One of the most remarkable stories in the global wine industry over the past two decades has been the growing prominence of Chinese domestic producers. Ever since the Chinese wine market officially opened to foreign competition in 2001 (with China’s entry into the World Trade Organization), the story has been one of the foreign wine brands largely dominating the middle- and high-end of the wine market, leaving the rest of the market to low-cost, low-end domestic producers. But that’s no longer the case – we are finally starting to see the appearance of bona fide domestic competition in the Chinese wine market.

The rise of new super-producers

The poster child for this new breed of Chinese wine producer is Changyu Pioneer Wine Company. The company has been around since 1892, making it the country’s oldest and most established winery. And for the past two decades, Changyu has been the undisputed sales leader amongst Chinese domestic producers. And now Changyu is taking the extraordinary step of going head-to-head with the largest and most established foreign wine brands in an effort to carve out its own unique niche in the high end of the market.

One key reason for Changyu’s success is its size – the company has nearly 35,000 hectares of vineyard under management. In comparative terms, that’s approximately one-quarter the size of Bordeaux. And it’s not just that Changyu is big – it’s also investing significant resources in increasing the prestige of its wines. Part of this is simply a PR push – showing world leaders like Angela Merkel of Germany and Vladimir Putin of Russia sipping its wines at official events is part of creating an aura of prestige. Not to mention the fact that Changyu recently spent 70 million Euros to build a Bordeaux-style chateau in the up-and-coming Ningxia wine region, or that Changyu has worked hard to find distribution for its products in elite establishments – ranging from a three-star Michelin restaurant in the UK to a seven-star luxury hotel in Dubai.

The rise of new super-regions

A second major reason for the rise of bona fide domestic competition in the Chinese wine market is the significant efforts being made by both industry and the government to create “super regions” around the nation. Right now, China has 12 different wine regions, but only a handful – such as Ningxia, Xinjiang and Yantai – that really have the potential to become super-regions. Yantai, for example, has already been called “China’s Napa Valley,” and Ningxia has already produced award-winning wines on the world stage.

The real star is Ningxia, a high-altitude, dry region that has been compared to the Mendoza region in Argentina for its climate and ecology, and to Napa Valley for its growing list of world-class wineries producing truly distinctive wines, all nestled within the foothills of the Helan Mountains. This region now boasts 86 different wine chateaux, with that number projected to grow to 100 by 2020. In fact, Ningxia has already established a unique wine tourism and culture plan that will result in the region becoming a wine tourism hotbed. It’s the reason, for example, why Changyu was so willing to commit to a 70 million Euro chateau. (It’s not just Changyu that’s investing in the region, either. Both LVMH and Pernod Richard have invested in the region.)

And for now, all the buzz and investment surrounding Ningxia appears to have to pay off – wineries located near the Helan Mountains in Ningxia have picked up 60 Gold and Silver medals at the Concours Mondial de Bruxelles (CMB) and another 20 gold and silver medals at the Decanter World Wine Awards.

Evolving business models

The big question, of course, is whether the average Chinese consumer will actually pay the equivalent of $15 per bottle of wine from a domestic producer. According to data from the China Alcoholic Drinks Association, 80% of all wines sold in China retail for less than $15. And only a tiny fraction – approximately 5% - retail for above $20 per bottle.

Historically, that means that big foreign producers – especially the big Bordeaux and Burgundy brands – have dominated the high end of the market, Until recently, if Chinese consumers wanted to splurge on a $20 or $30 bottle of wine, it meant buying a big, bold French red wine from a prestigious producer.

But here’s what has changed – the slowing pace of growth in the Chinese economy since 2014 is also having a slowing impact on foreign wine sales. And domestic producers are becoming a lot smarter about how to tweak their business models to keep up with foreign producers. For example, one strategy is to import bulk wine from a foreign winery, and then use that as part of a proprietary blended wine that is marketed and branded as a Chinese wine.

Another strategy is to leverage the OEM (original equipment manufacturer) model for the wine industry and create a completely private label wine that can be tailored to the buying characteristics of any retailer or brand. That helps to explain why there are now 1 million wines available for sale in China – domestic producers have found a very compelling way to appeal to consumers looking for the literally “one in a million” bottle of wine.

Solving the quality problem once and for all

During the 1990s and the early 2000s, Chinese domestic producers suffered from a quality problem. The state of industrial infrastructure was relatively undeveloped, a vibrant middle class had not yet emerged, and the application of cutting-edge science and technology to boost both yield and quality was relatively uncommon. That led to a situation where low-end “plonk” flooded the marketplace, bringing down the reputation of domestic producers.

But the Chinese government has stepped in, prohibiting the sale of “half-juice wine,” slashing trade barriers to doing business, and dedicating significant resources to helping new wine regions get off the ground. As a result, you now have a situation where a wine region like Liaoning – located near the North Korean border – is winning rave reviews for its ice wines.

A new era of competition in the Chinese wine market

Currently, the Chinese wine market is the fifth largest in the world, so it’s perhaps no surprise that the level of competition has really taken off, especially in the past five years. It’s no longer unexpected that Chinese wineries will win medals in competition, or that wine regions like Ningxia will be ranked among the Top 50 places in the world to visit (as the New York Times did in 2013). We’re now seeing the appearance of bona fide domestic competition, and that’s good news for the future health and vitality of the Chinese wine market.