Kentucky - China Talking Trade

By JOE BIESK, Associated Press Writer

FRANKFORT, Ky. (AP) - Less than a year ago, China was essentially off-limits for Kentucky bourbon producers, but after negotiations, the Chinese government last year relaxed a regulation allowing bourbon into its market. Now, China poses a potentially explosive market for the bourbon industry.

"The China potential is mind-boggling," said Ed O'Daniel Jr., president of the Kentucky Distillers' Association.

Gov. Ernie Fletcher is in China this week on a trade trip seeking to boost business prospects for Kentucky companies in a largely untapped market almost a world away.

After a visit to Japan last week, the governor was scheduled to spend the second leg of his trip abroad in China to meet with government officials there on topics including animal nutrition and mine safety.

While there, Fletcher is scheduled to stop by the state's Beijing trade office, which opened last year and now has a three-person staff.

"China is a rapidly developing market for Kentucky exporters," Fletcher said in a statement. It has grown by more than 500 percent since 2001. We plan to capitalize on this trend and take full advantage of every opportunity."

Take for instance, bourbon. Before 2006, the Chinese government had imposed a threshold on a compound called fusel oil, which is a byproduct of distillation. It was set at a level that effectively allowed Scotch whiskey into the market, but prohibited bourbon companies from directly competing.

Fletcher' first trip to China was in 2005, and while there he lobbied health officials to ease the restriction. It was eventually lifted after a Chinese government official came to Kentucky to view the bourbon-making process at local distilleries, O'Daniel said.

Full-blown expansion in the market is still likely years away, considering the time it takes to make bourbon combined with its relatively late entry into the Chinese market, O'Daniel said.

While Kentucky bourbon's presence there is negligible, that could change over time, he said. About 225,000 gallons of bourbon were shipped to China for the 12-month period ending last December, O'Daniel said.

"The Chinese have a palate there for the kind of distilled spirit that bourbon is, but it's never been marketed there," O'Daniel said.

China, with rising affluence and an interest in consuming imported products, likely poses a very good long-term market for bourbon and other spirits, said Max Shapira, president of Bardstown-based Heaven Hill Distilleries. Currently, the market is still "relatively small at best" and needs time to develop, Shapira said.

"There is an appetite and a taste profile, not only for imported products, but for products in the distilled spirits," Shapira said.

Brown-Forman Corp. and Beam Global Spirits & Wine Inc., two companies that produce various bourbon brands, are planning a reception in China while Fletcher is there.

China consumes about 25 percent of the world's distilled spirits and is one of the most important emerging markets, Keith Neumann, a spokesman for Jim Beam, said in a written statement.

"We think the interest that Chinese people have in western
brand icons and lifestyles in general presents a great opportunity for our brands," Neumann said.

Kentucky's prospects in China are not just limited to bourbon, said Ying Juan Rogers, trade services manager at the Kentucky World Trade Center in Lexington. There are more than 200 Kentucky businesses doing more than $300 billion worth of business there each year, she said.

In 1997, Kentucky's exports to China totaled nearly $40 million, Rogers said. That increased to more than $317 million by 2004, she said.

China is also a ripe market for Kentucky's coal industry and there's a trade mission planned there later this year, Rogers said. Chinese companies are currently interested in new coal technologies and equipment, she said.

"China is the largest end-user of coal and we know that Kentucky has a lot to offer in that area," Rogers said.

Lumber producers in Kentucky are also exploring options there. State officials and lumber producers met with a delegation of Chinese buyers last month who were looking for hard and soft wood for furniture and flooring.

Bob Bauer, the Kentucky Forest Industries Association's executive director, said growth in China has some Kentucky producers scoping possible new markets. Nevertheless, producers would prefer to send over value-added wood rather than raw lumber, Bauer said.

"I don't think there's any question that there's a potential for markets over there, and that has some people interested," Bauer said.

Still, entering the Chinese marketplace can be complicated, Rogers said. There are different government regulations and tariffs, and to successfully export there generally takes a long-term commitment, she said.

While Kentucky's expanding its opportunities there, the Bluegrass state is still behind other states when it comes to exploring potential in China, Rogers said. At least 20 other states have already had trade offices set up there - some for as many as 10 years, Rogers said.

"We're already behind," she said.

(Copyright 2007 by The Associated Press. All Rights Reserved.)
AP-NY-06-10-07 1336EDT

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