4 Nov, 2003

Asia-Pacific Hoteliers Optimistic But Cautious

Imtiaz Muqbil

About 300 of the Asia-Pacific region’s seniormost hoteliers and dealmakers wrapped up a major conference in Hong Kong last month, expressing optimism about future investment prospects but a lot of caution about the extreme volatility of cash flows due to recurring crises.

– From the Hotel Investment Conference Asia Pacific (organized by Horwath Asia Pacific and Sonnenbick-Goldman Company) in Hong Kong

1. ASIA PACIFIC HOTELIERS OPTIMISTIC BUT CAUTIOUS

2. RISK MANAGEMENT CONSULTANT DOES SOME CRYSTAL BALL GAZING

3. HOTEL CEO’S ASSESS THE STATE OF PLAY

4. CNN ANCHOR PUT ON DEFENSIVE OVER SARS COVERAGE

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1. ASIA PACIFIC HOTELIERS OPTIMISTIC BUT CAUTIOUS

About 300 of the Asia-Pacific region’s seniormost hoteliers and dealmakers wrapped up a major conference in Hong Kong last month, expressing optimism about future investment prospects but a lot of caution about the extreme volatility of cash flows due to recurring crises. In an interactive digital vote taken on the October 10, the last day of the Hotel Investment Conference Asia Pacific (HICAP), 58.7% of the roughly 200 participants in the conference hall said they held a ‘more favourable’ outlook towards hotel investment, while almost the same number, 61.1%, cited terrorism as their greatest concern.

Attended by hoteliers, consultants, bankers and financiers, plus consultants and suppliers to the hospitality industry, the conference was the first of its kind since the end of the SARS crisis and the Iraq war, both of which played havoc on the regional tourism industries as well as financial bottom lines.

Described as the worst ever faced by the tourism industry, the crisis is set to see major changes in the way the hotel industry develops and does business in the years ahead (see related stories in this dispatch).

Here are the questions asked in the digital vote, and the responses (in percentage of the votes cast) which summarise the prevailing views on some contemporary burning issues:

• Where do you expect the action to be over the next couple of years in Asia? China 51%. Thailand 15%. Japan 23.3%. Australia 4.8%. Indonesia/Malaysia/Philippines 4.1%.
• Do you expect there to be more or less capital available for hotel investment in Asia over the next year? More 73.7%. Same 17.9%. Less 8.3%.
• Versus this time last year, are you more or less favourable towards hotel investment: More favourable 58.7%. Neutral 27.3 %. Less favourable 7.7 %.
• What is the your greatest concern for the financial success of investment in the industry over the next few years? Terrorism 61.9%. Disease 12.2%. Long-term price erosion through Internet discount and crisis discounting 12.2%.
• Among transactions that get done, where will the equity capital originate? Domestic countries of asset location 42.3%. Elsewhere in Asia 29.2%. US 20.8%. Europe 5.4%.
• Which types of investors do you expect to be the most likely to actually complete transactions? Private Asian capital 53.5%. Opportunity funds / banks 16.8%. Hotel brands 13.4%. Non-hotel investors 9.2%.

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2. RISK MANAGEMENT CONSULTANT DOES SOME CRYSTAL BALL GAZING

Opening the conference with a broad overview of the Asia Pacific political and economic landscape, Paul Broadfoot, founder and managing director of Political and Economic Risk Consultancy, identified four major issues affecting travel & tourism: 1) Terrorism and infectious disease are risks that Asia will continue to face; 2) The most serious threats to the travel and tourism industry have strong cross border interlinkages. Recalling the Asian economic meltdown, he said there will be no way of saying ‘I am immune’; 3) Pretending that a problem does not exist can do more damage than communicating the full, harsh truth. 4) People can bounce back from crises remarkably fast.

He said the world certainly appears to be “a lot better place — this year is the first when we have not had an international tragedy one month before this conference.” While some events had been predictable, such as the Iraq war, the SARS crisis hadn’t. He called it “an educational experience that has made us a lot smarter now.” The bombing of the JW Marriott in Jakarta, inspite of being a major catastrophe, “did not scare people so much in the broader international context.” While there are bound to be more unsettling events, the ability to bounce back from them should not be forgotten.

For 2004, Mr. Broadfoot forecast: 1) Social unrest associated with next year’s election campaigns in the Philippines and Indonesia. 2) Shift away from globalisation to greater trade and investment protectionism by some countries; 3) Stepped up political rhetoric, with China- and possibly India-bashing in the US as the election campaign there heats up; 5) Increasingly critical view in Asia of US government policies — “you can’t have the US acting like this and expect Asia to say ‘isn’t that cute’?”. He said most of the opposition would be anti-American government, not necessarily anti-American citizens. At the same time, he said, we will see some US-bashing in Asia, in some countries more than others.

Mr. Broadfoot returned to this issue in the Q&A, saying in response to a question that the anti-globalisation movement will have an impact on hotels as some groups of people “are not going to want to stay in coca-cola hotels from North America.” He said US hotel chains will need to do some “cultural bridging work” with local populations.

Mr. Broadfoot said there are positive forces at play: 1) Most Asian economies will grow rapidly; 2) Investor interest is reviving in Asian stock markets; 3) Business and tourist travellers from China are on the rise, one of the most positive industry developments; 4) Individuals, companies and governments are learning how to respond better to crisis like SARS and also how to live with the risks.

Some things that won’t change in 2004 include: 1) Brinkmanship by North Korea and disruptive labour activism in South Korea. (Mr. Broadfoot said the US will remain in a confrontational mood over North Korea. “The seriousness of the debate I am not going to understate.”); 2) Heavy flow of direct investment into China, including a possible lifting of the ban on direct trade and travel between Taiwan and China).

Over the long term, Mr. Broadfoot said he was particularly worried about 2005 due to shocks from the US like post-election interest rate increases (which he said could be substantial) or a fall in real estate values there. He predicted the end of the current textile quota system as a result of World Trade Organization rules but forecast that the US, moving into protectionist mindset, would put up some other alternative barriers. This would affect countries like Cambodia, for which textiles and tourism are major forex earners, and force them to put more emphasis on tourism.

Other forecasts included: a) The Chinese RMB is likely to be revalued eventually, but not sure when; b) the emergence of Chinese state-owned multinationals moving aggressively on the regional and global stage; c) India’s and China’s potential to have a deflationary impact on prices and wages internationally for years to come; 6) Emergence of special preferential trading blocks within Asia, with greater China likely to lead the way.

Mr. Broadfoot spent a good deal of time discussing the political and economic ramifications of the US pressure being exerted on China to revalue the RMB. He discussed its implications on the spending power of Chinese tourists which would increase. If trade with the US falls, it would prompt a greater focus on tourism. Higher US interest rates could slow the growth of the US economy and other Asian exchange rates would also change vs the US$. The other scenario is the RMB will remain inconvertible and most Asian currencies closely follow the US$. He forecast more focus on intra-Asian trade.

Mr. Broadfoot said the above scenarios posed some key questions for companies: 1) What opportunities and threats do each of them present? 2) What would companies have to do to realise the opportunities and reduce the threats? 3) What should they be doing now? 3) How might the priorities of different customer types evolve and how might the customer-base change? 4) Which new and non-traditional competitors are positioned to serve customer needs more effectively; 5) How would a company’s current strategy fare in each scenario? What modifications would be more appropriate?

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3. HOTEL CEO’S ASSESS THE STATE OF PLAY

A number of hotel chief executives took part in panel discussions over two days. Here are some of the points they made:

• There was applause for the ‘spectacular’ travel resilience of the Asia-Pacific region. “You don’t see this in Toronto,” was one remark, a reference to the SARS crisis which also affected that Canadian city.
• David Baffsky, Sydney-based chairman of Accor Asia Pacific, said that in Australia, the domestic business is strong. There has been a lot of speculative development and the Rugby World Cup has produced very positive results. The meetings, incentives, conventions and exhibitions business is doing well. Regarding Indonesia, there is a feeling that the upcoming elections next year will get global media coverage and “that will hold back travel.” He also forecast that Vietnam and Indochina will be “stars of the future.”
• Patrick Imbardelli, managing director of InterContinental Hotels Group Asia-Pacific said that while Hong Kong is coming back to normal, a shift is likely as more opportunities open in low- to mid-scale hotels. He also said the industry came much closer together after SARS and that post-crisis recovery periods are getting shorter and shorter.
• The issue of media coverage of the SARS crisis took up some time. One of the speakers said the industry needs to better manage the communications in order to expedite the comeback process. Mr. Baffsky disagreed, saying it was not “for us to deal with but for governments to do everything to resolve.” He said the issues facing this industry are no different from any other. “It’s just a question of understanding and managing the risk.”
• On the Indian market, it was noted that India is realising it is getting into the game later than the Chinese, and making fundamental changes in its policies towards state-owned enterprises and multinationals. More changes are expected. Mr Koos Klein, President of Hilton International, Middle East and Asia-Pacific, noted Hilton’s franchise launch in India with the Oberoi group which is to rebrand nine of its hotels to Hilton.

Mr. Klein said he was also one of the few people to be “careful” on China, at least in the 4-5 star segments because of low room rates in all the cities except two. He said he was also worried about the level of non-performing loans. Instead, he saw bigger scope for mid-market and budget products.

• On the future of regional hotel chains, Patrick Imbardelli said there will be always be regional hotels but the big question is how they will reach the customer, access technology, manage their distribution systems. He forecast “a lot of pressure on regional brands and independent hotel chains to get out of the market at a lower cost.” The value proposition is becoming more commoditised — “if all chains listed on a computer are offering the same price, the brand will be the one that will make a difference.”
• Richard North, CEO of InterContinental Hotels referred to the importance of building high-quality strongly-differentiated brands. He said InterCon planned to boost its Internet presence as well as the number of languages handled by its call centres.
• Marriott Lodging International President and Managing Marriott Edwin Fuller said Marriott has 15 brands and sharp differentiation is paramount to each of them. He said the group has seen “unbelievable growth” in bookings over the Internet, and yet that represents a small percentage of the business. He said Marriott is seeking to forge alliances across all channels of distribution.

“The trick for us is to get people to be loyal to our brands,” he said, noting that customers are getting more aware of prices and deals that can be obtained over the Internet. At the moment, the focus is on international brand expansion. In 1991, he said, Marriott had 16 hotels outside the US, and today has 500. It sees a lot of opportunity to grow the second-tier brands in second tier cities. At least 40 hotels are planned in China alone by 2004. They will be among the 30,000 rooms Marriott plans this year, mostly in Asia. More extensive market research is also being done to help refresh the product and reposition the brands.

• Robert Cotter, CEO of Starwood Hotels and Resorts Worldwide, said vacation ownership is the fastest growing market as many hotels are now giving more space to RCI.
• On distribution issues, it was noted that over the long-term, hotels will need to keep a good mix of distribution channels between direct and intermediary. While the Internet is clearly the cheapest form of distribution, hotels need to keep control of the pricing strategies. “We may want 70% coming through the Internet but not 100%,” was one comment.

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4. CNN ANCHOR PUT ON DEFENSIVE OVER SARS COVERAGE

CNN anchor Andrew Stevens says the network has not reflected on its coverage of the SARS crisis, does not consider it sensationalistic nor does it feel that it contributed unfairly to the hysteria.

Although Mr Stevens was moderating one of the sessions at HICAP, one of the audience turned to him to ask point-blank whether CNN itself had reflected on its own coverage of the SARS crisis, and a prevailing feeling among the public that it had been sensational. Mr. Stevens replied that there had been no internal examination of the network’s coverage. “As far as our own international coverage is concerned, we didn’t particularly analyse how we handle that, and that could be partly because we handle big issues every day.

“We didn’t feel that we had overcooked this story. We didn’t feel we had been sensational.” He said part of the problem had been not knowing what they were dealing with early in the crisis. As that became clearer, the only thing done was to “roll back some of the colourful adjectives” which were being used in the early days of the coverage. He said that as far as he is aware, no-one has accused the network of contributing unfairly to the hysteria.

Accor Asia-Pacific Chairman David Baffsky chipped in to help CNN. He blamed the Chinese government, saying that if it had come clean about what it was dealing with early in the crisis, “it would not have gone on for as long as it did.”