Investment in Argentine Wine Industry

1. Investment in ArgentineWine Industry [Global Economy] Tyler Aldrich, Sun Uk Kim, Boon Young Lee* Seung Hwan Lee, Sung Kyoon Wang Feb 09, 2010 * Afternoon session

2. Executive SummaryArgentina’s wine industry offers attractive investment opportunities • Improving quality and attractive price point of Argentine wine has driven export growth 22% annually since 2001 • Interest in non-traditional wine producers is increasing in the US • Argentina has very good climate for high-quality grapes • Low production costs in Argentina are a competitive advantage • Compared to Chile and Australia, Argentina offers more attractive value proposition for foreign investors • Chile: increasing cost, low domestic consumption, over-supply • Australia: excess vineyard capacity, strong Australian dollar • Throughout the value chain, Argentina’s wine industry offers more opportunities than challenges for investing and expanding the business abroad • Despite attractive investment opportunities, many economic, political, and business risk factors exist. • However, recent attempts by Argentina’s government to attract foreign investment would help mitigate many of these risk factors • Therefore, investment in Argentina should be positively investigated Argentine Wine Industry Comparison Value Chain Risk

3. Argentine wine’s attractive price and quality have driven exports 22% annually Overview of Argentine Wine Industry • Country Statistics • GDP: $558B, #24 in world • Population: 40.9MM, #31 in world • Wine industry • Production: 1.5B litres / yr, #5 in world • Export: 0.4B liters / yr (28% of production) • - Increasing interest on non-traditional wine producers • - Recent Success of Chile and Australia • Price competitiveness • Low Exports compared to production • 22% CAGR since 2001, with 28% growth in 2008 • - Growing market • - Perfect environmental condition for grapes Source: CIA Factbook, FAOSTAT, Team Discussion

4. Chile and Australia are not as attractive as in the good old daysTakeaways from Chile and Australia • Country Statistics • - GDP: $819B / Population: 21MM • Wine industry • - 1.2B litres / yr, #7 market in world • - 0.6B liters / yr, 50% exported annually • - Export growth is 9% per year (2008) • Country Statistics • - GDP: $244B / Population: 16.6MM • Wine industry • - 0.9B litres / yr, #10 market in world • - 0.6B liters / yr, 65% exported annually • - Export growth is -0.3% per year (2008) • Market-oriented policies and high level of foreign trade • Internationally focused regional economy • Active in luring foreign investments • A cosmopolitan and creative cultural environment • Entrepreneurial business environment • Less constraining legislation • Well developed infrastructure • Proactive export policies Macro economy/ Policies Macroeconomic/Policies Macro economy/Policies • Australian wineries are market/growth oriented and technologically advanced wine producers • Foreign investments provided an important impetus to its wine industry. And Australian companies also have controlling interests in France and Chile wineries. • Government provides strong support, focusing on quality and improving foreign trade environment and domestic wine economy. It also operates Grape and Wine R&D center • Tourism played a major role in booting its wine export • Deregulation in the late 1980s brought influx of foreign investments and winemaking talent, resulting in more internationally recognized wines • New brands were product from joint ventures of European / American winemakers and local wineries • Arrival of foreign firms opened access to worldwide distribution channels and increased Chile’s wine image • Knowledge gained from foreign investments transferred to local firms and fostered the entry of entrepreneurs, increasing economic performance of Chilean wine 000 Wine industry 000 • Low domestic consumption • Increasing production cost (land, energy and labor) • Worldwide overproduction, export slowdown • Currently the industry faces an oversupply of wine stock, excess vineyard capacity and strong Australian dollar hurting exports Drawbacks 000 Source: www.wine-economics.org; http://faostat.fao.org/site/636/DesktopDefault.aspx?PageID=636#ancor

5. Throughout its value chain, Argentina’s wine industry offers more opportunities than challenges for investing and expanding the business abroadValue Chain Analysis Assets Acquisition Grape Cultivation Wine Producing Export Distribution Marketing • Separate promotions in fairs by clusters or export consortia • Malbec, Syrah, and, Tempranillo mainly cultivated • Natural resource based industries as agglomerations • Sales largely resting on domestic demand • Difficulty of accessing int’l distribution • Farms in huge expanse of Andes Mt. Chain As-is • Wide and efficient int’l distribution channel • Buzz effects from major tourist destination • Good water quality • Fertile land • Kind climate • Range of different grapes-growing altitudes • Largest Malbec growing country in the world • Pegged Peso to the US Dollars (Favorable Exchange- rate) • Flexible & Cheap Labor in Farming Practice Opportunity Challenges • Lack of variety of grapes • Difficulty of hiring and firing employees • Keeping good wine quality with increasing volume • Lack of Infrastructure for Overseas Logistics • Political Instability • Weak country brand for wine exports Source: EIU (Economist Intelligence Unit) Country Risk Service, Team Analysis

6. H M L Investment in Argentina should be positively investigated since many of risk factors can be mitigatedRisk Analysis Risk Map Mitigation Strategy Risk Current Situation Currency Paying taxes Trading across borders Political Protecting investors Enforcing contracts Exiting country • Possibility for unexpected depreciation due to inconsistent econ. policy • Heavy taxes on larger corporations • $1,480 and 13 days to export a container from Argentina • Upcoming election in 2011 may destabilize current political outlook • Average score in investor protection and director liability index • 36 procedures, 590 days and 16.5% of the claim to enforce disputed contracts • 2.8 years at 12% of asset value, to recover on average 29.8% on one dollar • US dollar is used in Argentina • Try to invest in dollars • Utilize government’s benefit for tax exemption to foreign investors • Utilize financial support for infrastructure and purchase of relevant equipment • Attract government’s support by providing infrastructure, promoting local economy, creating new jobs • Avoid direct investment and consider Joint Venture or Strategic Alliance • Hire local lawyer, establish JV, build up good relationship with government • Assume on-going business • Mapping Methodology • Risk factors from Doing Business (IFC) and Country Risk Service (EIU) • Relevant risk factors selected based on the team discussion • Magnitude of Source: IFC (International Finance Corporation) Doing Business, EIU (Economist Intelligence Unit) Country Risk Service, Team Analysis