LET’S THINK TWICE BEFORE WELCOMING THE SO-CALLED TAX FREE WINE – A DIFFERENT OPINION

The following article was contributed by a friend of mine. He expressed a totally different opinion about the impacts of the proposed zero percent wine tax as part of the 08-09 fiscal budget...

"I am writing to reveal a few truth about the global wine trade situation, and to recommend *AGAINST* completely eliminating the import tax on wines, which is against the prevailing opinion publicized by a few special-interest groups.

I'm also in the import/export trade of fine and rare wines. While I could go with the flow, and be a proponent to welcome 0% import tax on wine, and enjoying the higher profit margin as a result of this proposed tax cut/elimination. I feel strongly about the resulting disparity of wealth. I feel obligated to reveal the latest condition of fine wine trade and the real motivation of those who advocate it, and how misleading those numbers are, as detailed below:

This tactic is for the wealthiest to liquidate their collection of the now-expensive wines currently stored in Europe.

The truth is, with 0% import tax of wine to Hong Kong, it creates a convenient venue for the wealthiest, those who have collected expensive and rare wines, to liquidate their asset in Hong Kong to attain the maximum profit. Everyday drinkers usually do not cellar/collect/store more than the volume that they could consume, let alone storing them in Europe's bonded warehouse. The much advertised “500,000 cases of wines owned by Hong Kong people”, should be more accurately described as “owned by the wealthiest Hong Kong people, not the general public.” Having a free-ride into Hong Kong region, would mean more direct and faster exit for the expensive ones, either for sale, or for their own consumptions, on a tax-free basis.

The lie about reduction in wine prices as a result from 0% tax.

The retail prices of the highly valued French wines are determined largely by second hand market -- via auctions, or consignment sales through retail merchants close to the source of collections, i.e. in USA, or in Europe where the original collectors are. Please note that wholesalers from Europe don't hold onto old vintages, they must push out and churn the current releases, which are of lesser valued. However, the rise of old vintages’ values has evidently created speculative pricing, or "price fixing", in the current, and future releases!! This is a vicious cycle, and is in contrary to the hyped benefit of cheaper retail wine prices.

Last year, when HK government reduced the tax from 80% to 40%, it immediately caused an up-rise in auction prices of those high-end Bordeaux wine from Europe. That's because the less tax means more ammunition or fire power (capital) to bid in the second hand market. Merchants with ties to HK, bid aggressively, knowing that the same $1,000 cost now can afford a higher hammer price. They then flip the wines to the wealthiest buyers in Asia. Remember, to access older vintages, they mostly *must* be obtained from second hand market. The price hasn't come down since then. This time, if the tax is completely being eliminated, the same thing will happen again. To the wealthiest, the difference of USD$2,500/bottle and $2,200/bottle is *NOTHING*. To the merchants, however, it means more buying/bidding power and they'll bid more eagerly in the second-hand supply market, while maintaining their $2,500/bottle price, because the wealthy buyers won't care that small fraction of difference, thus creating another wave of price escalation due to speculative buying. The price of the wine in second hand market trade will not decrease even though the import tax is being eliminated.

On the cheaper end of the spectrum, the supply is abundant world-wide. I have seen second grand cru classes from Bordeaux, prices barely moved by 10% - 15% in the past year, way behind the hot ones. They are of less demand, and there is really very little speculative upside for them. Consequently, there is very little incentive to import those to Hong Kong anyway, due to lower margin and high logistic cost per bottle. With abundant supply on the cheaper wines outside of HK, and little incentive to bring those into HK's hypothetical "wine trade center", price of the affordable wines will not see significant reduction, if any at all!

The resulting polarization of wealth.

As I pointed out, the value of those 500,000 cases currently stored in Europe are mostly high-end wines, some easily valued at HKD$15,000 per BOTTLE, not per case. How will the general humble HK citizens go buy those on daily basis? This is a classic case where a fiscal policy would help the richest to become richer, and very little to the poor. The buyers of expensive wines via retail merchants in USA, are mostly speculators and they then shipped the wines to Asia, many via illegal means (improperly import into Hong Kong or China via US postal mail without sufficient custom declaration). Under normal circumstances, typical wine drinkers rarely buy wines more than USD$150/bottle, it is deemed a luxury. Once the consumption pattern is understood, it is easy to see how being a "wine trade center" of expensive wines, only benefit the richest collectors!

"Wine Trade Center will create more job opportunity!" --- ha, ha, ha! Yeah right!

The lie about creating new job opportunity in logistics and storage. This is the biggest lie being covered by the media. Let’s look at the world’s second biggest wine production region – Napa Valley’s wine storage business. It is capital intensive to build during the start up stage, but it takes very, very little to maintain. One of the biggest wine storage in northern California is run by 3 people with only 2 of them full time. This storage is running at full capacity, storing about 25,000 cases, and that only takes 3 people to maintain.

Another storage facility in one of wealthiest neighborhood in northern California could not survive and went out of business last year, because there wasn’t enough demand for it. This is in the homeland where wines are cheap, but only the few wealthier folks collect and store the wines. The general public does not collect any significant quantity, and renting a commercial storage would not make any economic sense to them, they buy as they need to consume.

A major wine logistics operator in California, the "*** Wine Transport" (name withhold), handles the distribution of hundreds of wineries throughout USA, has a 20,000+ sq. ft warehouse, but hires no more than 50 people to run their high-volume business, and has been like that for the past 25 years! They distribute hundreds of thousands of cases annually.

Another major importers of French wines in California, only hires 2 warehouse staff, one of them is the delivery truck driver, the other is half of a sales. This 2-men crew manages all their distribution needs. Trucking logistics will not see significant growth either, unless the cheaper wines consumption increases many-folds. Note that the true intention of those who openly advocate 0% import tax, is after the high-end wines. In that segment, the actual volume/quantity is relatively small, that it'd hardly translate into more needs for trucking logistics. So how many job opportunities we could create even though we are bring those 500,000 cases of fine wine back?

For example, 10 pallets of high-end French wines (500 cases) can easily carry a value of USD$1M to USD$1.5M. That is enough supply for several weeks of sales in Hong Kong/Macau, if not longer! I wish every Hong Kong family has become so rich and refined in their taste that they open a bottle of Mr. Tong's beloved 1982 Mouton Rothschild every week, but first average Hong Kong family rarely spend so lavishly, and second, there aren't that many 82 Mouton available in the market as of now.

The volume required to significantly create new job opportunity is simply not there. Put simply, unless cheaper tax will bring in a LARGE AMOUNT of cheaper wines for general consumption, 0% import tax will not translate into significant number of new job opportunities. Motivation of selling older vintage when the market is high. Judging from the age-groups of the most affluent collectors in Hong Kong, many started collecting in the 80s. Many of those 500,000 cases are old vintages in the 80s or older. Bordeaux wines from the best vintages in the 80s, 1982, is drinkable now, whereas the weaker vintages in the 80s, are effectively expiring now. Instead of seeing their weaker vintage wines become undrinkable or decline in value, Hong Kong collectors of the 80’s and before want a fast and cheap exit for these soon-expired items. “How do I get rid of my soon-will-expire wines in Europe, without paying a hefty premium?” is a lingering question among the wealthy collector crowd of Hong Kong.

Recent winter snow storm in China, and the correction in China's equity market, has already slowed down the purchase of the high-end wines. By advocating 0% tax to create a cheaper exit for their collections, the wealthiest intention could be to catch the top of the market before any uncertainty set in. Having 0% import tax would implicitly encourage speculative buying and trading, which is a risky practice and lead to unstable pricing.

Put Our Public Safety and Import Security at Risk

0% Import Tax will definitely promote aggressive importation of fine and rare wine. At the same time, this is a perfect opportunity for criminals to smuggle illegal items into HK by carrying such illegal items as explosives, firearms in Original Wood Cases (also known as “OWC”), disguised on the outside with proper origin labels and hidden deep in piles of OWC with the high volume of import wines.

It also creates a more difficult job for Customs officers to spot any illegal items at the import clearing, because the lack of necessity to evaluate and impose tax based on wine values, importers are must less likely to unravel every pallet for examination. One pallet of wines can have 50 cases, each is 19kg in weight. With 0% tax, Customs officers are under pressure to expedite the screening/examination of these "non-taxable items", thus allowing illegal items to slip through easily.

In our neighboring city Macau, system is in place to reveal the content of every case, OWC or not, at the import customs clearing. Such tight measure has successfully discouraged and deterred the smuggling of illegal items via wine transport.

Conclusions

Fine and rare wines are an acquired taste. The market is heavily second-hand driven, the commodity is hardly standardized, so there's a lot of arbitrage opportunity for pricing. All these are as such, because the general public is not well-educated in terms of the supply, demand, and pricing of hundreds of vintages from wineries around the world. The media accept and readily publish whatever the lobbyists feed them as "data".

While I'm not a super wine expert, I have been in the business long enough to shake my head when I read the media coverage, the "rumors of 0% tax", only from mouth of the special-interest. The media have been flooded repetitively with such brain-washing data figures, which are biased, and conceal the true beneficiary. The same article quoting the hypothetical set of trade figures, new job opportunity, and the famous “500,000 cases of wines in Europe owned by Hong Kong citizens”, was published at least 3 times in a month. Note, these are not official statistics data endorsed by any organization outside of the local advocates. The media can and will learn the truth eventually. If they do, you can bet on that they will write negatively about any government endorsement to business idea which profits few and do little good to the rest, without due consideration and analysis.

By revealing some of the market condition and mechanism, I only hope the HK government would do the right thing for its people. I see very little media coverage on the opposite side of 0% wine import tax, which is worrisome. I hope the HK government is not in the dark about these, and will take a balanced approach which rewards those who truly create new job opportunity, and help Hong Kong become a competitive and stable environment for wine trade.

Hong Kong has already its shares of speculative buying/trading in equity and real estate market, please don't help create yet another one in the fine wine market AND SEGRAGATE OUR SOCIETY EVEN FURTHER BETWEEN THE RICH AND THE POOR.

In my opinion, eliminating the import tax completely, is a poor fiscal and political move. I urge our Financial Secretary and his staff put some effort into analyzing the pros and cons of doing so, before the fiscal budget proposal becomes publicly available for review and approval. When and if the media learns about the above mechanism and landscape of the fine wine trade, a 0% tax proposal on imported wine will definitely draw heavy criticism from them.

It will look even worse, when the media can associate such policy with the fact that many prominent, high-ranking government officials have substantial, sizable collections of fine wines in Europe that will directly benefit from a “tax-free” import environment, for their own consumption, or for liquidation with higher tax-free profit."