Moutai: Risks Along The Intoxicating River

By Yuanchao Xu 18 December, 2017

As Moutai's stock rises, CWR's Xu reminds us to keep a clear head on its environmental risks to ensure prosperity

Kweichow Moutai (茅台), as the official national liquor of China, is not only famous for its intoxicating bouquet, but also for its continuous stock price increase recently. On 16 November 2017, Moutai reached its highest recorded market capitalisation at RMB900bn – one of the highest among global liquor enterprises.

Moutai’s sparkling results

As one of the most profitable listed companies in China, Moutai has an amazing gross profit margin of over 90%. This high margin can partly be attributed to the low cost of raw materials, which are barley and local sorghum.
The price of local sorghum is RMB7.2/kg, and the price of barley is about RMB1.8/kg. According to a reporter’s investigation, 1 kg of liquor produced by Kweichow Moutai consumes about 2.4kg of local sorghum and 2.6kg of barley. A bottle of Moutai weighs about 0.5kg, so its raw material cost is about RMB10. Yet the price of a bottle of Moutai Flying Fairy (its main product) is RMB1,299. This is a ballpark calculation, but it can to some extent explain the high margins of Moutai.

Would Moutai’s profit margin be >90% if environmental costs were factored in?

However, if environmental costs were factored in, would profit margins still be as high? Take water for example: water is heavily used in the process of liquor-making including heating, cooling, humidification, fermentation and cleaning. Liquor-making also generates wastewater. Plus the cultivation of sorghum and barley also requires water. Can the environment afford this water demand and wastewater discharge?

Moutai’s water risks at a glance – looks good

Kweichow Moutai is located next to Chishui River, one of the branches of Yangtze River. The special climate, geologic configuration, microorganisms, as well as the clear Chishui water, make Chishui basin the best and only place for Moutai.
Apart from Moutai, Chishui basin also nurtures many other famous liquor brands such as Langjiu (郎酒), Huaijiu (怀酒) and Xijiu (习酒). Therefore Chishui River is also called the “River of Intoxicating Liquors” (美酒河).
With the help of WRI’s global water risk map, we can have a rough idea of the current water risk of Chishui River basin. According to the map below left, the baseline water stress of Chishui River is low (<10%), indicating that competition for water is not intensive in the basin. Chishui also has a low to medium drought severity (below right).

But…these maps don’t tell the whole story

These global yearly maps don’t account for the seasonality of the basin and the special characteristics of Chishui’s liquor making industry. Researchers from the meteorological bureau of Guizhou have found that Chishui River’s runoff volume from May to September is much higher than the rest of the year; but the large water consumption of Chishui’s liquor making enterprises starts just afterwards at Chongyang festival (around October).

The basin’s upstream storage is extremely low, which means it’s very vulnerable to water supply variations & droughts

What’s more, as the above maps show, the basin’s upstream storage is extremely low, which means it’s very vulnerable to water supply variations. Once droughts happen, the water extraction activities in the whole basin will be impacted – not just for liquor making enterprises but also agriculture. For instance, a drought in 2013 resulted in a decline in sorghum production and a subsequent increase in prices. Chishui basin’s flood occurrence is also extremely high, which may intensify soil erosion.

Chishui River also faces pollution & ecological pressure

Apart from water stress, Chishui River is facing pollution and ecological pressure. According to Yangtze River Water Resources Protection Bureau’s research on Chishui River basin, Chishui River is suffering from serious water and soil erosion due to long-term over-exploitation and sulphur/zinc refining in the upper reaches, as well as pollution from industrial wastewater in the middle and lower reaches.
Below is a map of main enterprises in Chishui basin. Famous liquor brands lie along the Chishui River, as well as other enterprises with high water consumption, such as paper making, power and leather. According to a recent study, there were already about 400 registered liquor enterprises in Chishui basin in 2013. Moreover, this number is likely to rise, since Guizhou’s provincial government plans to increase liquor production to 800mn litres by 2020. Chishui basin accounts for most of Guizhou’s liquor production: in 2016, Guizhou’s liquor production was 490mn litres, with Renhuai alone (a city in Chishui basin) contributing 330mn litres.

Chishui River is suffering from serious water & soil erosion due to long-term over-exploitation…
 
…this number is likely to rise, since Guizhou’s provincial govt plans to increase liquor production to 800mn litres by 2020

Apart from different enterprises, Chishui basin is also the habitat for at least 1,700 types of plants and more than 350 types of animals, of which about 70 are nationally protected animals/plants. The impact on water quality due to industrial activities can greatly affect these living beings.

Can environmental damage be compensated?

Guizhou was one of the first provinces to introduce an ecological compensation system, and in 2014 the provincial government issued ecological compensation measures. For example, every year, an upstream city (Bijie) receives compensation of about RMB10mn in return for ensuring clean water for downstream reaches. Guizhou’s government and Kweichow Moutai each provide RMB50mn for the environmental protection of Chishui basin as a whole.

Ecological compensation amounts are far from enough…
…insufficient compensation can even indirectly lead to over-exploitation of arable land & more erosion

But it’s still far from sufficient. Pollution control and ecological recovery for just one lake upstream requires about RMB2.6bn, not to mention the whole basin.
Insufficient compensation can cause further negative impacts. Take Wumahe basin, a sub-catchment of Chishui, for instance. To secure the water use of liquor enterprises, industrial development in this upstream sub-catchment was strictly restricted. In 2009, all small paper making enterprises (a key local industry) were shut down to improve the water quality of Wumahe basin. RMB165/month was given to those who lost their jobs as compensation but it was not enough and many returned to farming. As a result, over-exploitation of arable land intensified, leading to more water and soil erosion.
Further compensation measures are still being surveyed and designed. Once these are finalised, another cost will probably be added to the profit statement of liquor enterprises.
It’s easy to get drunk on Moutai’s bouquet or its rising stock price. However, given the water risks and the inadequate ecological compensation system in Chishui River basin, clearer heads need to prevail if we are to continue enjoying Moutai for years to come.

Further Reading

• Hopes & Fears While Remaining Irrationally Exuberant – Spurred by recent news, China Water Risk’s Tan shares her musings from not kidding ourselves, including that tech will solve-all, to adjusting our goals and piercing our irrational bubbles to bring down waste
• Fashion Headlines This Festive Season – With lots happening in fashion over the last quarter, China Water Risk’s Dawn McGregor shares what is making her hopeful but also fearful. Plus, see what she says is forcing the industry to develop a new relationship with pollution
• Aquaculture: 8 Fishy Facts – Think because we get fish from water that its “Fish forever more”( 年年有“鱼”)? China Water Risk’s Woody Chan shares 8 must-knows on aquaculture that will make you re-think this
• Making Glaciers On Top Of The World – We sat down with Sonam Wangchuk, the real-life Phunsukh Wangdu of the Indian movie ‘3 Idiots’, to learn why he is and what challenges there are to overcome in creating artificial glaciers, known as Ice Stupas
• A Chinese Model For Foreign Aid – As the US & the EU retreat from their foreign-aid commitments, Professor Asit K Biswas and Kris Hartley from the Lee Kuan Yew School for Public Policy see this as an opportunity for a new and willing aid champion, China. See why

• Water In: Beer, Crisps & Chocolate – Food & drink help create a festive atmosphere in Christmas but how much water do they use? China Water Risk’s Woody Chan looks into the water footprints of beer, chocolate & crisps, the impact on China & potential solutions
• Can China’s “Milky-ways” Continue? – Consumption of dairy products in China has notably increased over the last 16 years. China Water Risk’s McGregor, Li & Chan take a look if these “milky-ways” can continue and also how much leading dairy companies (Chinese & foreign) are disclosing
• Glacial Bottled Water: A Threat To Asia’s Water Tower? – The growing fad of glacial bottled water means the industry is encroaching on glaciers crucial for Asia’s waterways. In China, this expansion is odds with President Xi’s wish for an ‘ecological civilisation’. CWR’s Liu on who’s bottling where