The future of travel and tourism in Asia

ASIAN INTELLIGENCE An Independent Fortnightly Report on Asian Business and Politics No. 824

Wednesday April 6, 2011

Foreign Tourist Inflows in 2010 Millions

40

36.03

35

a

31.27

30 24.60

25 20

15.94

15

11.60

10 5

3.52

5.05

5.57

5.58

7.00

8.61

8.80

0

a excludes visitors from Hong Kong and Macao. If they are included, the figure for total visitor

inflows to China in 2010 is 133.76 million.

REGIONAL OVERVIEW ..................... 2

PHILIPPINES ..................................... 11

CHINA .................................................... 6

SINGAPORE ........................................ 12

HONG KONG ........................................ 7

SOUTH KOREA .................................. 12

INDIA ..................................................... 7

TAIWAN .............................................. 13

INDONESIA .......................................... 9

THAILAND .......................................... 14

JAPAN .................................................. 10

VIETNAM ............................................ 15

MALAYSIA .......................................... 10

EXCHANGE RATES ........................... 16

POLITICAL & ECONOMIC RISK CONSULTANCY LTD.

Political & Economic Risk Consultancy, Ltd.

Issue #824 others, for that matter). Most importantly, we would like to look at some of the dynamics and implications for the future shape of the travel and hotel industries that most in these industries are not thinking about because of time constraints.

REGIONAL OVERVIEW The future of travel and tourism in Asia The disaster in Japan will dent the travel and tourism industries in Asia in 2011, but it will not derail it. The region as a whole is still headed for a record year, with the further recovery in airline, hotel and leisure industry profits led by a surge in business class travel and underpinned by steady growth economy-class travel. The pattern will continue whereby growth will be led by Asians traveling within Asia rather than by Americans and Europeans traveling to Asia. The biggest growth of new business in the medium-term will be by nationals of Asia’s largest countries, namely, China, India and Indonesia, traveling within their own countries. The profit margins for this kind of business will be slim since the majority of these kinds of travelers will be extremely budget conscious, but this will be more than made up for by volume gains. Japan’s prospects need to be analyzed separately from the rest of the region, since the disaster has the potential to hit the travel and tourism industries in the country much harder than the impacts of 911, the SARS epidemic and the 2008 global recession combined. For the near future, there will be a lot more demand for seats on planes leaving Japan than flying to there. Hotels will suffer lean times; many have already closed their doors temporarily. Restaurants will be hurt not only by the weak demand but also by fears over food safety. However, Japan’s impact on the rest of Asia is unlikely to be that great. Even before the crisis, the growth of Japanese tourists to other Asian countries was much slower than that taking place by other Asian sources, most notably, China, Korea, India and the ASEAN countries. Visitors from those countries are going to be steering clear from Japan for the rest of this year, but many are likely to choose alternative locations in the region. Our intention with this Regional Overview is not to focus on near-term trends in the travel, hotel and tourism industries or the impact of the Japanese disaster but to take a longer-term view at the driving forces shaping these industries (as well as many

Page 2

In a world where executives are suffering from “black swan fatigue,” senior managers have a good excuse for focusing on matters at hand, not on some far off horizon. However, managers who ignore potential trend changers and forces whose impacts are evident only over the medium term risk finding themselves in the wrong place at the wrong time with the wrong partner in the future. It is important to think outside the box, but to do that requires first knowing what is thinking that is “in the box.” When it comes to the airline, travel and hotel industry, that starts with the premise that the Asian region will lead global growth for the foreseeable future. From the perspective of airlines, in 2009, Asia overtook North America as the largest regional market by a few million passengers with an equal market share of 26%. By 2014, 800 million more people will fly, 360 million of those will be in Asia, bringing its market share to 30%. A slowergrowing North America will see its share slip to 23%. More “in-box” thinking is that within Asia, the most interesting markets of the future still have relatively low per capita GDPs but they are the ones with the biggest populations and are enjoying the most rapid economic growth. This is why companies are looking so hard at places like China, India, Indonesia and Vietnam. Then there is the issue of which countries are doing the most to invest in infrastructure. This includes destination infrastructure like hotels. Consider that Orlando, Florida, home of Disney World, has more hotel rooms than India. Which do you think offers more growth potential in the medium term for the hotel industry? Equally important is the physical infrastructure needed to get visitors from point A to point B. Which countries are doing the most to build new roads, airports, and rail systems? This is one reason why China is so much more interesting even than India and Indonesia. It is doing the most of any country in Asia to build quality infrastructure as fast as possible. Other governments

ASIAN INTELLIGENCE

April 6, 2011

Issue #824

Political & Economic Risk Consultancy, Ltd.

are talking about the big infrastructure dreams they have, but China is the country that is doing the most to act on those dreams. All of these variables discussed so far have a high impact but a relative low-to-moderate level of uncertainty. This makes them critical planning issues and important scenario drivers for any in the travel, hotel and tourism industries (and most others). The devil, however, is in the details – those variables where uncertainty levels are larger. This is where “out-of-the-box” thinking starts coming into play. For example, if so many companies from so many different industries are targeting the same countries for their growth, how will they manage the inevitable labor availability, quality and retention issues that are bound to arise? This holds as much for China as it does for Cambodia. Hotels are not only competing against other hotels for management staff, front-line and back office personnel. They are also competing against banks, professional service firms and other industries for exactly the same labor – industries that frequently are in a position to pay more and to offer better career prospects. It can be very difficult for hotels and others in the travel industry to remain competitive in economies that are enjoying boom conditions for sustained periods. Just look at Australia. In many ways this country is experiencing now what a number of booming Asian economies are likely to experience in the future. Therefore, it is a good country to monitor and from which to learn some lessons about what to expect. The more that Australian workers are attracted to high paying jobs in the mining and finance sectors, the more difficult it will be for service industries like hotels and restaurants as well as for price-sensitive industries like wine-making, agriculture and seafood to get and keep the labor they need. Relying more on outside contractors might become an appealing alternative, but consider the experience of Qantas, the Australian airline, which would like to lay off workers and subcontract certain functions to outside contractors but has been unable to because of union opposition. Instead, the airline is cutting management jobs. Moreover, booming economies are frequently accompanied by appreciating exchange rates (such as what is happening to the Australian dollar today). This can seriously affect price competitiveness in the

April 6, 2011

travel and tourism industry when it comes to attracting international travelers and keeping domestic travelers at home (when their money can go so much further abroad). The answers to these kinds of questions have profound implications for what Asia’s travel and tourism industry will look like in the future. There are other critical questions as well. When hotels and airlines are operating simultaneously in such diverse political systems as those of the US, China, Russia India, Egypt, Russia and Israel, it is quite common to hear senior business executives claim that politics has no place in their business and that they themselves are apolitical. This might be the politically correct response, but it is wrong and probably a lie. Companies that ignore politics and political issues will probably be so badly positioned in the medium term that they will miss the boat. This does not mean executives need to take sides in political debates, but it is vital that they are very much aware of the political dynamics taking place in and between the countries in which they are operating. Those dynamics include national security concerns, the political status of key domestic players, and the potential for radical changes in policy. For example, think how quickly the regional travel and tourism industry could be changed for the better by government or policy changes in North Korea or Myanmar that result in these countries opening up to trade, investment and tourism. The status quo does not deserve a great deal of thought and the downside risks – short of North Korea launching a war – are minimal from the perspective of international airlines and hotels, but a change in the status quo would deserve major attention. The tourism industry in both countries would boom – probably before any other industries. How likely is the status quo to change soon in either North Korea or Myanmar? Perhaps more than many Americans and Europeans are even contemplating. From the perspective of most Americans, for example, Cuba is still off bounds, but many Canadians are already flocking there on vacations. When it comes to Myanmar and North Korea, both countries have relatively good relations with China. It is entirely possible that Beijing might work with these governments to begin the process of economic reform, and that part of this reform might be to open

ASIAN INTELLIGENCE

Page 3

Political & Economic Risk Consultancy, Ltd.

Issue #824

their doors much more to tourists from China. If success breeds success, this could be just what is needed to encourage these governments to open their doors even wider to foreign visitors. Look how quickly the tourism picture changed in Hong Kong and Macao once their political status changed. In 1998, Hong Kong had 10.16 million foreign visitors, of whom 2.67 million or 26.3% were from Mainland China. In 2010, Hong Kong had 36.03 million foreign visitors, three and a half times more than in 1998. Of the total, 22.68 million were Mainland Chinese, 63.0% of the total and eight and a half times more than in 1998. It is the same story for Macao. In 1999 there were a total of 7.44 million foreign visitors. Last year there were 24.97 million. The increase is accounted for almost entirely by Mainland Chinese. Moreover, the major policy changes that took plase were not so much by the Hong Kong or Macao governments but by Beijing. Beijing’s policies toward a whole range of issues are the critical scenario drivers for the future of the airline, tourism and travel industry in Asia. Take the issue of national security from China’s perspective and think how the future for all of Asia could look much different than today. Two of China’s biggest national security concerns are, first, energy security and, second, the vulnerability of major East Coast cities – and by implication the entire economy – to direct military strikes and barricades that block the country’s major deep water ports. The vulnerability of coastal cities is not a new fear. It was why the old KMT government moved its capital to Chongqing when the Japanese invaded and why China’s Communist government focused so much of its initial efforts on developing heavy industry in inland areas like Chungdu instead of along the coast. China is one of the world’s largest countries in terms of geographic areas, but it has remarkably few entry and exit points – all along the East Coast. This has been a serious concern for Chinese leaders for decades, but now that the country has become a global power, the downside risks are much more daunting. Moreover, the more the country develops, the more dependent China is on oil and other commodities that need to be imported. They are vulnerable not only to blockades directed against the major Chinese ports but also to

Page 4

disruption along the narrow sea lanes surrounding Malaysia, Singapore and Indonesia, through which most ships carrying commodities to China must pass. China is likely to address its energy security concerns in several ways. First, it cannot be wasteful in using oil and other commodities, since the more of these commodities it uses, the more it will become dependent on imports and the more vulnerable it will be to the different threats posed by foreign suppliers. This means that China cannot afford to follow the US love affair with the car. Its population is so big and becoming mobile and affluent so rapidly that China has to be aggressive in exploring alternative means of transport. Major cities will be linked more by airlines and railroads than by roads. And since airports need to be located some distance from city centers, even airports will involve local train projects. Although media attention is focused on the boom in China’s automobile industry, as time goes on the emphasis of this story is likely to switch from its benefits to its costs – not only in terms of oil and raw materials that have to be imported to sustain the industry but also in terms of the cost to the environment in terms of air pollution and traffic congestion. Even the most fuelefficient cars will not address China’s growing traffic jams and parking problems. On the other hand, trains are comparatively fuel efficient. They directly address the problem of traffic congestion and are even an alternative to air travel when certain distances are involved, especially in the coming era of high-speed trains, and they are also a relatively efficient way to move cargo. Also not to be underestimated at this point in time is that China has the technological capability to build high speed trains; whereas it cannot match Boeing or Airbus in building airplanes. Trains developed in China are now breaking rail speed records. Non-stop commercial trains between Guangzhou and Wuhan average 313 km/h. Costs per kilometer of high-speed rail construction in China, and of train manufacturing, are much lower than elsewhere. In other words, this type of infrastructure meets a lot of the priorities of the Chinese government. China already has the world’s biggest highspeed rail network, at over 8,000 kilometers, and the 2011-15 budget for high-speed rail totals Rmb 3.5 trillion. This calls for a doubling of the size of the

ASIAN INTELLIGENCE

April 6, 2011

Issue #824

Political & Economic Risk Consultancy, Ltd.

existing high-speed rail line system. During the same period, China is expected to build another 45 airports, and a lot of the train construction will go to linking these airports to city centers and even to other airports, such as is already the case in Beijing and Tianjin. Combine the Rmb 1.5 trillion that the government is supposed to spend on airports between 2011 and 2015 with the amount being spent on high-speed rail gives a total expenditure of Rmb 5 trillion, equivalent to more than US$760 billion at today’s exchange rate, more if the renminbi appreciates against the greenback. Major cities within the three main urban agglomerations of Beijing-Tianjin, the Yangtzi River Delta and the Pearl River Delta will be connected by inter-city lines, which will in turn connect within the largest cities to a new proliferation of suburban subway networks. The ministry of railways' vision is that, by 2020, China's high-speed rail network will extend over 50,000 km (presumably including dualuse freight/passenger lines) connecting all provincial capitals and cities with populations over 500,000. The network would be accessible to 90% of Chinese. Neighboring provincial capitals would be only one to two hours apart, and provincial capitals would be only a half to one hour apart from other cities in their province. Travel time from Beijing to Hong Kong will soon be reduced to less than eight hours. Going forward China’s travel, hotel and tourism industries are likely to evolve along the web defined by rail system. There are still a lot of political variables that need to be monitored, not the least of which is who and which departments will have authority for deciding exactly how to proceed. China’s rail ministry is currently operating under a cloud. The official reason its former head, Liu Zhijun, was fired earlier this year was for "severe violations of discipline". The knives also seem to be out for the ministry based on recent reports of a “railway debt crisis racing out of control.” However, another motivating factor may well be that many other departments in the government have a strong vested interest in how rail and air infrastructure is put in place and do not want all the decisions made by the ministry of railways, which retains a range of powers that other ministries were forced to give up years ago. These powers give it a degree of autonomy that others in the government might want to reduce so

April 6, 2011

that there is a better balance between different departments and there are fewer opportunities for financial irregularities. Even if the authorities at the railway ministry operate in ways that are beyond reproach, the sheer amount of the funds that will need to be raised to finance the investment could squeeze out other Mainland companies from the IPO market and banking lending. Major state-owned railway and railcar building companies with shares listed in Hong Kong and Shanghai increasingly are relying on bonds and bank loans to finance projects. Firms from other industries with revenue-raising aspirations of their own might be trying to fight their way into the cue or at least to prevent railway-related companies from dominating it so much. Stretching the thinking of the implications of China’s national security policies further, China will not want its imported oil and gas supplies to be channeled through a few East Coast ports. It is and will build pipelines from southwestern China to the Andamen Sea through Myanmar and possibly another one through Laos and Cambodia, from western China to the Central Asian republics and from northern and northeast China to Russia. All of these pipelines are likely to be accompanied by other infrastructure projects, especially rail systems. There will also be air links from the major foreign cities through which these pipelines and trains travel to the Chinese cities that are doing the most business with these cities. China is offering to provide technology, equipment and trains, and even construction costs for countries willing to supply natural resources. Myanmar has reportedly confirmed that a 1,920 km line from Kunming to Yangon will be starting construction soon. Laos says a line to Vientiane may start construction in 2012. Agreements with Vietnam and Thailand also appear to be progressing. In short, China as a forcing shaping the travel industry in Asia goes far beyond being a place where a heavy concentration of airline and hotel business growth is likely to take place. More important is the details behind this growth. The roles of the railroad and the companies associated with it are likely to be much bigger than most foreign companies are contemplating. Major international hotels and airlines that do the best job of developing coherent,

ASIAN INTELLIGENCE

Page 5

Political & Economic Risk Consultancy, Ltd.

Issue #824

quality global brands could be at a distinct disadvantage to airlines and hotels that lay a quality, dense footprint on a regional scale in Asia. By focusing more on rail especially on internal travel but also on intra-regional travel, China and other Asian countries could be reducing many of the security headaches airlines are facing and also could be offering travelers a level of security, comfort and convenience that will be a distinct selling point. Last

but not least, the physical framework that evolves to service China’s travel and tourism industry as well as its cargo movements will help to highlight where and how companies should be focusing on opportunities elsewhere in Asia, which local companies might be interesting potential partners, where within individual countries and cities property prices are likely to go up the most, and how industries might want to change their logistics systems.

CHINA Comments China is booming as both a destination for foreign visitors and a source of tourists for other countries. The number of inbound trips by overseas tourists stood at 133.76 million in 2010, up 5.8% from the year before. Far and away the biggest source of visitors was Hong Kong. Because of the land, rail and ferry links, people from Hong Kong could make a number day trips to China and they accounted for 79.32 million or 59.3% of all foreign visitors to the Mainland last year. For much the same reason, visitors from Macao held second spot, accounting for 23.17 million visitors or 17.3% of the total. Excluding these visitors still gives a total of 31.27 visitors from other countries, which is the figure we used in the graph on the cover page of this report. The number of outbound Chinese tourists reached 57.4 million in 2010, up 20.4% on 2009. China is expected to be the world’s largest source of outbound tourists by 2020, accounting for about 100 million trips a year. In 2008, Chinese tourists passed all other nationalities as the biggest shoppers in France, according to a survey by the French government. In 2010, some one million Chinese visited Italy, each spending on average €869. This means Chinese tourists surpassed their American and Japanese counterparts to become the biggest spenders among foreign travelers to Italy. In 2010, Chinese tourists became the world’s top tax-free shoppers in Europe, taking the top spot from Russian tourists. Chinese travelers spent €744 on average, doubling the €368 spent by Russians. The development of the railroad system inside of China and linking it to other countries will emerge as one of the most important forces of change in the medium-term, but this is not apparent from recent developments, which show air as the more important and profitable force. Although the combined turnover of China’s two largest railway companies, China Railway Group and China Railway Construction Corporation (CRCC), saw double-digit growth to nearly Rmb 1 trillion last year, their profits were disappointing. China Railway’s net profits increased only 8.9% in 2010 to Rmb 7.49 billion, while CRCC’s net profit fell 35.9% to Rmb 4.32 billion. Compare the railway profits with those of the country’s major airlines. Air China was the most profitable airline in the world last year (and the largest by market capitalization). It reported a net profit of Rmb 12 billion for 2010 (up 147.3% over 2009), which was more than the combined profits of the two major railway companies. Moreover, profits for China Eastern surged 26-fold to Rmb 5.3 billion, while China Southern’s profits were up 17-fold to Rmb 5.8 billion. Hotels are also enjoying booming business and have been able to push up their rates back above 2008 levels, when the Olympic Games resulted in a peak in pricing. Shanghai Jin Jiang International Hotels saw an 81.5% jump in operating profit last year to Rmb 552.39 million and has just announced plans to expand overseas, including to new markets such as India and Russia. China’s boom is also boosting the profits of major

Page 6

ASIAN INTELLIGENCE

April 6, 2011

Issue #824

Political & Economic Risk Consultancy, Ltd.

regional hotels like the Shangri-La Group and the world’s largest international groups like ICH. Virtually everyone is trying to build its own brand in China. One major question going forward is which strategies will be most successful – those of Chinese groups trying to build off domestic bases developed in China to move internationally, regional hotels that might not have a huge presence in major mature markets like the US and Europe but are developing a dense footprint in Asia, or the major international hotel groups, who have global economies of scale but perhaps not as dense a footprint in Asia as some of the regional groups.

HONG KONG Comments Hong Kong is the biggest beneficiary of China’s tourism boom. The benefits are not just in terms of visitor flows from China, which increased 26.3% last year to a record 22.68 million (Hong Kong’s total foreign tourist inflows increased 21.8% last year to 36.03 million). Many foreign visitors to China from other countries go through Hong Kong on their way to the Mainland or on their way out of the country, so China’s growth as a tourist destination has also stimulated traffic through Hong Kong. The millions of Mainland Chinese who come to Hong Kong to shop have prompted the world’s top fashion and luxury goods companies to set up retail operations in prime districts in Hong Kong, pushing up local rents in the process. Some of these same companies are now looking to list on the Hong Kong stock market in order to tap surging investor demand. L’Occitane, a French cosmetics and perfumery company, listed in Hong Kong last May. Prada, the Italian fashion and luxury goods house, has submitted an application to list by July. If these IPOs are a success, other global brand names are likely to follow. Finally, Hong Kong’s economy is being stimulated by the construction of new infrastructure to support the China travel business. Proposed cross-border infrastructure projects include a railway linking Hong Kong and Shenzhen airports and a bridge linking Lantao to Macao and Zuhai. These land links, combined with existing road and railway links, ferry routes and air links to different Chinese cities have made Hong Kong the most “connected” outside city to Mainland China of anyplace in the world. The land links, in particular, have benefited Hong Kong, since they have made it possible for Mainlanders to make day-trips to the SAR (and vice versa). This has helped not only to stimulate the volume of business but also to get around potential bottlenecks like the high cost of land in Hong Kong, which would interfere with the expansion of the hotel industry needed to sustain the growth of tourism. Instead, hotels have been able to take advantage of the cheaper land on the other side of the border in places like Shenzhen to expand their operations. Because of this new infrastructure on both sides of the border, the fastest growing segment of the Hong Kong tourism industry is same-day travel from China, which surged 32.7% last year alone to 11.01 million Mainland visitors, compared with an 18.7% growth in overnight visitors from the Mainland to 11.68 million. This year same-day visitors are likely to be the largest single category of all.

INDIA Comments India’s tourism industry is like a race horse pulling a hay wagon. The industry’s potential for growth is second only to China in Asia, but it will not come anywhere close to China’s rate of development in the foreseeable future. There are too many obstacles in the way.

April 6, 2011

ASIAN INTELLIGENCE

Page 7

Political & Economic Risk Consultancy, Ltd.

Issue #824

The demand side of the equation is a compelling story. India’s economy is growing rapidly and the size of the middle-class is expanding, which should be and is stimulating the growth of domestic tourism as well as the outflow of tourists from India. The country does not have as many direct air links as China has with other major cities in the region and around the world, but Indians rank among the most rapidly growing groups of tourists to countries where there are direct links. India is also a natural draw for foreign tourists thanks to its many historical sites, cultural attractions and very high service levels. So why did only 5.58 million foreigners visit India last year? To be sure, this was a record, but it is so much less than what a country the size of India should be getting that it begs the question of what is wrong. Another telling statistic is the number of hotel room: at the start of 2006 there were only 1,934 hotels and 103,973 hotel rooms in the entire country. Considering that just one city in the US, Orlando, Florida, has 115,199 hotel rooms, something is amiss when a country of 1.2 billion people has so few places for tourists to stay. The answer is not that India has not made the radar screens of major regional and international hotel groups; it has. It is also not that there are no domestic hotel operators who fail to recognize a market opportunity when it is staring them in the face. Of the major hotels that do exist, locally-owned ones like the Taj and Oberoi offer a level of service that is second to none in the world, while Indian entrepreneurs behind the Asian American Hotel Owners Association have one of the biggest footprints of budget motels that exist in the United States. If they can do that in the US, why haven’t they done it in their own country? There are a lot of reasons. The biggest is the difficulties involved with land acquisition. This might sound like a small, manageable point, but it is not. It is one of the most difficult nuts to crack in India even for the best connected local entrepreneurs with cash behind them. There are also formidable regulatory hurdles and ecological obstacles. Projects are frequently delayed. Including land costs, building costs per hotel room can be very high in India, making it difficult to make sense out of numbers unless room rates are set very high. In addition, the supporting infrastructure, including electricity supplies and quality roads and railroad system are lacking – for many of the same reasons that there are not enough hotels. There has been a great deal of progress at improving the quality of the country’s airports in major cities, but conditions in secondary cities are difficult. There has also been good progress in building private airlines, but the continuing problems at the national airline, state-owned Air India, show what can go wrong when the fingers of the state bureaucracy get in the way. The Indian government has magnificent plans to improve the physical infrastructure, but it is doubtful that these will be implemented as announced. They money is not there, corruption is too rampant, and bureaucracy too thick. It is also important to keep India’s plans in perspective in order to see why it will not be another China. India’s annual domestic rail investment is US$9.1 billion. This compares with China’s domestic rail investment of US$105 billion a year. India also has very different national security concerns than China. Procedures for getting a visa to visit the country are much more onerous than procedures for getting a visa to visit China. This alone will hold down the growth rate and level of inbound foreign tourism, since the first interaction foreigners have with the country involves so much red tape and expense. A large part of the reason for the extra visa precautions is to screen against the risk of terrorism, which is much higher in India than in China (and another reason why foreign tourists will be more cautious). Perhaps the most significant reason why the pattern of both inbound and outbound tourism from India will evolve very differently in India than in China and at a more modest rate is because India lacks the border opportunities that China has. There are no obvious Macaos or Hong Kongs, and no pressing security reason for building railroad and other infrastructure through the countries of Southeast Asia in order to reduce choke point risks along the coast. China has made significant headway in growing tourism with such neighbors as South

Page 8

ASIAN INTELLIGENCE

April 6, 2011

Issue #824

Political & Economic Risk Consultancy, Ltd.

Korea, Japan and even Taiwan; India’s options are much less attractive: Pakistan, Bangladesh, Burma, Sri Lanka, Bhutan, Afghanistan, and Nepal. There is not even much of an incentive to build rail links with these countries and arguably a disincentive to do so because of war and terrorism threats. India does share a border with China, but the Himalayas are a formidable barrier to overcome, which means the main channel for moving people between these two countries will be by air and cargo by sea. The picture we have painted here is not very pretty, but it should be remembered that the problems preventing the growth of hotels and supporting infrastructure in India are reasons why the supply-demand equation will continue to imply good profitability potential for companies that are successful in building the hotels and running the airlines and other travel businesses. There is little risk of overbuilding in India the way that Beijing overbuilt in preparation for the 2008 summer Olympics. After the Games, hotel room rates collapsed and the industry when through a very painful period. What we are describing for India is not a matter of pain but of frustration – and for those with the patience, the financial rewards will be quite appealing.

INDONESIA Comments Indonesia has a well-deserved reputation for being one of the most exotic tourist locations in the world. The country’s natural beauty, complemented by its rich culture and the hospitality of its people, have long drawn people from around the world. With the benefit of hindsight, the 1997-98 racial and religious turmoil, 2002 Bali bombings, 2003 and 2009 Marriott Hotel bombings and 2004 Aceh tsunami all served to underscore just how strong and resilient Indonesia’s tourism industry really is. The number of visitors to Bali last year, for example, was nearly double the number in 2002, when the Bali bombings killed more than 90 foreign tourists. Indonesia welcomed more than 7 million international visitors in 2010, an increase of 10.74% compared to 2009. Bali, Indonesia’s largest destination for foreign visitors, recorded over 2.54 million visitors in 2010. Sukarno-Hatta Airport in Jakarta attracted 1.82 million and Hang Nadim Airport in Batam 1.007 million. With this kind of inherent strength, Indonesia’s tourism industry is set for more good growth. The main constraining factors will be a failure to coordinate supporting infrastructure. For example, the immigration desks at the main ports of entry are already so badly clogged during peak hours that the country is already near a physical limit on how many foreign visitors it can process. For all the improvements the national airline, Garuda, has made under its new leadership, foreign investors were still unwilling to support the company’s recent IPO – an indication of how bureaucratic interference (in this case regarding the timing and pricing of the IPO) can turn into failure what should have been a success. As a result, the airline’s expansion plans might have to be modified. And for all its talk about building new roads, power and other infrastructure, the government has not gotten very far in implementing these ambitious plans. Perhaps the biggest factor on which Indonesia needs to focus is how people and governments at the local level will shape the future development of tourism in their areas. Economic and political power shifted more to the local level following the collapse of the Suharto regime, and ultimately it is the culture and people of the areas that tourists visit that are why they keep coming back. Yet many of the critical decisions behind the growth of tourism in Indonesia are not made at the local level. They are made by national level authorities (immigration, airline, major infrastructure programs, etc.) and by wealthy entrepreneurs from Jakarta who finance the construction of hotels and holiday villas and therefore earn most of the income from tourism inflows. This is causing increasing resentment at the local level, particularly in areas like Bali, which have their own unique Hindu-based culture. They see outsiders profiting from their assets, a rise in crime and other social problems, and environmental and other damage hurting the quality of their own lives.

April 6, 2011

ASIAN INTELLIGENCE

Page 9

Political & Economic Risk Consultancy, Ltd.

Issue #824

Addressing these local concerns so people from these regions feel they have a say in shaping the industry that is closest to their lives is the immediate challenge facing Indonesia. The need is recognized by industry and political leaders in Jakarta, but as in everything else in Indonesia, the test will be in the execution of policy. If it is not good or fast enough, there is a risk not only of a social backlash at the local level but also that some of Indonesia’s most attractive features will be lost to uncoordinated, reckless development.

JAPAN Comments There were a record 8.61 million visitors to Japan in 2010, 26.8% more than in 2009, but that upward trend has been reversed by the triple blow of earthquake, tsunami and nuclear radiation fears. Considering that over 70% of the visitors to Japan last year were from other Asian countries, most of the money that does not go to Japan because of cancellations in the wake of the disaster is likely to go to other Asian destinations. More uncertain is how the disaster will affect the outflow of Japanese visitors to other countries. Last year the number of Japanese traveling abroad for purposes of tourism increased 7.7% to 16.64 million. The very short term impact of the tragedy will be to increase outflows, since some Japanese and foreigners residing in Japan will leave the country out of fear of being exposed to radiation. However, just as Japanese are already staying away from luxury retail stores and cancelling parties at hotels, as the impact of the disaster and urgency and cost of the reconstruction challenge sinks in, Japanese are likely to refrain from traveling abroad. The total number of Japanese visiting abroad is therefore like to fall this year. In the year following the Kobe earthquake in 1995, outbound travel from Japan declined by about 10%. All major American and European airlines are cutting their capacity to Japan, but in a reminder that crises can provide the best opportunities, the International Consolidation Airlines Group was quick to announce that it might consider investing in Japan Airlines after the Asian carrier came out of bankruptcy this month. All Nippon Airways has said it is planning a joint venture with Lufthansa. The hotel industry could be in for a bigger shake-out. International chains can ride out the storm even if they have to shut down their hotels. Business elsewhere in Asia is booming and will be sufficient to hold up their overall balance sheets. However, the situation is different for local hotels that depend entirely on the Japanese market. They might not be able to hold on, especially if there are lingering fears of radioactive contamination of foodstuffs. The situation will be more serious near the disaster zone than away from it, but no place is likely to be spared. Companies that own their premises can hold on longer, but many restaurants, bars and other establishments that pay rents are likely to need emergency relief if they are to survive.

MALAYSIA Comments The number of foreign visitors to Malaysia increased by 4.2% last year to 24.6 million persons. The country has an aggressive marketing organization that tries to be a niche player but gives the impression that it is really trying to copy what it sees as the hot button of the moment. A few years ago, the global focus was on environmentalism, and Malaysia was trying to position itself as an eco-travel destination. Then Thailand and India showed that medical tourism could be profitable, and Malaysia tried to market its health services. This year the buzz is on the return of the business traveler, and Malaysia has mounted a campaign to make the country a leading “business tourism destination.”

Page 10

ASIAN INTELLIGENCE

April 6, 2011

Issue #824

Political & Economic Risk Consultancy, Ltd.

What Malaysia does have going for it – and why it ranks as high as a destination for foreign tourists as it does – is a land link with Singapore. It also has one with Thailand, which could be very beneficial for both countries further down the road (especially when there is a rail link to China that goes all the way to Singapore). However, the link with Singapore alone is enough to make a huge difference. Residents from Singapore can and do easily make day-trips to Malaysia, while Singapore is a much bigger hub for regional and international aircraft than is Malaysia, and many foreign visitors can enter Singapore and then travel up to Malaysia. It is easier to move in this direction than it is to move from Singapore to Batam, Indonesia, which can only be reached by ferry (and air) and is separated from the rest of Indonesia by poor domestic transportation infrastructure. In contrast to Indonesia, Malaysia has already built a good physical transportation infrastructure, and it is continuing to invest in expanding and improving it. However, this is not a case of “build it and they will come.” Kuala Lumpur has built a fine international airport, but the tourists have not come. Walking around the airport terminal can be a lonely experience. Still, Malaysia has plenty of room in which tourism can grow. This is one industry in which, at least in terms of absolute numbers, it is doing better than neighboring Thailand, although if it did not have Singapore linked by road and rail to its tip, the scales would probably be tipped the other way. There are other reasons why Malaysia has more potential opportunities to grow tourism much further. Its racial and religious make-up, together with its geographic location, make it well suited to market its attributes to India and the Middle East – both of which are providing increasing numbers of outbound tourists. It is also well positioned to market itself as a destination to Mainland Chinese. Indeed, one of the bigger questions we have is why Malaysia has not done a better job of tapping this source than it has. After all, Malaysia has a large ethnic Chinese population and has long had casinos. But while Chinese have been flocking to the casinos in Macao as well as to Cambodia (where the casino monopoly in Phnom Penh is owned by an ethnic Chinese Malaysian) and now to Singapore (where one of the two new casinos has been backed by Malaysian money), Malaysia has not enjoyed the same boom in business. This warrants much closer examination. It might shed clues on why Malaysia has not been as successful as it would like in attracting other kinds of business as well and could be an indication that all the negative publicity given to Malaysian racial and religious problems has had a particularly strong impact on Chinese in other parts of Asia, including the Mainland.

PHILIPPINES Comments Despite its being the closest tropical location to such relatively wealthy Asian neighbors as South Korea, Japan, Taiwan and Hong Kong, the Philippines regularly attracts the fewest foreign visitors of any country covered by this report. Last year there were a record 3.52 million foreign visitors, 16.68% more than the year before. However, prospects for this year are not particularly good. Visitors from Japan and Hong Kong are both likely to fall sharply, the former because of the recent natural disaster and the latter because of the Hong Kong government’s warning against travel to the Philippines because of security fears following the botched kidnapping last year in which several Hong Kong tourists were killed. This negative news could also hurt the growth of tourism from Taiwan, China, Singapore and several other prominent sources. There are a few success stories. For example, European visitors are attracted to several new health and wellness spas. This has helped to offset a slowdown in demand for traditional spa products and services that resulted from a decline in the numbers of visitors from East Asia. The government is now trying to jump on the casino bandwagon, but it is very doubtful that this will be successful in view of the stiff competition from elsewhere in Asia, while efforts to develop eco-tourism products and services are fighting an uphill struggle in view of the country’s history of deforestation, coral reef destruction and regular natural disasters that range from deadly typhoons to volcano eruptions.

April 6, 2011

ASIAN INTELLIGENCE

Page 11

Political & Economic Risk Consultancy, Ltd.

Issue #824

There are a lot of reasons for the Philippines’ failure to really rank among the top tourist destinations in Asia. They range from a poor reputation for personal safety to frequent blackouts and other infrastructure deficiencies. Controversies surrounding the construction of a new airport terminal really hurt the country’s image. The bottom line, however, was that too many visitors stopped having an enjoyable experience, contrary to conditions in the 1960s and 70s when the Philippines was THE weekend getaway for people from wealthier neighboring Asian economies. Now there are more alternative destinations, with better or more novel experiences and priced competitively. Thailand has displaced the Philippines in terms of being a getaway for people working elswhere in Asia. Also, countries like Vietnam and Cambodia are enjoying tourism booms, some of which comes at the expense of the Philippines, while the Philippines has never succeeded in developing its own version of Bali or Phuket.

SINGAPORE Comments The new casino and resort complexes have succeeded in drawing more foreign visitors to Singapore. Preliminary statistics show that there were a record 11.6 million foreign visitors in 2010, up 20.2% from the year before. Moreover the biggest growth in visitors was from countries with reputations for accounting for some of the biggest gamblers in other gaming centers in the region, namely, other ASEAN countries (up 30.8%), China (up 25.0%) and Korea (up 32.6%). In comparison, the growth of tourism from longer-haul destinations was much slower. The growth of visitors from the US was only 12.5%, while the growth of visitors from most European countries was limited to single-digit increases. PricewaterhouseCoopers estimates the size of Singapore’s casino gaming market in its first year of operation at US$2.8 billion and forecasts that it will double this year to US$5.5 billion. The importance of neighbors as a source of tourists is reflected by Indonesia’s position as Singapore’s largest single market in 2010, supplying 2.31 million visitors, while Malaysia was in third spot, supplying 1.04 million. The importance of China and India as the fastest growing sources of new tourists is reflected by China’s displacing Malaysia as the second largest source of tourists (1.17 million in 2010), while India moved up to fifth spot with 829,000 tourists. It is important to note an exclusion to Singapore’s official tourism statistics: Malaysian citizens arriving by land are omitted. As in the case of China and Hong Kong, the land link between Malaysia and Singapore is the single most important factor stimulating visitor growth in both directions. Malaysians can and do visit Singapore on day trips and vice versa, and this type of visitor is a major source of business for both countries. If Singapore had a land link to Indonesia, it would boost the inflow of visitors from that country sharply too, but the dynamics are less exciting than with Malaysia. Indonesia might be a much more populous country than Malaysia, but it is an archipelago and Singapore’s land link would be with Batam, which itself is separated from the rest of Indonesia by water and is far from Indonesia’s biggest population centers. However, the flow if visitors in the opposite direction would be greatly stimulated. Consider that in 2009, the number of Singapore visitors to Indonesia was only 1.27 million, whereas the number of Singapore visitors to Malaysia was 12.73 million. That is the kind of difference that a land-link can make.

SOUTH KOREA Comments

Page 12

ASIAN INTELLIGENCE

April 6, 2011

Issue #824

Political & Economic Risk Consultancy, Ltd.

Korea has been enjoying good tourism growth thanks mainly to a steady increase in visitor flows from China. In 2010, the total number of foreign visitors increased 12.5% over the year before to a record 8.8 million people. Visitors from China alone increased 39.7% to 1.88 million, where they accounted for 21.3% of total visitors. Japan remained the largest single source of tourists last year, accounting for 3.02 million visitors, but the trend of growth from this source has peaked. Last year it decreased 1.0% from 2009, and prospects for this year are for a big slump in visitors from Japan due to fallout from the natural disaster. Korea has been doing a good job of positioning itself as a travel hub for East and Northeast Asia. It has been taking business away from Japan when it comes to long-haul flights from the US and Europe, and this business is likely to shift even more now that Japan’s infrastructure has been so badly damaged. Korea has also done a lot to improve its hotel infrastructure and is now doing more to attract Mainland Chinese visitors – for example, by allowing a casino industry to develop near the Incheon airport. Threats from North Korea have been going on for so long that most international airlines and tourists tend to discount incidents when they occur. Of course, if a war were actually to break out, it would be very bad for the tourist industry, but short of this kind of disruption, downside risks are limited and the travel and tourism industry should continue to enjoy good growth. Given enough time, it is more likely that an end to the status quo would be in a direction that causes travel, hotel and tourism in South Korea to boom. The most obvious change for the better would be an end to hostilities with the North that permits a re-opening of the border and is accompanied by reforms in North Korea that open its economy to the outside world and the construction of vital infrastructure there. Part of that construction would include building new road and rail lines along the length of the country that link into the South’s infrastructure. North Koreans are so poor that there would not be big initial benefits to the South in terms of the flow of visitors from the North. Most of the visitor flows would be in the other direction, from the South to the North, and it is the North Korean economy that would benefit. However, over time more North Koreans would visit the South too, while new infrastructure could provide ways for Mainland Chinese and Russians to travel by land to South Korea. Looking far down the road, it is even possible for undersea tunnels to be built between South Korea and Japan, on one side, and South Korea and China on the other. Believe it or not, there have been talks ever since 1917 to connect Japan with the Korea via an undersea tunnel crossing the Korea Strait. The tunnel would presumably connect the Korean port city of Busan to the Japanese port of Fukuoka on Tsushima Island some 220 kilometers away. Korea’s Ministry of Land, Transport and Maritime Affairs has also suggested the Chinese city of Weihai in Shandong Province as a suitable connection for the South Korea-China undersea train tunnel project, although the Chinese city is over 300 kilometers from South Korea’s coast. By comparison, Europe’s Channel Tunnel connecting France and the U.K. stretches 50.5 kilometers and cost roughly US$15 billion.

TAIWAN Comments In many ways, Taiwan’s situation is similar to South Korea’s except that the North Korean variable is absent. The pattern of tourism inflows is shifting in favor of Greater China (the Mainland, Macao and Hong Kong) and away from Japan. Nothing is likely to change the direction of this shift, only the speed that it is taking place. The shift will accelerate as Beijing and Taipei make headway in negotiations to reduce barriers to cross-Strait travel and investment. That means that double-digit increases in inbound tourist flows from China are likely for years to come. In 2010, Taiwan had more than 1.63 million tourists from the Mainland, 67.75% more than the year before. It also had another 794,362 visitors from Hong Kong and Macao, 10.60% more than in 2009.

April 6, 2011

ASIAN INTELLIGENCE

Page 13

Political & Economic Risk Consultancy, Ltd.

Issue #824

In contrast, visitors from Japan rose only 7.94% to 1.08 million. Visitors from the US and Europe are growing even more slowly than that (the former by 7.17% last year to 395,729 visitors and the latter by 3.16% to 203,301 visitors). In other words, Greater China accounted for the vast majority of the 26.67% increase in total visitor inflows last year to 5.57 million. Because the major immediate obstacles limiting cross-Strait tourist flows are political and the governments on both sides of the Strait have the funds to build and link infrastructure quite quickly (this is a difference between North Korea and South Korea), supporting the growth of tourism in Taiwan represents one of the more interesting opportunities in Asia.

THAILAND Comments Thailand had its ups and downs during 2010, particularly through April, May and June when social unrest was particularly high. Initial estimates place the volume of international arrivals at 15.94 million, some 12.6% better than calendar 2009. Thailand’s tourism industry which contributes so importantly to GDP is again having its remarkable resilience tested, this time by fallout from the Japanese disasters and the turmoil in the Arab world. There are repercussions too from the earthquake in New Zealand, another in Burma that caused casualties and damage inside Thailand, plus unseasonable floods in the south. Those have hit large numbers of foreign and local tourists at popular destinations, especially offshore Samui and other islands that for a time were cut off from the mainland by the suspension of air and ferry services. These events have caused the government’s tourist authority to revise downwards the expected number of tourists this year but only by a few hundreds of thousands -- from 16.78 million expected earlier to 16.47 million. Some in the industry believe the decline in numbers will be considerably greater. Three months ago the Tourist Authority of Thailand‘s estimate for 2011 was above 17 million. It will issue another revised estimate of the outlook in a few weeks. Hotel occupancy rates and forward bookings have been running at their highest level for three years, but this success may soon be overtaken when the full impact of the disasters mentioned above reaches the market. However, there is a good deal of confidence that visitors will not stay away from Thailand to the extent that many are fearing. Emergencies like the SARS epidemic, bird flu, fears related to terrorism and the political turmoil in the streets of Bangkok had less impact on tourism than was widely feared. At one time last year when the political unrest was at its peak, there were warnings that there would be fewer than 12 million tourists in 2010 but nearly 16 million arrived. The most negative impact this year will come from events in Japan. In 2010, the number of visitors from Japan totaled 993,674, a litle more than 1% less than in 2009. One million Japanese tourists had been expected through this year, but this will not happen now. Recognizing this, Thai tourism authorities are trying to change the rules to encourage longer stays. They want Japanese tourists to be granted entry visas valid for 90 days rather than the usual 30 days.

Page 14

ASIAN INTELLIGENCE

April 6, 2011

Issue #824

Political & Economic Risk Consultancy, Ltd.

The Tourist Authority is trying to persuade all tourists to stay longer and spend more. Longer-term visas would achieve that but hard-nosed bureaucrats and police may resist that because of their inbuilt suspicions of foreigners seeking visas. Passenger traffic amounting to 2.3 million travellers per year between Thailand and Japan accounts for 15% of total Thai air traffic revenue and is valued at US$1.16 billion a year. The national carrier, Thai Airways International, has 10 return flights daily to Japan and will be especially hard hit. Tourists from some nations including South Korea, China and India are growing faster in numbers than other sources, although the Chinese are particularly prone to cancel in times of natural catastrophes and other emergencies. Last year, 1.12 million Mainlanders visited Thailand, 44.24% more than in 2009, while the number of visitors from India increased 22.72% to 760,371 people and Koreans increased 30.28% to 805,445 people. More have been coming from the Middle East too but their numbers will probably decline this year due to the turmoil there. The Thais are hopeful that shortfall will be more than compensated by other tourists who have cancelled holidays in Japan. The government and the industry have a target to double the annual value of tourism by 2020 from nearly US$19 billion in 2010. That sum is 7% of GDP but when other activities directly related to tourism are included the revenue amounts to 12% of GDP. Growth of this magnitude may not be achieved unless the authorities accelerate measures to protect the environment and safeguard areas of particular beauty and interest. In a recent speech Prime Minister Abhisit said that had to be done in order to influence foreigners deciding where to go for holidays. Some Europeans, notably Scandinavians and the French, are beginning to regard Thailand as a less desirable holiday destination because of the worsening degradation of the environment. Those responsible for dealing with this problem will have to change their ways if there is going to be progress on this vexed issue. They will have to be tougher on local government bodies, the police, tour operators and hotel and resort owners who often pay only lip service to concerns about the environment.

VIETNAM Comments Tourism is one of Vietnam’s most rapidly growing industries. Its share of the economy is growing. It is providing more jobs than most other industries, and it is driving other kinds of industries like construction, retail services and transport. Despite the serious economic problems that existed last year, including relatively high inflation, the total number of foreign visitors to the country surged 34.76% to 5.05 million. Strong rates of growth like this are stimulating more investment in hotels, but the government is falling behind in putting other vital infrastructure in place like electric power and internal transport systems. Another problem is that so many different groups, including state-owned companies in very different industries, see tourism as a source of easy profits that they have moved into this field. There has been little coordination between the different projects and the infrastructure required to sustain them. Corruption is another problem, and it is arguable that too many bank loans have gone to support poorly-thought out projects in the tourism industry by firms that should have been focusing instead on projects the country need more and which were in the area of their core competency.

April 6, 2011

ASIAN INTELLIGENCE

Page 15

Political & Economic Risk Consultancy, Ltd.

Issue #824

Vietnam and China might have their political difficulties, but this is not stopping Chinese from visiting the country in increasing numbers. Last year, 905,360 Mainlanders visited Vietnam, 74.5% more than the year before. South Koreans were the second largest group of foreign visitors, at 495,902 million in 2010, up 37.7% from 2009. Interestingly, Cambodia was the country from where visitors to Vietnam increased the most. Improvements in road links between these two countries as well as measures taken by both governments to facilitate travel resulted in a 115.2% surge in visitors from Cambodia to 254,553. The flow was reciprocated. During 2010, the numbers of Vietnamese tourists arriving in Cambodia surged by 48% to 466,695 compared with 2009. Japan’s natural disaster will hurt Vietnam’s tourism industry, but not too badly. Japan was the third largest source of foreign visitors last year. Their number increased 24.0% to 442,089. This gain is likely to be completely undone this year, but the blow will be offset by increases in visitors from other Asian locations and, to a lesser extent, from the US, Europe and Australia.

EXCHANGE RATES Currency

4/01/11

Chinese renminbi

6.5478

Hong Kong dollar

7.7777

Indian rupee

44.464

Indonesia rupiah

8,696

Japanese yen

84.104

Malaysian ringgit

3.0266

Philippine peso

43.309

Singapore dollar

1.260

South Korean won

1,087

Taiwan dollar

29.2483

Thai baht

30.294

Vietnamese dong

20,913

Commercial middle rate expressed in terms of US$1.

Published by: Political & Economic Risk Consultancy, Ltd. 20th Floor, Central Tower 28 Queen’s Road, Central, Hong Kong Mailing address: G.P.O. Box 1342, Hong Kong

Tel: (852) 2541 4088 Fax: (852) 2815-5032 E-Mail: [email protected] Web site: http://www.asiarisk.com

The material in this report may not be reproduced in whole or in part without permission in writing from the publisher. While every effort has been made to collate, check and present without ambiguity all data contained herein, the variety of sources from which they have been assembled and differing methods of reporting render verification oftentimes impossible. Thus, they are published without warranty.