Chinese Have French Cognac Over A Barrel

Recently the European Commission  has imposed tariffs of Chinese electric vehicles being inported to the EU and obviously in a not unexpected move the Chinese impose their own tariffs on certain goods that EU countries export to China and has attacked one of the largest and most lurative products that  one EU country exports to china and that is Cognac from France.Now do understand that China represents 25% of the global market for cognac ( as in the French product and not brandy produced by other countries)  

This has caused the French Cognac producer Moet -Hennesy to consider a very  controversial move after China imposed tariffs of 35% on French cognac imports to the country. The company is looking at shipping the cognac to China in barrels or in tanks and bottling it in the country as its only bottled cognac that is hit with the tariffs not the bulk cognac supplies themselves.      
Now what does this mean. firstly lets look at the reaction in France to the suggestion that one of the major symbols of Western alcohol culture, cognac, may be bottled not in a strictly defined region of France, but in China.
Protests in France have led to disruption at the world-famous cognac producer Hennessy, with workers going on strike. The reason for this is as follows: China has increased tariffs on imported bottled cognac by 35%, with Hennessy, as reported by BFMTV, being a brand with a high level of dependence on export supplies.

The LVMH (Louis Vuitton Moët Hennessy) holding company is currently facing significant challenges. In the third quarter of this year, the company, which owns a large number of fashion brands (Dior, Guerlain, Givenchy, etc.) and producers of elite spirits, saw its turnover decline by 4.4% to less than 20 billion euros. This downward trend has been in place for some time. The first half of 2024 also showed a decline in almost all segments, with sales of alcoholic beverages falling by as much as 12%.

It is crucial to undertand that China represents a significant market for French cognac, accounting for a staggering quarter of all exports. Yes China imports 25% of all French Cognac exports
China is the second most important market for Cognac producers, and it is currently engaged in an undeclared trade war with the European Union, which has significant implications for the sector.
On 4 October, the European Commission announced that EU countries had approved the introduction of duties on Chinese electric cars. The applicable duties will now range from 30% to 36.3%, depending on the manufacturer. In response, China announced two new measures. Firstly, it will start assembling cars in Europe. Secondly, it increased duties on brandy and cognac, a significant part of which is produced in France. However, this was merely the beginning.
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The Hennessy management team concluded that losing the Chinese market would be an unfeasible proposition, and took the decision to react in a manner that was typical of French business practice. Following a detailed analysis of the conditions under which the duties apply, the holding has determined that they ONLY apply to cognac imported in bottles.

Consequently, if the product is delivered to China in a non-bottled format, such as in barrels, the duty will not apply. No bottles, no tariffs.

Previously, it would have been unfeasible for the Hennessy management to transport their products in barrels, however this was common practice in the 18th century. However, to avoid paying additional costs, they would have to go to great lengths. The solution to the problem was to deliver the cognac to China in large containers (barrels or special tanks) and arrange for the product to be bottled on site. However, local trade union representatives identified an opportunity for action and decided to take action
Frederic Merceron, a representative of the Force Ouvrier union among Hennessy employees, stated that management has informed them of plans to conduct tests on containers due to the shift in bottling operations to China. One can reasonably anticipate the resulting reductions in personnel.

"This is the first time such a well-known company has taken this approach," agrees Mathieu Devers, a member of the CGT. He is transparent in his view that Hennessy is merely the first to do so, and that other cognac producers will inevitably follow suit in order to minimise their costs and avoid the crippling tariffs.
An export test has been scheduled for completion by the end of 2024. Its objective is to assess whether the product quality would be adversely affected by the transportation process, in other words, by the new packaging. Devers stated that workers were informed that related materials, including bottles, labels, corks, and cardboard packaging, would also be sent to China, where the products would be bottled and all work previously done in France would be carried out.

Hennessy's management has issued a formal statement denying the proposed relocation of the bottling of production from the city of Cognac in the Charente department. However, Hennessy representatives were obliged to confirm that they were contemplating the bottling and packaging of a portion of their production in China.
The forthcoming study will focus on the bottling service, which could be temporarily outsourced to a provider based in China, subject to the outcome of the studies to be conducted. "The company's objective is to pursue all avenues for finding solutions that protect its interests and the Cognac ecosystem as a whole."
The National Interprofessional Cognac Bureau (Yes there is one  in France) released a statement regarding the situation. The communiqué made it clear that the Bureau's role was not to comment on individual strategic decisions of enterprises. However, it also acknowledged the challenging context and the possibility that some producers may need to use all available means to maintain their positions on the Chinese market.

"Our objective is to ensure that Cognac remains in Cognac," commented one of the hundreds of striking Hennessy employees, in a typically French pithy remark. "Our presence here is a demonstration of our desire to retain our employment."

Another striker added that they were fighting not only for their own jobs, but also for the jobs of other city residents and residents of the region. The decision taken by Hennessy management would inevitably affect not only the direct employees, but also suppliers, carriers, and resellers of products. "Relocating even a portion of the production to an alternative site would result in the loss of hundreds of jobs," echoed union representative Patrick Monier.

As reported by TF1, the La Vignerie cognac bottling plant, which fills tens of millions of bottles of the drink every year, could close. A total of 300 employees could be made redundant at this single enterprise.
In total, 80,000 people in the region are either directly or indirectly employed in cognac production. The National Interprofessional Cognac Bureau estimates that 14,500 individuals are directly involved in production, with an additional 72,500 indirect jobs, not only in the Charente department. This is not exclusive to Hennessy; it also applies to other cognac producers. However, it would be unwise to assume that this is the case across the board. Should the trial of transferring bottling and packaging operations to China prove successful, it is likely that other companies will follow Hennessy's example in due course.

The French President Emmanuel Macron has acknowledged the gravity of the cognac issue and has agreed with Xi Jinping to "try to find a mutually beneficial compromise." Prime Minister Michel Barnier will travel to Beijing in early 2025 to pursue this agreement. However, as is often the case, the relevant decision-makers have not yet reached a conclusion.

Local publications have reported that the first 1,000-litre container of cognac for China is scheduled to depart in mid-December. The quality of the product will be verified upon arrival, and if it meets the required standards, it will be bottled. Furthermore, the regulations governing cognac production do not stipulate that the renowned alcoholic beverage must be bottled in the same location where it is produced. This provides brand owners with significant flexibility.

Some of the strikers are calling for a review of the production standards, and Mathieu Devers has indicated that the Chinese will now be able to sell copies of the bottles and the most prestigious products.
However, another stakeholder, Cecile, provided a frank assessment: "The local culture is heavily influenced by cognac." "Without cognac, the city would cease to function." The primary motivation for the strikers is to maintain the status quo; however, the objective of the management team is to retain their position in the market at any cost.

It has been reported in the press that an unofficial decision has been made to transfer approximately 10% of Hennessy production to China. Despite concerns raised by Mathieu Devers that the move could result in Chinese brandy being sold in France, there has been no significant reaction from the public.

It seems that cognac connoisseurs will have to pay closer attention to the labels in the near future to determine where a particular bottle was bottled. It is possible that the French-produced and bottled batches will become more expensive, while those bottled in China will remain the preserve of the local market. In any case, the sales figures will soon demonstrate whether the strategy of the Hennessy management team has been a success. Should the transfer of production to China prove successful and profitable, it is likely that this will be expanded. Furthermore, employee strikes in France will have no impact on the situation.