AS China acquires a test for fine red wine, especially Bordeaux, it's inevitable that Chinese investors are buying chateaux in the famous wine-growing region. John H. Isacs examines the promise and problems of these investments.

Historically, newly affluent investors around the world have sooner or later turned their attention and capital to procurement of wineries. Over the past century we've seen investors from South America, the United States, Japan and the Middle East invest in the wineries of Europe and the New World. The recent global economic ascension of China means this is the time for Chinese investors.

Chinese acquisition of wineries is creating an exciting new dynamic in the wine industry, and Bordeaux chateaux have been among the prime targets. The exact number of Chinese investors in chateaux is anyone's guess, but it's believed to be around 20 chateaux at this time.

Chasing chateaux

There exist several compelling reasons why many of the important winery acquisitions by Chinese investors have been in Bordeaux. Recently, China became the world's biggest export market for Bordeaux wines, overtaking the United States. Bordeaux is also a region of economic contrasts, with the rich and famous chateaux becoming richer while most of the lesser-known chateaux struggle.

Increased competition from wine regions around the world that have lower costs and the European economic crisis have made the outlook for many Bordeaux chateaux increasingly dismal. Many of these struggling chateaux are available for fairly modest prices and, in fact, most of the Chinese acquisitions to date have been in the 2-6 million euro (US$2.5-7.6 million) range for relatively small chateaux in less prestigious sub-appellations of Bordeaux. The combination of a huge home market for Bordeaux wines and relatively low prices have made Bordeaux chateau the favorite of Chinese investors.

While I was doing research for this week's column, several Chinese buyers of chateau in Bordeaux also pointed out to me that the large number of fake or counterfeit Bordeaux wines in the China market also presents an opportunity. If they can control the production, importation and sales of their wines in China, they can assure the consumer that the wine is genuine, not counterfeit, giving them an important competitive advantage.

Pioneer investor

For many Chinese investors, purchasing a winery is the easy part; it's actually running the business and making good wines that have proved difficult. No one has done it earlier and none better than Hong Kong-based businessman Peter Kwok. In 1997 he purchased a chateau for his daughter Elaine. His raison de faire for purchasing Chateau Haut-Brisson, a Grand Cru property in the prestigious Saint-Emilion appellation on the right bank of Bordeaux, was to have a vacation home in France and expose his children to the French culture. Kwok freely admits that he knew little about winemaking when he purchased Chateau Haut-Brisson. What is so impressive about this case is how much Kwok learned over the years and how he, his family and team of French winemakers have dramatically improved the wines.

Newer Chinese investors could learn a lot from Kwok's example. He hired the best winemakers possible, including the world's most famous winemaking consultant, Michel Rolland. He invested in new equipment and technology and most importantly, new land. Whenever a new vineyard in Saint Emilion with superior terrior became available, he acquired it. Chateau Haut-Brisson grew from 10 hectares to nearly 17 hectares today.

Step by step, over the past 15 years, he worked to improve all aspects of winemaking at the chateau transforming Chateau Haut-Brisson from an underperforming somewhat anonymous small chateau to an award-winning chateau making world-class wines. It's fair to say that of all the wines from Chinese-owned wineries I have tasted over the years, the wines of Chateau Haut-Brisson are the best. I'm certainly not alone in this belief as the esteemed US wine critic Robert Parker recently gave the 2009 Chateau Haut-Brisson Reserve 95 points.

Not resting on his laurels, Kwok has recently purchased two additional chateaux, La Tour Saint Christophe in Saint-Emilion and La Patache in the esteemed Pomerol appellation.

Kwok may have been the pioneer Chinese investor, but he's by no means alone. Cheng Haiyan, who runs the wine business for her father's company Longhai International Trading Co in Qingdao, Shandong Province, purchased Chateau Latour-Laguens in 2008. The formerly rundown 60-hectare estate in the Entre-Deux-Mers region of Bordeaux is being enhanced by new investment in winemaking and facilities. One of Ms Cheng's goals is to make the chateau a tourist destination for Chinese visitors.

Likewise, Chinese investor Richard Shen, who owns the Nanjing-based Tesiro chain of 400 jewelry shops, has invested new money and vitality in his 15th-century Chateau Laulan Ducos in Medoc in the northern part of the left bank of Bordeaux.

It will be interesting to see if the new investments in Chateau Latour-Laguens and Chateau Laulan Ducos are able to improve the quality of the wines as dramatically as they have already upgraded their facilities.

Corporate investment

The government-owned company known by its acronym COFCO (China National Cereals, Oils and Foodstuff Corp) is best known for a variety of food products as well as the Great Wall range of wines. The company bought the 20-hectare Chateau de Viaud in the Lalande-de-Pomerol appellation last year for a reported 10 million euros. One of the key members of COFCO's wine team, Sky Yu ,emphasized to me that COFCO made the investment to prove that a Chinese-owned winery can make superior wines.

COFCO has plans to acquire more wineries in Bordeaux as well as other wine regions.

It has also engaged the services of Michel Rolland and are working to enhance almost every aspect of the winemaking process. Chateau de Viaud makes around 60,000 chateau-level bottles and 60,000 bottles of a second label annually. Though I haven't tasted a bottle of their new vintage, I expect significant improvement in the wines.

The future

The trend of Chinese investors acquiring chateaux in Bordeaux will continue, however, it will be a rude awakening for some. One perfectly good and potentially profitable reason for some investors to buy wineries is to sell the wines in China. Compared with the scale of their businesses back in China, their chateaux investment and business operations are quite modest. Some have invested simply for the prestige and at least at this point don't really care if they make money.

But many eventually will care and they may not have the business model necessary to succeed. Specifically, I think many new chateaux owners are making two strategically wrong decisions. The first is to only sell their wines in China and the second is to establish artificially high prices for their wines. My decades of experience in the wine world tell me this strategy is unsustainable.

Even COFCO with its unparalleled distribution and leverage in China understands the importance of being able to sell their wines in Europe. COFCO knows that the real value of a wine can only be established if the wines can be sold in multiple markets, not just China. But, unfortunately, the case of COFCO seems to be an exception rather than the rule.

Several Chinese chateaux owners have stated that they plan to exclusively sell their wines in the China market. But this myopic strategy is made worse by the prices of some of the wines.

A fair price is established in multiple markets, not just one. Several new Chinese owners of Bordeaux chateaux are selling their wines in China at artificially high prices. I know of several cases where wines that would be fairly priced at 10-20 euro in Europe are being sold in China for 1,500 to 2,000 yuan (US$236-314) and in one case more than 3,000 yuan! Even with all the added costs of transportation and import taxes, this is crazy.

In essence these owners are relying on special connections and the perception that the Chinese consumer doesn't know better. I believe this will prove a flawed model. How can a wine that can't be sold in Europe and other markets justify such high prices in China? Ultimately it can't.

Here again, I think Hong Kong businessman Kwok can be an example to his peers as his wines sell for approximately the same prices in China as they do in Europe and elsewhere.

The average retail price of Chateau Haut-Brisson is approximately 700-800 yuan, while the Chateau Haut-Brisson La Reserve 2007 is around 1,000 yuan. Taking into account the added costs associated with importing wines to China, these are the same costs the wines sell for in the wine capitals of the world, including Paris and London.

Since Kwok purchased Chateau Haut-Brisson, he has been able to triple the market value of the wine not only in China but also in Europe, something that can only be done by greatly improving the wines. This is the hope and promise for Chinese-owned chateaux in Bordeaux whose future portends to be profitable as well as delicious.