In 1996, Concha y Toro of Chile and Kendall-Jackson of Healdsburg, California both started operations in Argentina's top wine growing region of Mendoza. Ten years later, Trivento (the Concha y Toro subsidiary) is the second biggest exporter of bottled wine from Argentina, exporting to 93 countries. Kendall-Jackson, by contrast, sold off its Tapiz brand and left the country.

Foreign investors are now scrambling to grab land in this country, from the chic quarters of Buenos Aires to the Malbec vineyards of Mendoza. The French, in particular, have been enthusiastically buying land, and the Chileans too have started to invest significantly. Driving around the region, it is striking how many new wineries are being built and vineyards planted.

The divergent fortunes of Concha y Toro and Kendall-Jackson, as well as the experiences of other producers, offer insights on how investors, both big and small, can invest for success in one of the world's trendiest wine regions.

Argentina vs. Chile

Argentina lacks a history of exports. Historically one of the world's top wine-producing countries, the abundant production stayed on the domestic market to slake the thirst of one of the largest consumer markets on a per capita basis. This legacy means that there are generations of vineyard workers. The Cabrini family, for example, who sell their grapes to Patrick Campbell, of Laurel Glen Vineyards in Sonoma, are now in their fifth generation of grape growing. This long history means that there are lots of old vines, particularly Syrah and Bonarda.

Only in the 1990s, when an economic policy pegged the peso to one-to-one convertibility with the U.S. dollar, did exports rise both in quantity and quality. This export lag means that the infrastructure of exports-speaking English as well as the logistics-has trailed Chile. And in the new race for quality, it also makes Argentina's vineyards a work in progress, finding the best sites and the best matches for the terroir.

Campbell was attracted by the flavor profile of the wines, particularly the minerality. "There's tons of Cabernet Sauvignon in Chile. The last thing the world needs is another Cabernet. We need more wines of character," he said.

Campbell spends five months of the year in Argentina making two wines, Terra Rosa and Vale la Peña (literally translated as "worth it"). "You can't run an operation there by fax machine from Sonoma," Campbell said.

Citing the export-oriented nature of the Chilean economy, where he also once made wine but no longer does, Campbell said that Americans can feel more comfortable in Chile because English is more widely spoken and "the infrastructure is there for exports." Indeed, he trucks his wine over the Andes to a port in Chile to ship it back to America.

Bordeaux winemaker Francois Lurton, who also makes wine in Chile, said the Chilean climate reminds him of California-the Russian River Valley in particular. He and his brother Jacques are based in Bordeaux but own 500 acres of vineyard in Argentina and also make some wines in Chile.

For Americans it is not just the meteorological similarities with California, it is also the business climate of Chile that is different. "Americans feel more comfortable in Chile because of the mentality," Lurton said. Kendall-Jackson's Calina operation continues in Chile, for example.

Joe Ciatti, a broker of bulk wines and concentrates based in San Rafael, California, has offices in Argentina and Chile. He sends most of his wine from Argentina to Europe, rather than the U.S. "There are no global corporations in Argentina," he said. "Chile has Concha y Toro and Santa Rita and a small domestic base, like Australia, that forces exports."

Going Native

According to Campbell, there's a cultural sensitivity you need in Argentina that you don't need to have in Chile. "You've got to go there, have asado (a barbeque), talk about the family, the weather, have a social beginning to the whole thing and then approach the business side," he said. "You have to build strong personal relationships there in order to be successful. It takes a lot longer to get things done. If you're an impatient American, you'll get frustrated."

The most successful foreign vintners seem to get Argentina under their skin. "California may be the best place in the world to make wine," said Michel Rolland. "But it is a little bit boring. Argentina is fun and the people are great."

Tomás Larraín León, general manager of Trivento, also emphasized the importance of going native. León said that he is the only Chilean at the firm of more than 700 employees. "Our winemaker, our vineyard manager, everyone is from Argentina," he said. "That's why Trivento has a 100 percent Argentine identity." León lives a few minutes drive from the winery with his wife and family.

Francois Lurton agrees about the importance of being there: "Between us, my brother and I visit Argentina nine times a year. I visit with my family. Last year we rode horses over the Andes."

DLJ Merchant Banking (a unit of Credit Suisse), owns Peñaflor, based in Buenos Aires. Peñaflor has diverse holdings that include Trapiche, Bodegas Lavaque and several other wineries that make up Argentina's largest exporter of bottled wine. According to the company's U.S. wine importer, the U.S. owners subsume managerial control to Argentina.

The Chateau Model

Michel Rolland, who has been active in Argentina on a consulting basis for 18 years, also used top local talent to develop his massive Clos de los Siete project starting in 1998. The original seven partners in the project, all from Bordeaux, acquired 650 hectares (1,600 acres) of dirt in the Vista Flores-Valle de Uco area of Mendoza. They poached Carlos Tizio Mayer, an Argentine who trained at the University of California Davis, from Bodegas Norton to be the manager.

The chateau, or castillo, model of winemaking carries risks and costs. Ultimately six wineries will be built among the vines (four have been completed now), which is clearly expensive. Further, planting new vineyards adds further expense, especially when there are many old vines in the region. But Rolland wanted 5,550 vines per hectare, a density that was not available, he said.

Clearly, owning huge assets in a country with a history of hyperinflation is a risk. But since the peso rapidly lost 75 percent of its value against the dollar in 2002, the prevailing sentiment is that the crash provided an excellent buying opportunity. The currency crashed, but the vineyards stayed the same.

The main vineyard risk, which is exacerbated under the Castillo model, is hail. Localized hailstorms can appear from nowhere and can pummel a vineyard. If these come near harvest when the fruit is ripe, the entire crop can be lost. Indeed, many growers plan that they will lose a fifth of their harvest every year because of hail. Many also use some form of hail netting, either a more expensive canopy or a more labor-intensive vine-wrapping.

Thus, many producers sprinkle vineyard holdings throughout the region, spreading the hail risk. But Clos de los Siete has put all its eggs in a 2,000-acre basket, and they don't even use nets.

One way to get around the currency risk is to lease vineyards or to contract with local growers. But on the other hand, owning the land may be an appealing asset play for foreign investors if they are betting on a rebound in the currency.

The Lessons From Kendall-Jackson

For Jess Jackson, the political turmoil and rapid currency devaluation of 2001-2002 proved the final nail in the coffin of the Argentine venture. His Las Vinas de Tupungato, which produced the brands Mariposa ("butterfly") and Tapiz ("tapestry"), was the victim of bad luck as well as tactical errors.

Jackson first started making wine in the 1996 harvest, using local facilities and buying grapes, running the operation from Sonoma. The early harvests were abysmal in quality, drenched with abnormal rain from El Niño in 1998.

"The crusher was half full of water," Kirk Ermisch said of that year's crush. Ermisch was the general manager from 1998 to 2000 and oversaw the building of the winery in Tupungato. He now imports wines from the region with his own company, The Southern Wine Group.

Site selection may have harmed the project. Persistent chatter in Mendoza says that the property was purchased without water rights. On the contrary, Ermisch says that a low-flow well was actually on the site, and a second, deep well was dug. He added that some water was diverted from an irrigation canal after Jackson paid for it to be cemented, which prevents water loss.

Randy Ullom, chief operations office and winemaster at Kendall-Jackson, agrees that water was not an issue. "We purchased four ranches during the course of our stay that came with/without wells and water rights," he said. "Water was never difficult to obtain, contrary to prevailing rumors."

The perception on the ground in Mendoza is that Kendall-Jackson first tried to run the operation from Sonoma and then imported key personnel from California who thought they knew best. Ullom confirms that they "culled talent" from the California operations.

Ermisch claims that the Tupungato winery was "on par with" Catena, a leading exporter, when it was built. Yet the management in Sonoma wanted to make cost-competitive brands while Catena was selling wines for $40 a bottle. The U.S. sales staff did not push the Argentine labels, Ermisch said, since they were busy selling the Vintner's Reserve brand from a new project in Monterrey. The cost of living was expensive for the American ex-patriots when the peso was pegged to the dollar. The numbers weren't working, and then the currency collapsed.

"With no economic assurances from the government anymore, and knowing and having 35 years of experience with South American government, it was clear that the financial future and economic state of this country was nebulous. We had a tremendous degree of commitment up until the government failed with their commitment," Ullom said.

"Jess Jackson never believed in Argentina. The project was fundamentally plagued by a lack of vision," Ermisch said.

Ultimately, in 2001-2002 political turmoil made the peso's peg to the dollar unsustainable. The country defaulted on its debt, the largest sovereign default ever, and let the currency float freely. Because it had been artificially overvalued, the peso promptly fell. Four pesos were soon needed to buy one dollar compared with a one-to-one ratio during the 1990s.

Due to the crisis, Jess Jackson decided it was time to sell, and with the Argentine assets marked down significantly, a wine glut on the U.S. market and an economic slowdown, Jackson decided to cash out rather than double down. He sold the winery to a group of Argentine investors in 2002. The Tapiz brand continues today.

By contrast, Concha y Toro's Trivento used the currency collapse as a time to expand. They purchased new vineyards and now have 980 hectares of vineyards in Argentina. They pushed exports at that time, emphasizing the newfound cost-competitiveness, and expanded on the domestic market to make up for some wineries that were unable to deliver at a time of uncertainty.

"Trivento is a long-term project because we understand that the wine industry needs this kind of vision," León said.

In hindsight, the crisis was a major catalyst for exports. From 1995 to 2001 under the dollar peg, the volume of exports declined or was flat. According to Argentine government statistics, by 2005, global exports were $300 million for two million hectoliters, double the value and volume of four years earlier. The U.S. is the top market for Argentine wines by value with $63 million worth of wine exported in 2005. The U.K. is second with a value of $26 million.

In an irony that is no doubt bittersweet for Kendall-Jackson, the Agrelo area where they built the Tupungato winery and had a vineyard has now become a hotbed of wine activity. Their first vineyard, once remote and isolated at high elevations, is now surrounded by other vineyards.

"In the next five or six years, we will see the potential of Argentina," Rolland said. But will Americans be participating in making wines or just drinking them? wbm