China Tourist

Room to grow?

Tougher times for luxury hotel chains

Hotel w

One of the 721 five-stars in China

The White Swan Hotel in Guangzhou – the inaugural five-star lodging in China – can also lay claim to being the first Sino-foreign joint venture in the hotel industry. It got the regulatory go-ahead to open in 1979 and was part of Deng Xiaoping’s plan to ‘reform and open’ the Chinese economy. Modern hotels, as Beijing came to realise, gave overseas investors some of their first impressions of how China was changing.

But ideological barriers still very nearly clipped the White Swan’s wings. During initial planning, co-investor Fok Ying Tung, a Hong Kong tycoon, was horrified to learn that the army wanted to install anti-aircraft guns on the hotel roof (a feature in high-rise buildings at the time, designed to rebuff “imperialist enemies”). It took Fok months of lobbying to overturn the plan for a military deployment.

Since then international investors have enjoyed decades of largely unrestricted entry to the hotel sector. At the start of this year, there were 721 five-star hotels operating in China and the rate of investment only seems to be accelerating.

Take InterContinental Hotels Group, which already accounts for about 10% of the 659,000 branded hotel rooms in China, but has 50,000 more under construction. Hilton Group also plans to increase its presence from 32 hotels last year to 150 properties by 2015. “Every four days a new branded hotel is built,” according to a report published last year by the China Tourist Hotel Association. As WiC has reported previously, the leading hotel groups offer to bring their brands and managerial expertise to China (see WiC98). Most of the start-up costs in new projects, including land prices or rents, are shouldered by local partners. International chains then charge a management fee, typically up to 3% of revenue.

Local governments have been keen to embrace top hotel brands too, seeing them as a symbol of local achievement. A five-star hotel managed by a recognised brand has become a “pre-condition and standard practice” in the sale of prime commercial plots, says the Economic Observer. “It enhances the reputation of the city and creates jobs.”

But the rush to build hundreds of thousands of rooms is putting this coalition of interests to the test. An increasing number of foreign hoteliers are experiencing a souring relationship with their Chinese partners.

Last week, InterContinental commemorated its thirtieth anniversary in China by opening the InterContinental Shanghai Ruijin. Just a few blocks away in the Puxi district of the city, the mood was far less buoyant in another hotel under the same brand. In fact, the landlord of the InterContinental Shanghai Puxi – the real estate firm Shanghai Yaoda – is involved in litigation with its foreign partner for alleged contract infringement.

The five-star hotel in Puxi only opened for business in late 2009. And according to the National Business Daily, Shanghai Yaoda isn’t happy with the hotel’s operating performance. Yaoda also considers the opening of another InterContinental hotel nearby as a breach of its own 20-year agreement with the hotelier. An arbitration commission in Shanghai has agreed, ruling that InterContinental must pay its Chinese partner Rmb150 million ($24 million, or about 30% of InterContinental’s operating profit in China last year) in compensation. The row is rumbling on. Each company is now trying to stop the other from using the InterContinental brand.

Nor is it an isolated case. The Economic Observer notes that this is InterContinental’s “fifth Chinese divorce in as many years”.

More Chinese partners will want to part ways with foreign hoteliers, the Shenzhen Daily predicts, especially if the aggressive expansion continues in the sector. And the current arrangements in which the local partner stumps up most of the capital for new projects are also “poised for wholesale changes”, it says. Of the Rmb400 billion ($65 billion) invested in new hotels in China over the past five years, foreign hoteliers have chipped in less than 4% of the capital. The International Commercial Daily agrees, predicting that the “risk-free, asset light” model favoured by the leading hotel brands “is coming to an end”.

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