MAY 3, 2019

Zurab Kapanadze, Anania Devsurashvili, Mariam Jangulashvili, Keti Kurtsikidze, Nino Khatiashvili

CALIFORNIA WINE
CLUSTER
Paper of Speyer Group
 Introduction
US state of California is highly developed region with very diverse economy and
highly advanced industries and production. One of such spheres is wine production. While
Wine industry was present in California for a long time, recently, The Golden State has
become one of the leading producers of wine in the world with numerous institutions
serving its advancement. It is also, interestingly one of the economic clusters that porter uses
in his examples.

During this presentation we shall discuss the California wine cluster. First, we shall
proceed with demonstrating this cluster according to Porters model, after which we shall
analyse the cluster map which he offered. Next, we shall compare California with France and
Australia in regards of wine production and analyse the reasons behind stagnation that
occurred in franc in regarding this sector and advancement of Australia. After this
comparison we shall analyse the role that Government plays and can play to further advance
said cluster, with latter part will be in form of recommendations.
 California wine cluster according to Porter’s diamond model
Porter’s diamond model lies in four broad attributes of a nation, attributes that
individually and as a system constitute the diamond of national advantage. These attributes
are: 1. Factor conditions; 2. Demand conditions; 3. Related and supporting industries; 4. Firm
strategy, structure and rivalry.
1. Factor conditions – the nation’s position in factors of production, such as skilled
labour or infrastructure, necessary to compete in a given industry, land, natural
resources and capital.
We should start with the workforce of the cluster in California where vineyard
operators typically sought to rehire the same migrant workers every year in order
to minimize training costs. Salaries were given to the workers according to their
experience and skills. Several viticulturists and winemakers in California had
graduated from the Department of Viticulture and Enology at the state-run U.C.
Davis, one of the world’s leading wine research institutions. It offered formal
research programs and specialized courses of study related to wine production
techniques with considerable input from the scientific disciplines of chemistry,
biology and genetics. The institute had supported research into the health benefits
of wine and was promoting efforts to position wine as the “time-honored drink of
civilized life” in the minds of both consumers and regulators. Three other state-
run universities, U.C. Berkeley, U.C. Riverside and Fresno State also offered
highly regarded programs. Wineries had extensive apprenticeship programs of
their own that trained new winemakers in all aspects of the winemaking process.
Most California wine grape growers were located in three broadly defined areas –
North Coast, Central Valley and Central Coast. The North Coast, which included
Napa and Sonoma Counties, was perceived by most industry experts to have the
state’s best combination of soil, climate, sunlight, topography and water for wine
 grapes. The Central Valley was hotter and generally less ideal. The terroir of the
cooler Central Coast fells somewhere between two other regions. Its reputation
had improved dramatically since the 1980s and was quickly approaching the
quality of the North Coast in the eyes of some experts.
The most important factors of production are those that involve sustained and
heavy investment and are specialized. Competitive advantage results from the
presence of world-class institutions that first create specialized factors and then
continually work to upgrade them. In our example, there was a research
institution - Viticulture and Enology Department at the University of California at
Davis. Though much of the innovation took place at the wineries themselves, U.C.
Davis helped introduce several new technologies such as mechanical harvesting,
drip irrigation and field grafting. There were also very influential trade
associations in the cluster, for example, the California Association of Winegrape
Growers (CAWG). Founded in 1974, CAWG included both wineries and
independent growers that together accounted for half of the state’s wine grape
production. The association played an active role in state and federal lobbying and
sought to promote quality wine grape production through activities such as best-
practice dissemination.
2. Demand conditions – the nature of home-market demand for the industry’s
product or service. A nation’s companies gain competitive advantages if domestic
buyers are the world’s most sophisticated and demanding buyers for the product
or service. Sophisticated, demanding buyers pressure companies to meet high
standards, to innovate and to upgrade into more advanced segments.
Prohibition (a legal ban on alcoholic drinks), which lasted from 1920 to 1934,
nearly wiped out the art of quality winemaking in the United States. Vintners
survived by making grape juice and sacramental or medicinal wines. As
prohibition came to an end, the Depression hit the U.S. economy. Winemaking
 did not regain steam until the Second World War when the U.S. was largely cut
off from European sources. Demand for low quality sweet and fortified wines such
as Thunderbird fueled California production throughout the 1940s and 1950s. The
onset of the 1960s sparked a renewed interest in wine as young people were eager
to experiment and were attracted by wine’s “of the earth” image. Most wineries,
led by E&J Gallo in California’s Central Valley, produced inexpensive, generically
blended “jug” wines that appealed to contemporary American tastes. The Robert
Mondavi Winery, founded in 1966, was widely credited as America’s first
“premium” commercial winery and had been the first new winery to appear in
Napa Valley since the 1930s.
Bottle shape and labeling had a significant influence on customer’s perception of
quality. Bolder labeling and design were typically used for lower premium and jug
wines in an attempt to differentiate them from the ever-increasing number of
brands on store shelves. Higher-end wines were packaged conservatively in order
to portray a refined image.
3. Related and supporting industries – The third broad determinant of national
advantage is the presence in the nation of related and supporting industries that
are internationally competitive. International competitive home-based suppliers
create advantages in downstream industries in several ways. First, they deliver the
most cost-effective inputs in an efficient, early, rapid and sometimes preferential
way. Far more significant than the mere access to components and machinery,
however, is the advantage that home-based related and supporting industries
provide in in innovation and upgrading an advantage based on close working
relationships. Suppliers and end-users located near each other can take advantage
of short lines of communication, quick and constant flow of information and an
ongoing exchange of ideas and innovations. However, a nation need not be
competitive in all supplier industries for its companies to gain competitive
 advantage. Companies can readily source from abroad materials, components or
technologies without a major effect on innovation or performance of the
industry’s products.
In case of California wine cluster, while best known for its leadership in
aerospace, biotechnology and computer hardware and software, the state had been
the largest agricultural producer in the United States for more than 50 years. In
addition to agriculture, food processing had developed as a major area. California
had also established a reputation for gourmet restaurants and gourmet food.
Another major sector, tourism, generated an estimated $60 billion in annual sales
and employed 670,000 people. California attracted more visitors each year than
any other U.S. state. The cluster also had its own research institution, relevant
universities and trade organizations (considered above in factor conditions).
4. Firm strategy, structure and rivalry - national circumstances and contexts create
strong tendencies in how companies are created, organized and managed as well
as what the nature of domestic rivalry will be. No one managerial system is
universally appropriate. The presence of strong local rivals is powerful, stimulus to
the creation and persistence of competitive advantage. Geographic concentration
magnifies the power of domestic rivalry. The more localized the rivalry, the more
intense. And the more intense, the better.
In California raising consumer demand for wine in the 1970s and early 1980s
attracted new competitors. Of NAPA’s 140 wineries in 1986, 90% had been
founded after Mondavi. Hoping to leverage their mass market capabilities, large
corporations, including Coca-Cola, Pillsbury, Seagram’s and Nestle also entered
the industry through acquisitions.
Science and technology played a vital role in bridging the quality gap between
European and California winemakers. Traditionally, European vintners had relied
heavily on feel and time-tested practices. California winemakers of the 1960s and
 1970s began using quantitative analysis and new techniques to produce higher
quality, more consistent wines. Innovations flowed rapidly among the state’s
vintners, especially in Napa, where most of the major wineries were located side-
by-side along State Highway 29 and its eastern parallel, the Silverado Trail.
Though much of the innovation took place at the wineries themselves, U.C. Davis
helped introduce several new technologies such as mechanical harvesting, drip
irrigation and field grafting.
The interactions between the primary factors that determine the overall development
of the wine industry in California is demonstrated on the cluster map (in presentation).
Firstly, we have two core spheres that are heavily interdependent on each other:
winegrowing and wineries. The interdependence is that wineries naturally need grapes, a
raw resource in this case, to produce wine, while winegrowers’ profit and income heavily
depends on wineries.

These two core segments in turn are influenced by two major factors: One of the
primary factors are government policies in relations of the sphere. This may be manifested as
various actions and decisions, be it subsidies for the industry, certain legal frameworks that
would support development of the winegrowing on specific area and other means. Generally
governmental support is essential for the development of the industry, although improper
governmental intervention may lead to severe problems sooner or later. On the other hand,
we have non-governmental actors that participate in advancement of this sphere, by means
of Education, Research and Trade. Technological and Scientific progress is one of the vital
parts of development of any kind of industry, including wine production. From producing
new variations of vineyards to improving machines of harvesting grapes and producing wine,
all serve to increase production efficiency of said industry.

Hereafter, two core spheres are affected by various different factors: Vineyard growth
is affected by factors such as Grapestock denoting existing grape supplies that in turn
determine demands on Grapes, chemicals and fertilizers that affect the potential harvest by
both supporting growth of grapes and preventing it being affected by diseases. The lions
share on potential harvest however, comes from technologies available to farmers. This
includes both Irrigation Technology, that is especially important for California that is largely
arid region, and harvesting equipment, reducing manpower demanded for harvesting and
making the process much cheaper.

Winemaking sphere is likewise affected by several factors that may be divided into
two parts. First would be the cost of producing, bottling and advertising wine. This includes
winemaking equipment, barrels, bottles, corks etc (general material requirements) alongside
advertising. The second part is factors determining the demands on wine that are shown, on
this map, to be Tourist and Food clusters.

It must be noted, however, that while the map demonstrates the general factors quite
well, it may not show them in its fullness and may miss several vital parts as well. For
example, one of the factors missing from the list, affecting Vineyard growth, is Land, which
is vital due to various reasons. Land size, its composition, and other natural factors are one of
the factors that determine potential harvest, specific taste and other characteristics of the
grape and hence, profit of said industry.

Clusters that determine demands are also seen to be missing some aspects that would
perhaps be optional to be included. This may range from major factor such as Global
demand, that may push producers to bottle more wine for export, to relatively minor and
factors, such as, for example, religious composition of the region (example for the influence
of this factor: Wine is required for Christian rituals and services, that would naturally
increase demands and don’t fall in either “Tourism” or “Food” categories).

Nevertheless, such cluster maps cannot always contain full information and several
factors are strongly overlinked with each other to the point that it may even be confusing to
show said connections with diagrams. Hence, they are minimalized but to the point that
viewer and analyst may still get the basic information from it.

History of development of wine industry in California

To analyse the development of California wine cluster and its emergence as one of the
prime wine producing regions, we should analyse its history.

While wine was produced in California since Spanish colonization, it largely

developed after conquest of the region by United States, followed by California Gold Rush,
due to which, region saw massive influx of immigrants and had a major effect on the
geography, economy, and history of wine growing in California. The Gold Rush brought
people to Northern California, many of whom arrived and settled in San Francisco (whose
population grew from 1,000 to 25,000 between January 1848 and December 1849). This
resulted in a significant increase in demand for wine and spurred wine production in the area
within 100 miles of San Francisco. The 1850s saw planting and wine production expand in
earnest in many parts of Northern California. Many of these are still major centres of wine
cultivation and production.

Newly arrived immigrants both from other US states and Europe contributed to the
growth of newly emerging industry. In the 1850s and 1860s, AgostonHaraszthy, a Hungarian
soldier, merchant and promoter, made several trips to import cuttings from 165 of the
greatest European vineyards to California. Some of this endeavour was at his personal
expense and some through grants from the state. Considered one of the founders of the
California wine industry, Haraszthy contributed his enthusiasm and optimism for the future
of wine, along with considerable personal effort and risk. He founded Buena Vista Winery
and promoted vine planting over much of Northern California. He dug extensive caves for
cellaring, promoted hillside planting, fostered the idea of non-irrigated vineyards and
suggested redwood for casks when oak supplies ran low. As home to both Buena Vista
winery, California's oldest commercial winery, and Gundlach Bundschu winery, California's
oldest family-run winery, the Sonoma Valley is known as the birthplace of the California
wine industry.

In 1863, species of native American grapes were taken to Botanical Gardens in

England. These cuttings carried a species of root louse called phylloxera which attacks and
feeds on the vine roots and leaves. Phylloxera is indigenous to North America and native
vine varieties had developed resistance. European vines had no such evolutionary protection.
By 1865, phylloxera had spread to vines in Provence. Over the next 20 years, it inhabited and
decimated nearly all the vineyards of Europe. Many methods were attempted to eradicate
phylloxera but all proved temporary and none economical. Finally, Thomas V. Munson, a
horticulturist in Texas, suggested grafting the European vinifera vines onto American riparia
rootstocks. So, there began a long, laborious process of grafting every wine vine in Europe
over to American rootstocks. It was only in this manner that the European wine industry
could be retrieved from extinction. In 1879 Captain Gustave Niebaum established Inglenook
Winery in Rutherford, California a small village (in Napa County, California). It was the first
Bordeaux style winery in the USA. Captain Niebaum's wines became world-renowned. His
Inglenook wines won gold medals at the World's Fair of Paris in 1889. During the period
when the Europeans were contending with phylloxera, the American wine industry was
flourishing. By 1900, America had a fully developed and proud commercial wine producing
business. Many California wines received medals in European competitions. Barrels of
California wine were being regularly exported to Australia, Canada, Central America,
England, Germany, Mexico and Asia.

As we can see here, California wine industry flourished due to both rapid
development of the region, favourable geographical conditions and general weakening of the
European contenders due to new disease. But everything was damaged due to prohibition
from 1920-1934 and even after its abolishment the sector was severely damaged and didn’t
really recovered for decades to come.
 André Tchelistcheff is generally credited with ushering in the modern era of
winemaking in California. Beaulieu Vineyards (BV) founder and owner Georges de Latour
hired Tchelisticheff in 1938. He introduced several new techniques and procedures, such as
aging wine in small French Oak barrels, cold fermentation, vineyard frost prevention, and
malolactic fermentation.

In 1965, Napa Valley icon Robert Mondavi broke away from his family's Charles Krug
estate to found his own in Oakville, California. It was the first new large-scale winery to be
established in the valley since before prohibition. Following the establishment of the
Mondavi estate, the number of wineries in the valley continued to grow, as did the region's
reputation. Some California wine makers began to produce quality wines but still had
difficulty marketing them. Frank Schoonmaker, a prominent journalist and wine writer of
the 1950s and 1960s introduced the German idea of labelling wines using varietal (Pinot noir,
Chardonnay, Riesling) rather than semi-generic names borrowed from famous European
regions (Burgundy, Chablis, Rhine, etc.). Overtime, Californian wine became popular
worldwide. It was said that that "until the exploits of California's modern pioneers of the
1960s and '70's, no-one had ever before challenged the right of Europe's, and in particular,
France's vineyards, to be regarded as the only source of great wine in the world."

So, to summarise the overview of the history, advancement of California, as one of

the prime centre of wine industry did not depend on a single factor, rather it was a complex
development dependant on several factors, including rapid development of California after
Mexican-American war and Gold Rush, decline of European wine production due to diseases
affecting vineyards and most importantly, presence of strong institutions that supported
research and innovative approach towards the subject matter. Later may be of paramount
importance, which will be clearly demonstrated once we compare Californian and French
wine clusters.
 Case of France

One of the critical differences between French and Californian policy towards the
industry was their opinions regarding technologies and scientific development. California has
several educational and research institutions that extensively research new technologies
varying from increasing harvest to producing wine, and The Wine Institute founded since
abolishment of prohibition had strong influence and lobby in federal government. Though
much of the innovation took place at the wineries themselves, U.C. Davis helped introduce
several new technologies such as mechanical harvesting, drip irrigation, and field grafting.
Meanwhile France was more conservative on approach towards new technologies. France
had long-established apprenticeship programs at individual vineyards and winemaking
establishment. What was more important, however, is that the French shunned upon
Californian scientific and mechanical approach towards wine production. Naturally this
doesn’t mean that there were no implementations of new technologies at all, and yet it
severely hindered by such approach.

The second main difference is size of wineries and labour prices. French wine
producing companies were traditionally smaller and didn’t bottle and store wine themselves.
In this case, the “Negociants” played an intermediate role, purchasing bulk wines in the open
market and then handling blending, bottling, and marketing. This partially decreased the
potential profit. Alongside this there are also different prices. While France has high labour
price, Californian wine producers had immigrants as cheap labour source for vineyards.

Lastly, there were policies by EU regarding wine market. France and other European
countries periodically had overproduction due to which EU issued subsidies of approximately
1 billion dollars in 1997. New vineyard planting of table wine grapes was prohibited and re-
planting of existing vineyards was allowed only every eight years. Most EU support went to
subsidized “grubbing-up” of lower quality vineyards, having permanently removed over 1.2
million acres from production by the middle of 1998. As a result, the overall acreage in
France and other European countries was declining though the areas devoted to VQPRD
wines were increasing. In addition, mandatory and voluntary distillation, which transformed
wine into alcohol for human consumption or fuel, removed wine from the open market. In
France, over 20% of wine production went to distillation or further processing. Other
support and output reduction devices included mandatory storage of wine for up to nine
months in anticipation of distillation and aid for the conversion of grape must into grape
juice for human and animal consumption. Some experts believed that the EU’s tight control
over yields and wine production prevented or at least reduced the incentives to experiment
with new varietals and wine types.

Overall, relative decline of French wine industry is mainly the result of shunning on
innovations and mechanization, relatively small size of wine producing companies and strict
control of the sector by EU.

Case of Australia
Similarly to California, Australia is ne of the New World nations that recently
emerged as one of the leading wine producing countries.

The first grape vines were introduced to Australia in the late 1700s, but it was not
until the mid-1800s that significant wine production took place. Wine cuttings from the
Cape of Good Hope were brought to the penal colony of New South Wales by Governor
Phillip on the First Fleet (1788). An attempt at wine making from these first vines failed, but
with perseverance, other settlers managed to successfully cultivate vines for winemaking,
and Australian made wine was available for sale domestically by the 1820s. In 1822 Gregory
Blaxland became the first person to export Australian wine, and was the first winemaker to
win an overseas award. In 1830 vineyards were established in the Hunter Valley. In 1833
James Busby returned from France and Spain with a serious selection of grape varieties
including most classic French grapes and a good selection of grapes for fortified wine
production. Wine from the Adelaide Hills was sent to Queen Victoria in 1844, but there is no
evidence that she placed an order as a result.

As with California, lion’s share of development of wine cluster of Australia depended

on immigration from European nations. Migrants brought various traditions and knowledge
of wine production. Hence, quality of Australian wine was much improved by the arrival of
free settlers from various parts of Europe, who used their skills and knowledge to establish
some of Australia's premier wine regions. For example, emigrants from Prussia in the mid-
1850s were important in establishing South Australia's Barossa Valley as a winemaking
region. In smaller scale, winemakers from Switzerland also helped in establishing Geelong
wine region in Victoria in 1842. Through the mid-1960s, few premium grape varietals were
grown, and the country produced primarily bulk wines. migrate into the country and the
general prosperity of Australians improved, wine consumption and production began to
climb.

Asides this, and again, as it is in case of California, Australian winemakers and

policymakers credited much of the wine industry’s success to heavy investment in and
reliance on innovations in viticulture and winemaking technology. Scarce water resources
stimulated much of this activity. By the 1990s, Australia had established it self as a cost
competitive producer of high – quality wines, with 3,000 growers and 1,000 wineries.

Early Australian winemakers faced many difficulties, particularly due to the

unfamiliar Australian climate. But because it is also warm, dry, and Mediterranean overall,
making Australia ideal for wine production, they eventually achieved considerable success.
"At the 1873 Vienna Exhibition the French judges, tasting blind, praised some wines from
Victoria, but withdrew in protest when the provenance of the wine was revealed, on the
grounds that wines of that quality must clearly be French. “Australian wines continued to
win high honours in French competitions. A Victorian Syrah (also called Shiraz) competing
in the 1878 Paris Exhibition was likened to Château Margaux and "its taste completed its
trinity of perfection." One Australian wine won a gold medal "first class" at the 1882
Bordeaux International Exhibition and another won a gold medal "against the world" at the
1889 Paris International Exhibition. That was all before the destructive effects on the
industry of the phylloxera epidemic.

Australia had higher labor costs. However, land prices were generally lower.
Australia’s growth in the world export market had been nothing short of remarkable. The
country’s export in value term had grown 36% annually from 1985 to 1997. Australia’s
export value per gallon over much of the same period had exceeded both the U.S. and Chile.

As with most industries based on perennial crops, the wine industry is cyclical in all
wine-producing countries. Even though Australia’s area under vine has grown at about the
same pace as the country’s total crop area on average since the mid-19th century, and its
wineoutput has grown only marginally faster than total gross domestic product, around those
long-run trends have been several distinct production cycles.

Australia had established Wine Bureaus in several countries including the United
Kingdom, The United States, and Germany to coordinate promotional activities. An
important part of natural resource capital pertinent to wine is terroir, which refers to various
aspects of climate, topography, soils, geology, etc. that determine the quality of the wine's
growing environment. Experience has determined the best sites and most-suitable grape
varieties in long-established wine regions, while in new regions and where climate is
changing rapidly, science is being used to speed the selection process (Gergaud and
Ginsburgh 2008). The conventional wisdom is that winegrapes grow best between the 30°
and 50° temperate latitude bands where rain is concentrated in the winter and summer
harvest times are dry. Southern Australia is one of relatively few regions of the world with
those climatic conditions.

Technologies are certainly transferable across countries, and for wine that
transferability process has accelerated over the past two decades via both fly-in/fly-out
vignerons and foreign direct investments. But new technologies in agriculture tend to be
developed to save the scarcest factor of production, as reflected in relative factor prices. new
labour-saving technologies can help high-wage countries remain competitive in winegrape
growing. For countries whose trade costs are too high for their wines to be internationally
tradable, production is determined by the domestic demand for wine – which historically has
differed greatly across countries, even controlling for income differences (Holmes and
Anderson 2017b). Domestic demand also is relevant to smaller firms unable to cover the fixed
cost of entering export markets, and even to a complete industry if it is too small to be able to
afford generic promotion abroad. For these reasons the size of the domestic market can be a
contributor to an industry’s productivity and hence competitiveness (Linder 1961, Krugman
1980), and can help explain a home-country bias in wine demand (Friberg et al. 2011)

To sum up, Australian wineries – like other New World producers – were able to
benefit from the production losses in Europe due to the phylloxera outbreak in the half
century prior to World War I. Also, the interwar period exports were artificially stimulated
by an export bounty plus a UK tariff preference, which favoured exports of low-quality
fortified wines at the expense of higher-quality table wines. Those exports promptly
collapsed when those supports were removed in 1947. Furthermore, the wool boom of the
early 1950s and the mining boom of the latter 1960s and 1970s reduced the international
competitiveness of other tradables industries including wine, as did import quota and tariff
protection to Australia’s least-competitive manufacturing industries through to the 1980s.
Mining’s impact on the real exchange rate again dampened the wine industry’s export
performance increasingly through the first dozen years of thepresent century. And last, the
tariff import protection and relatively low excise taxation of wine and brandy shielded the
wine industry somewhat from international competition, which would have slowed the
speed with which the quality of the domestic industry’s exports converged on the global
quality frontier.
 In conclusion, global demand for Australian wines shows no signs of waning with
Australian wine exports continuing to experience strong growth in both value and volume.
Overall, Australia is experiencing its highest export value growth rate in 15 years. China
remains the fastest growing market for a sixth consecutive year with continued domination
of the export market. With the support of the Australian Government’s $50 million Export
and Regional Wine Support Package, contributing to a growth of 66% in export value to a
total of $1.005 billion in 2018, cracking the $1 billion mark for export to a single country.
China paid an average $5.71 per litre, up by 11% from the previous year, and is the strongest
market for Australia’s premium wines.

Government’s role in increasing companies’ competitive advantages

Government’s proper role is a catalyst and challenger; it is to encourage or even push
companies to raise their aspirations and move to higher levels of competitive performance.
Even through this process may be inherently unpleasant and difficult. Government can’t
create competitive industries; only companies can do that. Government plays a role that is
inherently partial, that succeeds only when working in tandem with favorable underlying
conditions in the diamond (Diamond Model according to Michael E. Porter which will be
considered below). Still, governments’ role of transmitting and amplifying the forces of the
diamond is a powerful one. Government policies that succeed are those that create an
environment in which companies can gain competitive advantage rather than those that
involve government directly in the process, except in nations early in the development
process. It is an indirect, rather than a direct, role.
There are some simple basic principles that governments should embrace to play a proper
supportive role for national competitiveness: encourage change, promote domestic rivalry
and innovation. Some of the specific policy approaches to guide nations seeking to gain
competitive advantage include the following:
1. Focus on specialized factor creation - mechanisms such as specialized apprenticeship
programs, research efforts in universities connected with industry, trade associations
activities and most important the private investments of companies ultimately create
the factors that will yield competitive advantage.
2. Avoiding intervening in factor and currency markets - by intervening in factor and
currency markets, governments hope to create lower factor costs or a favorable
exchange rate that will help companies compete more effectively in international
markets. Evidence from around the world indicates that these policies are often
counterproductive.
3. Enforce strict product safety and environmental standards - strict government
regulations can promote competitive advantage by stimulating and upgrading
domestic demand. Stringent standards for product performance, product safety and
environmental impact pressure companies to improve quality, upgrade technology
and provide features that respond to consumer and social demands.
4. Sharply limit direct cooperation among industry rivals - under certain limited
conditions, cooperative research can prove beneficial. Projects should be in areas of
basic product and process research, not in subjects closely connected to a company’s
proprietary sources of advantage. They should constitute only a modest portion of a
company’s overall research program in any given field. Cooperative research should
be only indirect, channeled through independent organizations to which most
industry participants have access.
5. Promote goals that lead to sustained investment – government has a vital role in
shaping the goals of investors, managers and employees through policies in various
areas. The manner in which capital markets are regulated, for example, shapes the
incentives of investors and in turn, the behavior of companies. Government should
aim to encourage sustained investment in human skills, in innovation and in physical
assets.
6. Deregulate competition - regulation of competition through such policies as
maintaining a state monopoly, controlling entry into an industry, or fixing prices has
two strong negative consequences: it stifles rivalry and innovation as companies
become preoccupied with dealing with regulators and protecting what they already
have; and it makes the industry a less dynamic and less desirable buyer or supplier.
7. Enforce strong domestic antitrust policies - real national competitiveness requires
governments to disallow mergers, acquisitions, and alliances that involve industry
leaders. Companies should, however, be allowed to acquire small companies in related
industries when the move promotes the transfer of skills that could ultimately create
competitive advantage.
8. Reject managed trade - managed trade represents a growing and dangerous tendency
for dealing with the fallout of national competitiveness. Orderly marketing
agreements, voluntary restraint agreements or other devices that set quantitative
targets to divide up markets are dangerous, ineffective and often enormously costly to
consumers.

Potential Actions for Further Development of the sector

1. Promotion of California wine productions abroad in order to increase the number of

exports

California wines accounted for 90% of the total value of U.S. wine exports. Roughly
8% of California wine production volume was shipped overseas, nearly all of which
passed through the Port of Oakland, just east of San Francisco. Most wineries employed a
relatively small international sales force, relying heavily on national and regional
importers for brand development and marketing. A few wineries had established
distribution companies abroad. Though the value of U.S. exports had grown 25%
annually from 1985 to 1997, U.S. wines had tiny market shares in many of the largest
wine markets in the world, especially in major wine producing countries such as France
and Italy.

California wineries typically faced higher tariffs and retail sales taxes abroad than
foreign rivals did selling into the United States. Tariff rates can roughly $0.75, $0.15 and
$0.05 per bottle in Japan, the European Union and the United States, respectively. Excise
taxes ranged from negligible amounts in France and Italy to $1.85 per bottle in the
United Kingdom. Sales tax or VAT rates were also typically higher, ranging for example
in the European Union from 5% to 25%.

The U.S. Congress had recently revamped export promotion assistance for U.S.
wineries, shifting more dollars toward collective marketing programs operated by the
Wine Institute and away from individual wineries. Total export assistance was budgeted
for $4.5 million annually with almost 75% going to the Wine Institute. The remaining
25% was allocated to small and medium-sized wineries (less than 500 employees) who
also spent matching funds of their own. Expenditures on export promotions typically
involved trade shows and advertising in target markets.

Despite the latter fact California wine cluster still was not advanced in carrying out of
exports worldwide in comparison with other important winemaking industries abroad
according to the above-mentioned circumstances and indicators.

The California state government and the Federal government of the United States, for
solving this problem, could intensify the promotion of Californian wine worldwide and
the cooperate with international actors and large-scale winemaking countries on more
intense and consistent basis.

By increased cooperation on international level the cluster will be able to get more
favorable conditions with regard to lower tariffs and costs that are related to exporting of
goods. This cooperation can be achieved partly by promotion of the cluster in the world
which should be implemented incrementally and gradually. There can be a great variety
of the means for promoting the wineries, such as creation of the online platform of the
California wine cluster where a lot of attractive advertisements and interesting short
videos will be placed about uniqueness of California winemaking and California wine
productions.

2. Facilitating the development of start-up businesses to widen the California cluster

The Federal government should facilitate young people to start a business. Individual
motivation and commercial talent are very important and a scarce resource in any nation.
A nation’s success largely depends on the types of education its talented people choose,
where they choose to work and their commitment and effort. Individual motivation is
essential for any kind of business development, which can be hindered due to several
factors, be it asymmetrical information, monopolies, heavy costs for starting business,
exhausting legal framework and so forth, all of which demotivate the future producers to
invest in the business. Following this general knowledge, Government should create
system which allows entry of the new players on a field, as well as giving them sufficient
resources for starting business, be it financial (grants or low interest loans) or other kind
of materials.

3. A Coordinated and planned mechanism for distribution of wine productions and

solving the problem of direct shipment

The distribution of alcoholic beverages in the United States was tightly regulated. The
twenty-first amendment to the U.S. Constitution, which repealed Prohibition in the
1930s, gave states the right to regulate the consumption, production, importation,
distribution and retail sale of the alcoholic beverages. Winery executives often
commented that distributing wine in the United States was like “selling to fifty different
countries.” In most states, alcoholic beverage producers were not allowed to ship
products to either resellers or consumers in other states unless they had a physical
presence (usually a distillery or winery) in that state. This had created a legally mandated
“three-tier system” (producer to wholesaler to retailer) through which almost all alcohol
was funneled.

With the development of the Internet, direct shipping had become a much-debated
topic within the industry. Concerned that wineries would sell directly to underage
drinkers and avoid paying excise taxes, states were becoming tougher on enforcing
existing regulations. Twenty states prohibited all direct sales and a few like Georgia and
Florida had made direct shipping a felony. Another 18 states imposed strict regulations
on direct shipments. Twelve states allowed direct shipments of small quantities of wine
to states that provided reciprocal treatment. The wine industry had lobbied heavily for
fewer restrictions, arguing that states’ rights to control alcohol distribution were in direct
conflict with federal protection of interstate shipping.

As we see from the information given above there is a considerable problem with
regard to interstate shipping in the United States which affect both producers and
consumers. The widely accepted “three-tier system” causes larger costs for consumers and
less profit for businessmen. Interstate shipping, on the other hand, can simplify trading
procedures and facilitate competition between states within wine industries. Taking into
account all of these arguments we recommend Federal as well as states’ Governments to
promote interstate shipment.

4. Further development and research of relevant technologies and advancement of

knowledge of the sphere

Out of all four potential recommendations, the final one may be most vital one as
well. As it was demonstrated in both development history of Californian wine cluster and
its comparison with Australian and French ones, technological advancements of new
world nations and their emphasis on innovation was one of the largest factors for the
development of said industry I these countries, making them one of the leading nations
in wine production. In stark contrast, one of the reasons for stagnation of the French
cluster was their refusal to accept new innovative approaches.

That’s why it is essential for the Federal government to strengthen institutions and
universities which will offer formal research programs and specialized courses of study
related to wine production techniques with considerable input from the scientific
disciplines. In addition, the Government and the universities should work together to
create and carry out special programs or particular competitions which will finance the
most innovative and creative projects about starting new competitive businesses in the
wine cluster.
 References

 On Competition – Michael E. Porter

 Managing Defence in a Democracy – Laura R. Cleary and Teri McConville
 Porter, Michael E., and Gregory C Bond. “The California Wine Cluster.” Harvard
Business School Case 799-124, June 1999. (Revised February 2013.)
 Australian wine industry competitiveness: Why so slow to emerge? - Kym Anderson
 Simpson, J. (2011). Creating Wine: The Emergence of a World Industry, 1840-1914,
Princeton NJ: Princeton University Press.
 Meloni, G. and J. Swinnen (2014). The Rise and Fall of the World’s Largest Wine
Exporter — and its Institutional Legacy, Journal of Wine Economics;