's anti-corruption campaign has yet to abate, and the Chinese frenzy for Bordeaux has yet to resume. The region's wine exports to China fell by 26% last year to $300 million.
But rich Chinese continue to buy property in Bordeaux just as they purchase real estate in the U.S. and Canada, and the Chinese government still wants to become a major wine producer, in part to stabilize the soil in the large desert regions where it plans on planting vineyards. The scale of Chinese ambition is staggering; the government wants to build 1,000 massive estates that will attract tourists, not to mention allow the politically connected to add to their fortunes by contracting to build and manage the properties. The government wants foreign money and expertise to aid in this development, and large French producers have warily heeded the call, unable to pass up the chance to enter a market with 1.3 billion people.
But Mustacich's excellent narrative shows how little the French have understood that market, recent history that clouds their future prospects in China.