• The strong demand for wine in Asia, particularly the Chinese mainland, will create a big opportunity for wine exporters to market their products.
• The recent abolition of wine duty in Hong Kong will further foster its wine trading, helping Hong Kong to develop into a regional WTDC.
• To promote Hong Kong as Asia's WTDC, HKTDC is organising the first Hong Kong International Wine Expo in August 2008.
• As a regional WTDC, the projected additional value-added benefits will be over HK$1 billion in 2012 and nearly HK$3 billion in 2017.

With the general contraction of wine consumption in Europe and the US growth slowing down, all eyes are on one distinct growth area ¡V Asia. Currently, the Asian market represents only a small percentage of global wine consumption and only a small proportion of wine Asians consume is imported. However, Asia's growth is estimated to be in the tune of 10% to 20% per annum in the next five years with the Chinese mainland, Hong Kong, Singapore, Korea and Taiwan leading the charge. The consumption value in Asia (excluding Japan) is expected to double the current amount to reach US$17 billion in 2012, and jump to US$27 billion by 2017.

The strong demand for wine will create a big opportunity for wine exporters to market their products to Asia. The import value of Asia (excluding Japan) is expected to reach US$1.1 billion by 2012 and US$1.5 billion by 2017. Within Asia, the Chinese mainland is the biggest importer in volume, and it is anticipated that the mainland alone will import US$870 million-worth of wine by 2017.

While the rise in Asian wine imports offers massive opportunity for wine exporters, another niche way of trading wine also presents tremendous growth potential. That is the wine investment market that includes en primeur (wine futures) offered by wine merchants, wine investment funds offered by private banks and wine auctions. Even though the total wine investment value is still tiny in Asia, wine investment markets are already huge in world financial centres like New York and London. This market is growing at a faster pace than the wine import market as wine investment offers a more sophisticated way for wine collectors to manage their wine portfolios. It is projected that the demand for wine investment by Asian investors will amount to US$500 million by 2012 and US$970 million by 2017.

The success factors that have made London the most sophisticated wine centre in the world are geographical location, well-established trading hub, well-established wine culture, impartiality, world-class wine storage and favourable wine duty policy. Hong Kong possesses many similar advantages. Indeed, the recent abolition of wine duty will further foster Hong Kong's wine trade.

Abolition of wine duty will have a number of positive effects. Zero wine duty will reduce administrative burdens and storage costs, facilitate trade and distribution, galvanise auction houses and fine wine merchants into establishing a presence in Hong Kong, encourage wine tasting and consumption, and make Hong Kong the first free wine port among major economies.

On the other hand, Hong Kong has a few inadequacies that need to be overcome if it has to achieve the status of a regional wine trade and distribution centre (WTDC). Such inadequacies are brief wine trading history compared to London, losing the first mover advantage to Singapore and lack of adequate wine expertise. In this context, it is clear that Hong Kong's position should not be logistics-focused. Instead, Hong Kong should position itself as a wine trading and investment centre, a wine marketing and exhibition centre, and a wine storage and distribution centre.

Evidently, the recent abolition of wine duty will help Hong Kong develop into a WTDC in the region. But apart from duty abolition, Hong Kong should also step up marketing efforts, strengthen wine education, as well as develop wine investment tools. To promote Hong Kong as Asia's WTDC, HKTDC is organising the first Hong Kong International Wine Expo in August 2008, concurrently with the Food Expo.

If Hong Kong can develop into a regional WTDC, it is estimated that Hong Kong can capture 24% of the region's import market in 2012 and 33% in 2017. While these additional wine re-exports, coupled with increasing retail business, can generate direct benefits to Hong Kong's economy, it would also create indirect benefits resulting from higher demand of linked businesses, such as storage, trade shows, educational programmes, tourism, advertising and promotion, management and consultant services. Employee incomes generated by these businesses would induce more consumer spending and further benefit the overall economy. On the whole, the projected incremental value-added benefits to the economy will be more than HK$1 billion in 2012 and nearly HK$3 billion in 2017. Thousands of new jobs would be created as well.

If Hong Kong can successfully develop its wine investment market, it is estimated that Hong Kong can capture 55% of the region's wine investment market in 2012 and 69% in 2017. In this context, the economic benefits to the Hong Kong economy would be even higher, especially because wine investment-related business is of high value-added.

I.  A Booming Wine Market in Asia

Asian Market Overview

While the demand in Europe is declining and the growth in the United States is expected to slow in the near future, most forecasts on wine consumption point to one distinct growth area ¡V Asia.

Currently, the combined wine consumption in Asia (excluding Japan) is about US$7 billion, and represents merely 7% of the worldwide consumption value, or equivalent to 13% of the combined European consumption and 40% of that of the United States.

However, Asia's growth is estimated by industry analysts to be in the tune of 10% to 20% per annum in the next five years with the Chinese mainland, Hong Kong, Singapore, Korea and Taiwan leading the charge. The growth of Asian markets looks even more spectacular amidst the global market growth of less than 1% in the next five years.

With this growth rate, the consumption value in Asia is expected to double the current amount to reach US$17 billion in 2012, and jump to US$27 billion by 2017. It is also projected that by 2017, Asia's gross wine consumption value will surpass that of the United States, and account for over 20% of the worldwide consumption.

This optimistic outlook of the Asian market is based on the region's strong economic performance, the burgeoning middle class, increasing affluence of its people and still tiny per capita consumption. Other principal drivers of growth are lifestyle and health consciousness. Those who are health conscious are switching from strong spirits to wines while the western-educated generation has found wine more agreeable with their palates and lifestyle than other types of alcoholic beverages. In some economies like the Chinese mainland, the government actually encourages consumption of wines which are made of grapes and discourages grain-based alcoholic beverages to preserve foods for the growing population.

Within Asia, Japan is the biggest wine importer with import value over US$780 million in 2006. However, the Japanese market is very mature and its growth rate is negligible. Japan's inward-looking wine economy and tightly networked distribution system further prevent it from becoming either an attractive market or a business partner of international wine exporters and merchants.

India's domestic wine consumption is expected to grow 150% over the next five years, but its protective wine policy prevents a level playing field for wine trading. The high federal basic customs duties of 150% for spirits and 100% for wines, combined with the additional customs duties, raising the cumulative duty burden to between 177% and 540% depending on the import price of the products. As such, imported wine only accounts for less than a quarter of the total consumption.

South Korea is a fast growing wine market with an expected growth rate of over 70% for the next five years. However, the percentage share of wine as part of the overall alcohol consumption is still low. Wine currently accounts for less than 0.3% of total alcohol consumption, but the compound annual growth for the last five years has increased 29.5% by volume and 33% by value.

Singapore has experienced 22.5% growth in wine imports and 16% growth in re-exports in 2005. The city has built up a reputation of being Asia's wine logistics centre by concerted efforts from the government and institutes. Its largest re-exports are to Indonesia and Malaysia.

As part of China, Hong Kong's domestic wine consumption has experienced healthy growth at 10% in value and 13% in volume from 2000 to 2006. Its import value has experienced a compound average growth rate (CAGR) of 22% between 2003 and 2006.

Rise of the Dragon: the Mainland Wine Market

The Chinese mainland is identified to be the single most important wine market in Asia in terms of both volume and value growth. According to a Master of Wine who is also a wine merchant, the Chinese mainland is far more important than any other Asian economies such as India and Japan because wine is a good accompaniment to Chinese cuisine, and Chinese have one of the most sensitive and discriminating palates in the world. With increasing disposable incomes and integration with the western culture, Chinese demand for fine wine will soar.

Currently, domestic wine brands account for a large majority of the Chinese wine market, and imported labels have only a 3% to 5% market share. This phenomenon is due partly to price advantage and partly to the improving quality of the local wine resulting from investment and participation of foreigners. Other factors, such as counterfeit foreign products and lack of transparency in the tax structure, also add extra burdens on wine importers in the Chinese mainland.

Despite all these unfavourable factors, wine imports have witnessed phenomenal growth in the 2000's, especially after the wine import tariff was reduced to 14% in 2004 after the Chinese mainland's accession to WTO.

Grape wine import value (bottled below 2 litres) reached a record high of US$184 million in 2007 compared to US$77 million in 2006, after posting CAGR of 39% between 2000 and 2005.

With wine import tax reducing to 14% and the Chinese economic engine steaming ahead, wine imports to the mainland are expected to maintain its double-digit growth through at least 2008 Olympic Games in Beijing and 2010 World Expo in Shanghai.

Industry analysts estimate that there are currently 800-1,000 wine importers in the Chinese mainland, of which 30-50 are the very large ones. The second-tier regional distributors number as many as 10,000. Some well-established nationwide importers represent hundreds of brands from over 10 wine-producing countries. Their sales networks cover all major cities of the mainland.

II.  Opportunities Created by the Asian Market

Increase in Asia's Wine Imports

The strong demand for wine has created a big opportunity for wine exporters to market their products to Asia. The import value of Asia (excluding Japan) is expected to reach US$1.1 billion by 2012 and US$1.5 billion by 2017. Within Asia, The Chinese mainland is the biggest importer in volume, and it is anticipated that the mainland alone will import around US$870 million of wine by 2017.

Increase in Asia's Wine Investment

Fine wines are collectable items and have investment value. In the past few decades, investment-grade wine has experienced unprecedented growth in price and recognition. The rising number of buyers chasing after a limited supply of rare and fine wine has driven up the price of fine wine to previously unseen levels.

There are several types of wine investment vehicles available in the world's wine economy:

1. En Primeur (Wine Futures) Offered by Wine Merchants

En primeur or pre-bottled wines are wines purchased from vintage vineyards in large volume, usually by barrel, at a lower than retail price. The reason for purchasing en primeur is apparent: highly rated vineyards are limited, and therefore demand for wine from those vineyards can only go up if people are getting wealthier and wish to enjoy better wine. At the same time, while the annual production volume of those vineyards remains the same, the natural value of the wine will increase. For this reason, many private and corporate buyers prefer to purchase en primeur to lock in the price pre-bottled for fearing that prices will run away or the wine they want will not even be available. Experienced wine merchants usually make such purchases for their private customers.

2. Wine Funds Offered by Private Banks

Another type of wine investment tool is wine investment funds, which are available in the global market, especially for vintage wine. Historically, these types of funds are managed by merchant banks, and are offered to their clients as special interest funds much like art investment funds. Fund managers use the investment pool to purchase a portfolio of vintage wine by bulk, and/or en primeur wines. Wines in funds run by private banks are not usually for immediate consumption, but rather traded to realise its value over time.

While wine investment funds are available in Hong Kong, they are managed by overseas fund managers and marketed through their representative offices in Hong Kong. In the past, the physical withdrawal of wine from the funds was subject to high taxes. This was particularly the case since Hong Kong's wine duty structure was previously based on dollar value which tended to penalise high-value wines. As such, wine investment funds have not been too popular for general investors. However, the environment is changing, as the wine duty has been abolished recently.

3. Wine Auctions

London pretty much created the modern wine auction, and the city is still the world's centre for this method of buying and selling wine. Christie's launched its specialist wine department in 1966, and its rival, Sotheby's, followed in 1970. Wine auctions in London attract wine lovers from Tokyo to San Francisco to trade their priceless collections.

While wine investment is considered to be exotic in Asia, wine investment markets are already huge in world financial centres like New York and London. In fact, the wine investment market is growing at a faster pace than the wine import market. These types of wine investment offer real benefits and/or profits to the investors, and provide a more sophisticated way for wine collectors to manage their wine portfolios. It is anticipated that once Asians have a better understanding of the wine funds and the funds become more readily available, the growth of these kinds of investment tools will be phenomenal, given Asians¡¦ strong craving for more alternative investment tools to manage their growing wealth.

It is projected by the industry that the total wine investment in Asia will amount to US$500 million by 2012 and US$970 million by 2017.

Increase in Wine Marketing Activities

Moreover, riding on the growing demand in Asia, wine marketing activities such as wine fairs, wine tasting, wine competitions and wine journalism in this part of the world are expected to flourish. Even though wine exhibitions can be conducted in an unorchestrated fashion, a well coordinated trade show brings the trading platform to another level by allowing international producers to showcase their wines, and facilitating deal making. The world's most established wine show is the London International Wine and Spirits Fair (LIWSF), which attracts 5,000 exhibitors and 14,000 visitors. Singapore has developed its home-grown ¡§Wine for Asia¡¨ targeting international traders and wealthy Asian buyers. In the future, any city which can create the most effective marketing and exhibition platform for this region is going to win a huge prize.

Today, international wine trading and distribution is largely controlled by London, the world's most well-established wine centre. In recent years, the English have stepped up their marketing efforts in Asia, and it is estimated that Asian business represents about 25% to 30% of London's international sales. Due to the soaring Asian demand, there is an imminent need for Asia to establish its own wine trading and distribution centre (WTDC). Both Singapore and Hong Kong aspire to take the leading role.

III.  Does Hong Kong Have the Edge?

Hong Kong's Advantages

The success factors that have made London the most sophisticated wine centre in the world are geographical location, well-established trading hub, well-established wine culture, impartiality, world-class wine storage and favourable wine duty policy. Hong Kong possesses many similar advantages.

1. Geographical Location

While proximity to top wine-producing countries gives London great access to top wine from top regions, proximity to the Chinese mainland and Northeast Asian countries gives Hong Kong an advantage to access the region's fastest growing wine markets.

Located at the heart of Asia and the estuary of the Pearl River, backing on to the vast hinterland of the Pearl River Delta with major transportation routes to the rest of the mainland, Hong Kong is an attractive and logical base for wine traders looking to benefit from trading opportunities in the region.

If Hong Kong becomes the regional WTDC, the transport route for New World wine to Asia will be greatly shortened. Instead of shipping wine from the New World nations half way around the world to London and then to Asia, the New World wines can be shipped directly to a Asian centre from the source, saving time and cost, and reducing undue risks that wine otherwise may be exposed to during unnecessarily long distance transportation. In this way, Hong Kong is able to handle Asian wine trade with flexibility and competitive pricing, and support time critical wine promotion events by making on-demand delivery and effective distribution of smaller quantities to Asian customers.

Another advantage that Hong Kong has over Singapore is its cooler climate in winter. As wine is a highly perishable item, transportation of wine in extreme temperatures might cause irreversible damage to the product.

2. Well-established Trading Hub (Free Flow of Goods)

Hong Kong is a free port with no import tariffs with exception of excise tax on a very few items. Free port status has facilitated Hong Kong to evolve into a trading hub over many decades for many high-value items. For instance, pearls are auctioned in Hong Kong in spite of a lack of domestic production.

As a well-established trading hub, Hong Kong is home to many experienced traders who are savvy in conducting international business. It also has a good track record of being an ideal trading platform for international suppliers and Asian buyers, thanks to its bilingualism, management efficiency and the rule of law.

3. Zero Wine Duty

In his 2008/09 Budget announced on 27 February 2008, the Financial Secretary proposed to exempt the wine duty with immediate effect. Previously, Hong Kong's value-based wine policy gave Hong Kong a negative reputation in the global wine trade as the red tape resulting from this policy creates serious logistics issues to wine traders. This image severely jeopardised Hong Kong's chance of developing into a regional WTDC. Abolition of wine duty has the following positive effects:

(i) Reduce Administrative Burdens and Storage CostsĆ

• Elimination of the need for bonded storage as no duty needs to be paid and no inspection by customs is necessary: now wine can be stored everywhere for the convenience of the wine traders and wine merchants, creating a market opportunity to convert old or discarded industrial buildings into wine storage facilities.ƒÜ
• Giving incentives to local and Asian wine collectors to ship their personal collection back to Hong Kong to enjoy tax rebates from London and other foreign countries: for investment-grade wine collectors, this rebate can potentially be substantial enough to finance further purchases in Hong Kong, given Hong Kong's free wine port status.

(ii) Facilitate Trade and DistributionĆ

• Encouraging high-value wines to be traded and purchased in Hong Kong rather than in Europe: because there are high sales taxes in a lot of the European countries, zero wine duty in Hong Kong will be attractive to buyers, making Hong Kong a premier marketplace for quality wines. When the volume of fine wines in Hong Kong is large enough, a secondary market for fine wine sales will naturally be created.ƒÜ
• Increasing the flow of quality wines through Hong Kong: previously, traders, especially fine wine traders avoided shipping wines in or through Hong Kong because of the red tape resulting from wine duty, which posed threats to quality wines during inspection in the duty-not-paid zone. Zero duty eliminates unnecessary red tape and allows free flow of goods.ƒÜ
• Making on-demand delivery possible: with a potential increase in high-end storage space, more quality wines will come and be stored in Hong Kong. The convergence of wines in Hong Kong, which enjoys a strategic location, enables wines to be delivered on-demand and in smaller quantity cost-effectively by air or by sea, supporting time-critical wine tasting and other marketing and promotion events in the region.

(iii) Encourage Auction Houses and Fine Wine Merchants to be Based in Hong KongĆ

• Buyers would realise that cost concerns due to value-based wine duty are gone. Auction houses will find Hong Kong an ideal place for sales to be held to help market their wine to mainland and other Asian buyers.

(iv) Encourage Wine Tasting and ConsumptionĆ

• Abolition of wine duty will help position Hong Kong as the premier wine destination in the world, and encourage MICE (meetings, incentives, conventions, exhibitions) tourism as well as consumer tourism to experience Hong Kong's cosmopolitan flair, finally bringing Hong Kong to be on par with other world-class cities like London and New York.

(v) Make Hong Kong the First Free Wine Port among Major EconomiesĆ

• Zero duty instantly removes the stigma Hong Kong had in the wine logistics and trading world, and sends a strong signal to the trade that Hong Kong is friendly to the regional wine trade and distribution. The publicity value of such a move is enormous.

4. Well-established Financial System (Free Flow of Capital)

Hong Kong has developed over several decades into a dynamic financial and investment hub. In fact, Hong Kong was recently ranked - in a report released by the City of London Corporation - as the third international financial centre after London and New York, ahead of Singapore and Zurich.

As one of the world's most active and liquid securities markets, the city is also the largest venture capital centre in Asia, managing about 30% of the total capital pool in the region amounting to some US$40 billion. Hong Kong's success in the financial sector is partly because of the absence of any capital controls, and partly because Hong Kong has neither capital gains nor dividend income tax.

Wine investment funds are available in Hong Kong, but they are managed by fund managers overseas and operated by their representative offices in Hong Kong. This phenomenon is mainly due to the high wine excise duty in Hong Kong in the past. However, with such a robust financial system, Hong Kong has the ability to attract inflow of capital and experts such as wine fund managers, analysts and researchers to be based in Hong Kong after the wine duty has been abolished.

5. Brand Marketing Experience

Strong brands have the benefits of price premium and market share leadership. This is particularly the case in the Asian wine trade as Asian consumers are very brand-conscious. Effective brand strategies employed by New World producers have yielded them marketing success in the region. Hong Kong's substantial pool of brand marketing experts, along with other professionals, are essential for international wine suppliers and traders who wish to launch their products, particularly high-end wine, in Asia.

Hong Kong has long been a prime marketplace in Asia for many branded lifestyle products such as watches, jewellery, cosmetics and fashions. It will just be a natural extension for fine wine to be showcased and marketed here.

In the long run, Hong Kong's brand marketing knowledge and experience might well help the mainland's wine industry build up names in the international markets. After all, Hong Kong has long been a preferred partner for foreign businesses exploring the mainland market, and for mainland enterprises venturing to the outside world.

6. Growing Wine Culture

Wine is part of culture and lifestyle. High levels of wine knowledge and appreciation will increase the city's credibility of being a WTDC.

Hong Kong's wine culture can be traced back to a few decades ago, assisted by its early interaction with the UK. In recent years, the return of immigrants back to Hong Kong has also helped enhance the breadth and depth of the city's wine culture. As far as the fine and rare wine market is concerned, Hong Kong has a handful of savvy wine collectors whose collections are up to international standards. When it comes to the mass market, various signs demonstrate that general interest in wine is picking up:

(i) There are over 2,000 wine liquor licence holders and 180 wine wholesalers in Hong Kong.

(ii) Hotels and restaurants are hosting well-attended wine tasting dinners and deluxe hotel wine cellars bulge with vintage collections.

(iii) Several wine centres, societies, clubs and schools have opened in recent years.

7. Impartiality

Just like London, Hong Kong is not regarded as a wine producer as it only has very minimal wine production. This helps Hong Kong maintain a status of impartiality. Neither the Old nor the New World wine producers has any concerns over Hong Kong's impartiality and credibility as a regional WTDC, where a level field for wine trading will be conducted.

8. Transportation Connectivity

Apart from having one of the busiest ports in the world, Hong Kong International Airport (HKIA) has ranked as the busiest airport for international air cargo since 1996. In 2006 alone, HKIA handled four million tonnes of freight, one million tonnes more than its distant second, Seoul.

Continued integration with the Pearl River Delta, Yangtsz River Delta and other strategic locations in the mainland will allow Hong Kong to become an air transportation hub for the Chinese mainland, providing efficient and cost-effective air services for both cargos and passengers.

No other city in Asia has such good connectivity and frequent air access to all major Chinese cities at a comparable transportation cost. Considering the mainland the growth engine for future wine trading in Asia, Hong Kong definitely has the unrivalled advantage in this area.

Hong Kong's Inadequacies

At a glance, Hong Kong seems to have the right ingredients to become a regional WTDC. However, Hong Kong should not be complacent as it is facing formidable competitors. At the same time, a few inadequacies of Hong Kong, if neglected, might become stumbling blocks of its success.

1. Brief Wine Trading History Compared to London

Hong Kong has a significant pool of experienced fine wine merchants who have great wine knowledge and international wine trade experience. However, in vying control of the local and regional fine wine market with their London counterparts, Hong Kong does not have the silver bullet. London's wine trading history is centuries-old, which has earned it a strong reputation and long-standing relationship with established wine producers and suppliers. Within the fine wine world, London has the most authoritative evaluation body, the single most established education body and the world's only wine pricing index. London's success was not built overnight.

2. Lost First-mover Advantage to Singapore

As the current century opened, Hong Kong had once strived to become a major wine distribution centre in Asia. Unfortunately, after the burst of the IT bubble in 2000 and the SARS attack in 2003, the economy of Hong Kong experienced an unprecedented downturn, and the wine trade development in Hong Kong was stalled. This has given Singapore a chance to move ahead without much competition from the region and challenge from Hong Kong. Now Singapore has earned a global reputation as a wine logistics hub in Asia and developed its home-grown Asia Wine exhibition, it is much easier for it to build on this foundation, which means Hong Kong faces a tougher battle.

3. Lack of Adequate Wine Expertise

The wine trade is a multifaceted industry whose success can only be built on the foundation of many other related sectors and businesses. In order to handle a regional wine trade industry, Hong Kong needs co-ordinated efforts from a broad range of industries, from catering and hospitality, to logistics and warehousing, to MICE and professional services.

Singapore has long recognised the need to develop a generation of wine experts in various fields to sustain the growth of its regional wine trade business. Over the past decade, the Singapore Hotel Association Training and Education Centre has provided programmes on the fundamentals of hospitality management and front-line service training. This has been beneficial to Singapore's wine trade industry by supplying a pipeline of front-line workers who are sound in basic hospitality operations. Hong Kong lags behind in its nurture and development of professional front-line workers on a large scale. This raises a concern that the basic foundation is not strong enough to sustain a growing wine trade industry. At the same time, Hong Kong also lacks wine experts in the areas of wine logistics, wine evaluation, wine consultants, educators, sommeliers, viticulturists and professional front-line workers.

Hong Kong's Positioning

Having considered the success factors of the well-recognised global and regional WTDCs, evaluated the advantages and inadequacies of Hong Kong, and realised where Hong Kong is standing now, it is clear that Hong Kong's position should not be logistics-focused like Singapore. Instead, it should focus more on wine trading, marketing and investment areas where values are higher and Hong Kong has the most edges. It is therefore recommended that Hong Kong should reposition itself as follows for long-term success.

1. Wine Trading and Investment Centre

Hong Kong's growing wine culture, well-established financial system, free flow of capital and information and its image as the world's freest economy make it an ideal candidate to be a wine trading and investment centre.

2. Wine Marketing and Exhibition Centre

Hong Kong's substantial pool of brand marketing professionals, high level of wine knowledge, and its experience in organising international B-to-B exhibitions strengthen Hong Kong's position to be a wine marketing and exhibition centre.

3. Wine Storage and Distribution Centre

Hong Kong's ideal geographical location, world-class airport, global transportation connectivity, transparent customs procedures and management efficiency are all assets for Hong Kong to become a wine storage and distribution centre.

IV.  Strategies

Step Up Marketing Efforts

In the wine industry, wine tasting is the primary means for producers, brokers and merchants alike to reach out to their customers. While regular tasting is part of the wine industry's selling repertoire, wine fairs are the key events around which producers and merchants plan their year's activities. Of note, there are three fairs that industry players gravitate towards. They are the LIWSF, Dusseldorf's ProVine, and Bordeaux's VinExpo.

Hong Kong currently maintains a relationship with VinExpo, which has selected Hong Kong as its host for its Asia Pacific show biennially, with the next show being held in late May 2008. Having such a relationship ensures Hong Kong staying on the global wine media's radar screen, while allowing local trade to take part in the global wine scene and giving regional trade an opportunity to do business in Hong Kong.

In addition, the HKTDC will organize the first Hong Kong International Wine Expo in August 2008, concurrently with the Food Expo, to promote Hong Kong as Asia's WTDC. The Wine Expo will host wine dealers, cellars, producers and suppliers of related services from Hong Kong, Asia and the rest of the world, aiming to create a one-stop platform for exhibitors and buyers to meet and explore business opportunities in the booming markets of Asia and the Chinese mainland. Exhibit categories will include liquor and beverage products, equipment and services required for wine production, and wine accessories.

Strengthen Wine Education

The basis of any new industry is knowledge, and it is particularly the case for a specialist industry like the international wine trade. Without proper education in different facets of the business, a strong foundation for a new industry and a sustainable base for talent cannot be built.

Wine education creates new career horizons for workers of any education level, and creates a new category of high-value, knowledge-based workers that can offer their services not only in Hong Kong, but also in the Chinese mainland and other Asian economies. Specialist jobs created as a result of wine education include sommeliers, wine journalists, wine logistics specialists, viniculturists, wine marketers and wine consultants.

In today's market, the most widely accepted professional wine education course is offered by UK's Wine and Spirits Education Trust (WSET). While there are courses offered by other organizations, WSET's reputation precedes all others.

In Hong Kong, there is only one course provider that offers WSET at the diploma level, whereas there are eight others that offer WSET courses up to advanced level, or adequate education levels for those in the wine trade. These courses, mostly for consumers, teach them how to appreciate and buy wines. For professional level courses that focus on trade training, purchasing and sommelier training, there is plenty room for growth. This is especially the case when there is only one person in Asia qualified by the Court of Master Sommeliers to teach advanced-level sommelier courses. It becomes clear, therefore, that there are not enough experts to provide training relevant to the Asian palate, particularly for those courses and workshops meant to provide trade-qualified and accredited training.

Develop Wine Investment Tools

An important part of London's success is its headquartering of numerous wine investment funds and wine futures houses, and most importantly the London International Vintners Exchange (LivEx). Being a regional WTDC, Hong Kong should encourage the development of wine investment tools to provide alternative investment options for Hong Kong and Asian investors. Those tools include: (i) wine investment funds offered by private banks and private fund managers; (ii) en primeur wines, or wine futures, offered by wine merchants; and (iii) wine auctions for rare and fine wines from local and foreign owners.

Wine investment funds and wine futures, while being exotic investment vehicles, provide relatively low-risk investment opportunities that provide serious wine investors with a more sophisticated means to manage their wine portfolios, while also giving the average punter the chance to gain steady growth. According to LivEx 2007 statistics, the LivEx 100 index alone projects a 12-month return of 43%, whereas the FTSE 100 and S&P 500 only offer 5% and 4.9% return respectively over the same period. With such projected returns, wine investment is a competitive investment option for many qualified investors.

Wine investment funds typically operate as traditional funds, with typical minimum investments starting at £á100,000 and some even going up to minimum investment prices of £á5,000,000. Wine futures on the other hand offer lower entry-level pricing starting from as little as £á5,000 and upwards, thus allowing investors to enter the market at a lower cost, while letting their investment appreciate in value. With increasing affluence in Asia, Asian investors are craving more alternative tools to manage their growing wealth. In fact, international wine investment funds managed by overseas fund managers have already captured some business from Asia. When wine investment funds become more available and known in Hong Kong, it is anticipated a considerable portion of this business will be shifted to Hong Kong.

V.  Economic Benefits

Methodology

There is no readily available data on the potential size of the wine distribution and trading market in Asia. However, there are import and re-export figures of the overall and individual Asian markets. Domestic consumption figures are also available. These data, coupled with the trade figures obtained from London relating to turnover and employment of its international wine trade and investment, provide a good foundation for the estimation of economic benefits for Hong Kong as a WTDC.

The analysis in this report adopts the standard methodology common to the evaluation of economic benefits and impact in other economies. The economic benefits are mainly derived from three categories: (i) direct; (ii) indirect; and (iii) investment, which are analysed separately in this report. Induced benefits are also estimated.

In calculating the economic benefits of Hong Kong as a WTDC, only incremental economic benefits are taken into consideration. Natural growth of the existing wine-related businesses is excluded.

The direct benefits include the more recognisable industry contributions, or economic activities contained exclusively within the wine distribution and trading industry. These include wine re-export and retail business.

The indirect benefits define the creation of economic activities resulting from linked businesses, supply of goods and services, and provision of operating input. Examples include storage, trade shows and exhibitions, educational programmes, tourism, retail and hotel, advertising and promotion, management and consultant services.

The investment vehicles available in the world's wine economy include (i) wine futures; (ii) wine funds; and (iii) wine auctions. It is estimated that these wine investment sectors will bring in tremendous economic benefits once Hong Kong becomes a WTDC.

The induced benefits measure the consumption expenditure of all sectors¡¦ employees. In other words, those employed directly or indirectly by the wine trade industry take their pay cheques and induce additional economic activities in the form of retail consumption, personal expenditures on health care, banking, insurance and other sectors of the economy.

Projections on Re-exports and Investment

Demand for imported wine in Asia in the next decade is expected to be phenomenal due to strong economic growth and increasing affluence in the region. If Hong Kong can implement all the strategies above, it is believed that Hong Kong can capture 24% of the wine import market in Asia in 2012 and 33% in 2017. Abolition of wine duty has already removed administrative burdens and undue costs for wine moved in and through Hong Kong. Being the first and only wine duty free haven in major economies, Hong Kong sends a strong signal to the wine world, and will receive positive media publicity around the globe. At the same time, wine exporters and merchants will stock up their wine in Hong Kong to enable ¡§just-in-time¡¨ delivery to Asian customers, leveraging Hong Kong's good air traffic connectivity in Asia at a comparable transportation cost. In the long run, as Hong Kong's profile of being a regional WTDC rises and effects of other initiatives such as marketing and education start to kick in, it is believed that more London wine merchants will migrate to Hong Kong to take advantage of the wine boom in this region.

As far as the wine investment market is concerned, it is believed that this will be an all-or-nothing situation. If Hong Kong could successfully develop into a regional WTDC and build up its reputation, it would be able to gain a considerable market share of Asian wine investment within a few years. However, if a critical mass cannot be created to build up Hong Kong's reputation, it is likely that most investment business would be retained in London.

On a positive note, Hong Kong is expected to capture 55% of the investment market in Asia in 2012 and 69% in 2017. For one thing, about two-thirds of wine investment in Asia is made by mainland and Hong Kong investors. If wine investment tools are available, they are very likely to place their orders through Hong Kong. Second, wine futures and auctions involve physical delivery of wine. If trading and storage are easy but not costly in Hong Kong, it will be another big incentive for Asian wine investment to take place in Hong Kong. Third, wine futures operators, investment banks and major auction houses currently have their operations or even headquarters in Hong Kong. It will not take much time for them to set up or expand a team in Hong Kong for conducting wine investment business for Asian investors.

Economic Benefits ¡V Medium Term (2012)

The projections of economic benefits only take into consideration the additional growth of each sector in case Hong Kong becomes a regional WTDC. Growth potential estimations are based on primary research of in-depth personal interviews in the related sectors and empirical data available in the public domain.

1. Direct Benefit

Re-export ¡V It is believed that Hong Kong can capture 30% of the wine imports from the Chinese mainland and 6% from other parts of Asia.

Retail ¡V Abolition of wine duty drives the retail price down, and makes wine more affordable to people in all walks of life. At the same time, more wine promotions and wine tasting activities will also drive sales.

In sum, the additional re-export and retail business will generate value-added of HK$558 million to the economy, creating around 2,260 new full-time equivalent (FTE) positions.

2. Indirect Benefit

Storage ¡V Availability of high-end wine storage will encourage Hong Kong and Chinese people to ship back their wine collection from abroad to take benefit of tax rebates.

MICE ¡V Vinexpo is held in Hong Kong every two years. HKTDC is also organizing the Hong Kong International Wine Expo.

Tourism & Hospitality ¡V The profile of Hong Kong as a regional wine hub is enhanced by international media coverage. This will further boost Hong Kong as a cosmopolitan city and a preferred tourist destination.

Education & Journalism ¡V Becoming a WTDC, Hong Kong will be able to attract a critical mass of wine professionals and educators to Hong Kong to provide international standard wine courses for trade professionals. These courses do not just target Hong Kong people; there appears to be a huge demand from the mainland as well.

AMPRP ¡V In the meantime, an increasing amount will be spent on advertising, media, public relations and promotion every year.

Professional Services ¡V More services will be required from consultants such as wine specialists, market research, insurance and accountants for the increasing wine-trade activities for the region.

On the whole, it is estimated that around HK$588 million of value-added will be generated by all these supporting services, creating some 1,080 new FTE positions.

3. Investment Benefit

Paper Trading ¡V It is expected that Hong Kong can capture 60% of the paper trading market.

Wine Funds ¡V Meanwhile, Hong Kong will likely capture 45% of the wine fund market.

Taken together, around HK$183 million will be generated, adding some 100 new FTE positions.

4. Induced Benefit

The new FTE jobs will lead to an increase in employee compensation, resulting in around HK$332 million of induced benefit.

5. Total Economic Benefit (2012)

Economic Benefits ¡V Long Term (2017)

1. Direct Benefit

Re-export ¡V It is expected that Hong Kong can capture 40% of the wine imports from the Chinese mainland and 10% from other Asian countries.

Retail ¡V Coupled with increasing domestic consumption, tourists will also come to Hong Kong to enjoy and purchase wine if it is cheaper in Hong Kong than in their home towns.

These additional wine-distribution businesses will generate value-added of HK$1,351 million to the economy, creating around 4,370 new FTE positions.

2. Indirect Benefit

Storage ¡V By 2017, almost all the wine collections stored abroad should be moved back to Hong Kong. In addition, new wines purchased by the Asian collectors over the years are expected to be stored in Hong Kong.

MICE ¡V While Hong Kong's position as a regional WTDC is further strengthened, wine trading and distribution in Asia will be fostered due to the existence of a strong wine centre in the region.

Tourism & Hospitality ¡V With the development of a reputation as a trend-setter in wine culture in Asia and a cosmopolitan city at par with London and New York, tourist visit will further increase.

Education & Journalism ¡V Convergence of fine wine and experts transforms Hong Kong into a knowledge hub of wine. Wine education and journalism will flourish just like the London centre.

AMPRP ¡V More economic activities in all sectors create more needs for advertising and marketing by wine merchants, retailers, hotels, exhibition organisers and the like.

Professional Services ¡V More consultants will be needed for the increasing wine trade activities for the region.

Taken all by all these supporting services together, it is expected that some HK$939 million will be generated, and around 1,340 new FTE positions will be added to the economy.

3. Investment Benefit

Paper Trading ¡V It is estimated that Hong Kong can capture 75% of the paper trading market.

Wine Funds ¡V It is estimated that Hong Kong can capture 60% of the wine fund market.

The value-added to the economy generated by these investment activities is estimated to be HK$468 million. Some 210 new positions will be created as well.

4. Induced Benefit

The new FTE jobs will lead to an increase in employee compensation, resulting in around HK$691 million of induced benefit.

5. Total Economic Benefit (2017)

VI. Conclusions

The positioning of Hong Kong as a regional WTDC creates a new industry that allows Hong Kong to seize the huge opportunities created by the booming wine business in Asia. In so doing, Hong Kong can raise its profile and bring home tremendous economic and intangible benefits.

If Hong Kong can develop into a regional WTDC, it is estimated that Hong Kong can capture 24% of the region's import market in 2012 and 33% in 2017. While these additional wine re-exports, coupled with increasing retail business, can generate direct benefits to Hong Kong's economy, it would also create indirect benefits resulting from higher demand of linked businesses, such as storage, trade shows, educational programmes, tourism, advertising and promotion, management and consultant services. Employee incomes generated by these businesses would induce more consumer spending and further benefit the overall economy. On the whole, the projected incremental value-added benefits to the economy will be more than HK$1 billion in 2012 and nearly HK$3 billion in 2017. Thousands of new jobs would be created as well.

If Hong Kong can successfully develop its wine investment market, it is estimated that Hong Kong can capture 55% of the region's wine investment market in 2012 and 69% in 2017. In this context, the economic benefits to the Hong Kong economy would be even higher, especially because wine investment-related business is of high value-added.

The list of benefits Hong Kong can create as an Asian WTDC can go on and on, but one is particularly valuable and cannot be measured by GDP ¡V it puts Hong Kong directly on the radar screen of global media. Increased awareness and consumption of wine will enhance Hong Kong's reputation as a world-class cosmopolitan city, and solidify Hong Kong as Asia's cultural trendsetter, which is already in the areas of luxury items, performing arts, cuisine, tourism, exhibition/convention business and international financial.

There is now a unique opportunity to create a high-value, knowledge-based industry that gives Hong Kong an edge over the region, and positions Hong Kong to capture the mainland's large consumer market not with cost-driven measures, but value- and market-driven measures.

By abolishing wine duty and becoming a WTDC, Hong Kong can solidify its position as a world-leading centre for wine trading and distribution. Moreover, it gives Hong Kong first-mover advantage as the world's first and only free wine port among major economies. The increase in quality wines entering our ports will enable Hong Kong to become the world's wine showcase. This makes Hong Kong the clear-cut destination to conduct wine trading. Not only will the local wine industry benefit from an influx of traders, all local industries and particularly SMEs will benefit from an in-flow of wine marketing, promotion, hospitality and catering needs.

It takes at least five to six years to establish a WTDC. Once measures are taken towards becoming a WTDC, and Hong Kong's reputation grows, it becomes increasingly difficult to be replaced. London is a very good example. This is an opportunity that Hong Kong cannot afford to miss, because the window of opportunity closes gradually each day as the mainland opens up. Hong Kong's time to create a new industry and become a genuine cosmopolitan city is now!

This is to acknowledge that HKTDC's Research Department has commissioned Actrium Solutions (HK) Ltd to conduct the study on Hong Kong as a Wine Trading and Distribution Centre.

This new report is available at HKTDC's Retail Outlets. It can also be purchased through the HKTDC Bookshop section in the HKTDC's trade portal: info.hktdc.com.