Australian Wine Industry

Introduction

“Australia is a nation born of globalization, a fragment of an empire in the new world” (Moran 2005). The country has a population of approximately 20 million people, and it’s divided federally into six states and two territories. The country further centralizes its governance under a national government based on British and American constitutional and parliamentary cultures (Moran 2005). In simple terms, globalization refers to the process of integration of the world into one huge market through the relaxation of trade and other barriers in different countries (Nande & Dias 2007). The history of globalization in Australia dates back to the 16th century and has transformed over the years into contemporary globalization, which entails intensification of international relations as well as increased permeability of a range of economic, social, and political boundaries, which has facilitated international trade and foreign investment (Moran 2005).

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The wine industry holds significant status in the global economy and enjoys a diverse market across the world (Jenster, Smith & Mitry 2008). Western Europe and Australia are among the largest producers and consumer of wine across the globe, and although the actual vine areas tend to reduce with increased production and consumption, these regions offset this by utilizing advanced methods of production and technology, which leads to overall increment in the level of output in the industry (Jenster, Smith & Mitry 2008). Efficient production in the wine industry has considerably aided the European market in remaining relatively stable in the recent past. Improved economic conditions and effective policies have further brought radical changes in the global wine industry.

In the period 2001-2002, world wine production reduced by four million hectolitres, 4.8 of which fell from the European tally, but this decline was offset by increased production in Asia, Australia, and Africa (Jenster, Smith & Mitry 2008). On the other hand, the period between 1990 and 2002 was characterized by a general decline in European consumption with France and Italy which had the highest per capita consumption reducing by 14.5 Mhl in France and over 7.6 Mhl in Italy to 52.5 and 53.9 respectively (Jenster, Smith & Mitry 2008). In overall terms, the wine business continues to thrive in the modern market as it represents the way of life of the modern man. The comparative sizes of the major world markets have been analyzed by various methods such as total liters per year or the per capita consumption in terms of monetary units (Jenster, Smith & Mitry 2008), and the Euromonitor International global sector briefing of 2007 ranked Australia among the top ten wine consuming countries by liters per capita in 2001/2006 with European countries such as Italy and France topping the charts (Jenster, Smith & Mitry 2008).

SWOT Analysis for Australia

In order to assess the suitability of establishing a wine company in Australia, we have to consider the strengths, weaknesses, opportunities, and threats that the company would face in Australia. The country has a strong economy with a per capita GDP, which competes relatively with the dominant European countries (OECD 2010). This achievement can be attributed to extensive economic reforms, low inflation rates as well as growing international relations with countries such as China, which are also developing at a high rate (OECD 2010). The economy has proven to be strong, especially due to its ability to withstand internal and external events such as major droughts and fluctuating climatic conditions constantly facing the country (Botterill and Fisher 2003).

The country was also able to withstand the financial crises that hit the Asian countries in the late 90s and have had a surplus budget since 2002 (Meredith and Dyster 1999). However, the country has a socially permissible system for information transfer, and its enforcement of environmental and economic laws significantly hinders foreign investment in the region. Australia provides a business-friendly environment, and according to World Bank, it is the easiest destination to do business with the minimal time taken to establish a business in the country. However, the country is often faced with natural calamities such as drought as well as robust import demand and a strong currency, which increased the trade deficit.

Further, in order to expand international operations into the Australian wine industry, we have to consider the competitive advantage of the country and its convenience in international transactions relative to other potential investment regions. While the classical theories have emphasized the role of factor endowment such as land, labor, and natural resources, among others in the determination of comparative advantage, Michael E. Porter presents the view that a country can establish new factor endowments such as advanced technology, skilled labor, and government support among others to enhance their competitive advantage (QuickMBA 2010). The production of wine in Australia has not increased proportionately to the suitability of soil and climate persistent in the region (Osmond and Anderson 1998). However, during the late 80s and early 90s, the acreage land in Australia devoted to grapevines almost doubled, and the real value of wine production grew by more than 10% annually (Osmond and Anderson 1998).

The region registered remarkable success in the decade, and the wine industry experienced an export boom in the 90s where the volume of exports accounted for a third of the total sales while in previous years, wine exports constituted 2-3 percent of the total sales (Osmond and Anderson 1998). In the recent past, the Australian market has performed remarkably in the world market, contributing to 2% of the world’s global production (Marsh and Shaw 2000). While in the mid-1980s, the country was an importer of wine, as in 2000, the exports constituted 32% of the total production (Marsh and Shaw 2000). This development and improvement in the Australian wine industry may be attributed to the decline in Australian exchange rates in the mid-1980s, which significantly influenced demand in the region. Tastes and incomes in consuming markets have substantially favored the Australian styles since wines have become a daily accompaniment of modern lifestyles in the region (Marsh and Show 2000). In addition, the excellent performance of the wine industry in Australia may be attributed to the region’s natural endowment and physical advantages as in the classical theory of competitive advantage (Marsh and Show 2000).

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The wine industry has experienced structural changes over the recent past, which has consequently affected the pattern of firms as well as the pattern of industry associations (Marsh and Show 2000). In the mid-80s, the industry was highly fragmented, with producers working towards their own interests rather than the interests of the entire industry. However, the early 1980s saw the emergence of industry associations that promoted export trade, research, innovations, and inventions (Marsh and Show 2000). The development of these associations led to great achievements in the wine industry and also led to the establishment of the mutually antagonistic relationship between the wine companies, which paved the way to progressively expanding conceptions of synergies and shared interests (Marsh and Show 2000).

Production in Australia was concentrated in three major firms Southcorp, BRL-Hardy, and Orlando-Wyndham Group, which accounted for 51% of the total production, while the top nine companies in the country contributed to 78% of the total production (Marsh and Show 2000). In addition, there were over 1000 wine producers in the country as well as over 4000 wine grape growers (Marsh and Show 2000). Government initiatives saw the establishment of the Australian wine and Brandy Corporation in the early 80s, which was charged with the responsibility of regulating the export market and levy for growers and producers (Marsh and Show 2000). This corporation sought to address the conflict between representative organizations from large and small producers and also exposed the absence of a national body that represented the interests of small and medium producers. This led to the establishment of the Australian winemakers’ forum (Marsh and Show 2000). Other bodies have been established ever since, which has led to increased representation of all the stakeholders in the Australian wine industry.

Investment Climate in Australia

Australian historical and cultural ties to the west have significantly shaped capital inflows into the country (Nolan 1996). During the 80s, there was persistent pressure on the country to undertake investment regulatory reforms and open up its economy in order to keep pace with the booming Asian neighbors (Nolan 1996). The country embarked on numerous measures to attract foreign investment in order to reduce the risk of facing a reduction in its traditional export markets as a result of international integration that was taking place in the global economy, such as the European Union (Nolan 1996).

Integration led to increased interdependence between member countries, consequently reducing the market base for Australian goods. The operating costs have remained relatively stable, consequently attracting foreign investment relative to locations such as Singapore and Hong Kong, where prices have been soaring in the recent past (Nolan 1996). For instance, office space in Singapore will cost a businessman twice as much as the cost he would incur in Melbourne or Sidney. In Australia, the cost of housing is approximately one-ninth of that in Japan, and the cost of telecommunication and raw materials is relatively lower, rendering the region preferable for the establishment of a multinational corporation (Nolan 1996).

Traditionally, Australian labor was popular for high costs and manufacturing expertise. However, the current Australian pool of labor is recognized for its skilled managerial base, which further attracts foreign investments (Nolan 1996). Despite the fact that the country consisted of a small population of approximately 20 million, its management pool is at least three times the size of her competitors around the Pacific Rim, and this has significantly aided the development of the support services sector which have promoted the performance of the wine industry (Nolan 1996). The Australian government seeks to facilitate foreign investment that complements the economy, particularly the export-oriented industries (Nolan 1996). Consequently, the government has established various bodies aimed at regulating foreign investment and international trade, such as the foreign investment review board, which examines and approves foreign investment under the terms of the federal acquisitions and takeovers act, the department of the treasury, which regulates foreign investment and the foreign affairs and trade department which is responsible for setting policies related to foreign trade and international economic relations (Nolan 1996). These serve to ease the process of establishing a new business in Australia.

Critical Evaluation of Porter’s Diamond Model

In his national diamond model, Michael Porter analyzed the differences among countries in terms of international competitiveness of their industries with regard to factor conditions such as supplier markets, demand characteristics, competitive industry dynamics, as well as trends in firm strategy and structure (Walker 2003). He argues that these factors fundamentally determine international competitiveness and help people to establish why some countries are more competitive than others and the reasons why some industries are more competitive than others (Walker 2003). Porter’s theoretical framework has been recognized as the most influential perspective used to explain the competitive advantage of different countries (Barbe n d). The theory acknowledges the impact of the industry on competitiveness without ignoring the role played by operational activities at the firm level (Barbe n d).

Porter’s theory focuses on the prevalent situation in a country with regard to production factors, endowment, presence of skilled labor, and advanced infrastructure, among other physical factors that play a major role in promoting competitive advantage in most regions (Recklies 2001). Each country consists of its own set of factor conditions, which renders it more competitive relative to its counterparts. This is evidenced by the presence of low-cost countries that are endowed with cheap labor, agricultural countries that are rich in fertile soils for farming, as well as countries with a start-up culture that has well-developed venture capital markets, e.g., United States (Recklies 2001). The model also emphasizes home demand conditions, which refer to the prevailing demand conditions in the domestic market and heavily impact on economic orientation and promote innovation and product development in a country (Recklies 2001).

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According to Porter, “a country can achieve national advantages in an industry or market if the home demand provides clearer and earlier signals of demand trends to domestic suppliers than to foreign competitors” (Recklies 2001). In addition, the presence or absence of internationally competitive supplying industries and supporting industries heavily determines the competitive advantage of a company. For instance, competitive supplying industry will promote innovation and internationalization, while an efficient support industry will promote the efficient performance of other industries (Jenkins and Pigram 2003). In terms of firm strategy, structure, and rivalry, Porter views the cultural aspects of a country as playing the most significant role in the determination of competition; different countries have different management structures, work relationships, etc., which works to the advantage of different industries (Recklies 2001). In his views, domestic rivalry and search for competitive advantage within an organization can help a company to gain such an advantage on a global scale (Recklies 2001).

However, the assumption that competitive advantage is created at the home market in a first stage without the involvement of foreign multinational firms and that firm can only expand internationally in the second stage by building upon their home base where all key strategic decisions are taken remains in doubt (Rugman and Verbeke 2005). In reality, many multinational firms, especially those that have their origins from open economies, need to take on board from the outset the diamond determinants and firm-level practices prevailing in large trading partners (Rugman and Verbeke 2005). Paying attention to foreign diamond factor determinants does not necessarily confer the same competitive advantage benefiting insiders in large nations, but foreign direct investment creates an opportunity for bridging the institutional differences and enables foreign firms to blend in foreign markets, consequently increasing structural interdependence between countries (Rugman and Verbeke 2005). Despite this shortcoming, Porter’s Diamond model has been utilized by many organizations to identify and formulate policies that can build home-based competition in order to gain global competitiveness (Recklies 2001). However, there exist limited studies that have been carried out to prove the concept of national competitiveness based on this Porter’s diamond model is true.

Recommendations and Conclusion

From our analysis, the wine industry in Australia is performing excellently in the global market, and establishing a new firm in the region would be beneficial for the European mid-sized company. This is because the economy of Australia is up to par with most European countries, and its investment climate attracts foreign investment. In addition, the country has advanced infrastructure and support industries, which would allow the wine company to perform efficiently in the region. However, Australia should embark on extensive integration with other countries in order to increase its market base and attract more foreign investors. The country should also establish permanent measures to counter natural calamities such as droughts and climatic fluctuations, which have in the past affected the volume of business in the country.

Reference List

Barbe, T. G. F., Not dated. Mercosur Union, Porter’s Diamond, And The Competitiveness Of The Uruguayan Broiler Industry, UK. [Online] the royal agricultural college, school of business. Web.

Botterill, C. L., & Fisher, M., 2003. Beyond Draught; People, Policy and Perspectives. London, Csiro Publishing.

Jenkins, J., & Pigram J., 2003. Encyclopedia of Leisure and Out Door Recreation. London, Routledge.

Jenster, P. V., Smith, ED., & Mitry, JD. 2008. The Business of Wine: A Global Perspective. Denmark, Copenhagen Business School Press DK.

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Marsh, I., & Shaw, B. 2000. Australia’s wine industry: collaboration and learning as causes of competitive advantage [Online]. Web.

Meredith, D., & Dyster B, 1999. Australia in the Global Economy; Continuity and Change. Cambridge, Cambridge University press.

Moran, A., & Australia, 2005. Nation, Belonging, and Globalization. London, Routledge.

Nande, A., & Dias, S. 2007. International Business and New Trends. Mumbai, Nirali Prakashan.

Nolan, L. J., 1996. Australia Business; the Portable Encyclopedia for Doing Business with Australia. San Rafael, World trade press.

OECD, 2010. OECD Economic Surveys; Australia 2010. Australia, OECD publishing.

Osmond, R. and Anderson K., 1998. Trends and Cycles in the Australian Wine Industry 1850 to 2000, Australia. [Online] Centre for International Economic Studies. Web.

QuickMBA, 2010. Strategic Management; Porter’s Diamond of National Advantage. [Online] internet centre for management and business administration Inc. Web.

Recklies, 2001. Porter’s Diamond: Determining Factors of National Advantage. [Online] Web.

Rugman A. M., & Verbeke, A., 2005. Analysis of Multinational Strategic Management; the Selected Scientific Papers of Alan M. Rugman and Alain Verbeke. UK, Edward Elgar Publishing.

Walker. G., 2003. Modern Competitive Strategy. New York, McGraw International.

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