The late April outbreak of a new strain of H1N1 flu sent a spasm of anxiety through the global tourism industry. The concern was especially strong in Asia, where tourism has been growing faster than in any other region. During the short-lived SARS epidemic of 2003, travel in Asia plunged dramatically, and hotel occupancies in China, Taiwan, Hong Kong and Singapore dropped from between 70% and 80% to as low as 10%. Airlines, restaurants, travel agencies, theme parks and other tourism-related businesses suffered accordingly. Would the new H1N1 flu have the same effect?


As of mid-May, the tentative answer was “no.” While travel to Mexico was down sharply, and travel to other affected countries like the U.S. and Canada was down slightly, fears of a global pandemic, one that would sharply impact tourism, had subsided. On May 4, the World Health Organization (WHO) issued a statement saying that it advised no restrictions on travel, but by then global travel had fallen only slightly and was already beginning to rebound.


But the outbreak was yet another reminder of the unpredictable nature of tourism, a schizophrenic industry that is characterized by rapid swings in sentiment that can cause “hot” destinations to lose their luster overnight. Sudden travel downturns can be caused by political turmoil: Tourism to Thailand, for instance, has dropped more than 10% so far this year, due partly to the riot-induced closure of gateway Suvarnabhumi Airport in November 2008, and the subsequent high-profile rioting in Bangkok, Pattaya and elsewhere.


Political turmoil and epidemic diseases aside, other events can also derail tourism. Governments often play a role by restricting visas or otherwise limiting travel. When China unexpectedly placed sharp restrictions on inbound visitor visas during the Summer Olympics in 2008, international travel into the country fell more than 20% in August 2008, compared with the previous August, depriving hotels of an expected windfall. Economics is another wild card: Leisure travel spending is discretionary, and during a downturn, travel is one of the first industries to suffer. According to the United Nations World Tourism Organization (UNWTO), the current economic downturn has caused overall international travel to fall from 5.7% growth in 2007 to an expected 2% to 3% decline in 2009. With all of these looming variables, and given the fierce competition within the industry, making money in tourism is almost akin to gambling.


But the industry is also typified by optimism. Global tourism has been growing steadily at almost 5% per year in the past decade, with 930 million international arrivals in 2008. And always around the corner lies the next potential tourism gold mine. In the 1950s and 1960s, it was America, as U.S. tourists surged into Europe, Asia and elsewhere. In the 1980s, the Japanese first began to travel in large numbers, and in the late 1980s and early 1990s, travelers from Korea and Taiwan likewise began to travel en masse, lifting the profit margins of hotels and airlines throughout Asia and the world.


And now, the latest — and perhaps the greatest — potential tourism gold mine has been identified: mainland China. The optimism is fueled by some remarkable numbers: In 2000, just 10 million Chinese traveled abroad, but in 2008, more than 45 million traveled overseas. And that is only the beginning, say analysts: With its huge population, rising wealth and a government that has been slowly but steadily liberalizing outbound travel, China clearly has enormous tourism potential.


But will Chinese tourism reach that potential? Given the fickle nature of tourism, there are some strong caveats. Visas remain a problem, the global downturn is a worry and the extent to which the Chinese government will further loosen restrictions on outbound travel is a lingering question mark. In addition, not every country will profit equally; the great China travel sweepstakes will create winners and losers. China Knowledge at Wharton examines the enormous potential — and the possible pitfalls — of China’s fast-expanding travel market.


Red Tape


So far, despite the growing numbers of tourists, two significant barriers have combined to slow the growth of Chinese tourism: government red tape and the global economic downturn. Both problems are likely to prove temporary, say tourism professionals, but for now, they constitute significant hurdles to the growth of Chinese outbound tourism.


Government red tape occurs both inside China and in the destination countries. Chinese citizens must get approval from within China to travel abroad, and they must also obtain a visa from the country that they wish to visit. Those steps can be arduous, depending upon the destination. Travel to Hong Kong is relatively easy, while travel to Europe and the U.S. are quite difficult. Since mid 2008, the Chinese have been allowed to travel to the U.S. in registered tour groups, after passing a rigorous visa process that often includes interviews, but prior to that, they were required to secure hard-to-get business or student visas. Even now, the U.S. has put in place rigid quotas that allow only a very gradual increase in the number of Chinese tourists in the next few years.


To further complicate China’s outbound travel situation, only citizens of certain cities and provinces in China are allowed to travel to certain destinations, and sometimes only under certain circumstances, such as by joining a qualified tour group — although the trend is toward a steady increase in the number of qualifying cities and provinces. But given the red tape, patience is advised for all countries that hope to attract Chinese travelers. “It takes time to build up the mainland market,” says Stanley Yen, president of Landis Hotels and Resorts, which manages eight hotels and resorts in Taiwan and two hotels in China. “It’s not like you just open a tap and water comes out.”


The Case of Taiwan


Taiwan is a good example of the perils faced by any destination that wishes to attract more mainland tourists. When direct cross-strait flights between mainland China and Taiwan were launched in July 2008, a wave of optimism swept through Taiwan, and it increased in December 2008, when the weekly quota was raised from 36 flights per week to 108. The optimism was further fueled by an agreement in April 2009 that will once again raise the number of weekly cross-strait flights to 270 when it takes effect, probably in late June. It was widely expected that Taiwan, with its Chinese heritage and its proximity to the mainland, would prove extremely popular with mainland Chinese tourists. There was talk of soon lifting the initial daily quota of 3,000 visitors, as ultimate demand was thought to be much higher.


But so far, the flow of mainland visitors to Taiwan has been much smaller than anticipated. The quota of 3,000 visitors has never been reached, although 2,700 visitors did arrive in a single day at the start of Chinese New Year. According to the Taiwan Tourism Bureau, which lumps Overseas Chinese visitors together into a single category, approximately 160,000 mainland visitors came to Taiwan in the first three months of 2009, an average of only 1,800 per day.


Lost in the initial optimism were some tough challenges. First, the competition for mainland travelers is fierce: Like other destinations, Taiwan must compete with the charms of Thailand and the Philippines, the gambling Mecca of Macau, the shopping paradise of Hong Kong, the nearness of Korea and Japan, the exotic landscapes (and gambling) of New Zealand and Australia, and the long-haul lures and polished marketing campaigns of Canada, the U.S., Europe and others. “In some respects, all of Asia is our competitor,” says Philip Chao, deputy director of the international affairs division at the Taiwan Tourism Bureau.


Second, with the global recession in full swing, more would-be Chinese travelers are staying at home. According to Travel Business Analyst, a Hong Kong-based travel consultancy, the number of China outbound travelers increased 15% year on year from January through October 2008, but growth then slowed sharply to 3% in November, and 1% in December. It has rebounded somewhat since then, reaching 3.6% growth in March 2009, year on year, and 4.9% for the first quarter, but even that falls short of its previous double-digit annual growth.


And third, many people in the industry underestimated the procedural bottlenecks. Tour organizers in Taiwan must produce detailed tour contracts and itineraries that cover every aspect of the proposed tour, including price, accommodation, insurance and a list of participants, and they are not allowed to change those itineraries. Mainland travelers must acquire entry permits to Taiwan and tourist visas, they must travel in groups of at least five, and they must spend a minimum of US$80 per day.


The key worry for Taiwan, and for many other destinations including Japan, Europe and the U.S., is that mainland tourists will stay behind, and some of the rules are designed to make tour operators responsible for ensuring that the tourists return to mainland China. “There is concern that some tourists may remain in Taiwan,” explains Eddie Lee, owner of Taipei-based Tiptop Tour and Travel, one of Asia’s largest wholesalers of hotel rooms. “Some people will stay back, that’s true, but I believe the percentage will be very low. It is not as serious as before, because China’s economy has improved so much.”


The procedural bottlenecks are beginning to disappear, as both sides become more familiar with the process. Some of the initial requirements have also been revised, partly in response to the slow start. The minimum size of tour groups from mainland China to Taiwan has been reduced from 10 to five people (plus a tour guide from mainland China), and the maximum stay increased from 10 to 15 days. Mainland China has also expanded the number of provinces whose residents are allowed to travel to Taiwan from 13 to 25. With the improvements, Taiwan still expects to reach its daily quota soon. “In my personal view, I would say, hopefully we can reach 3,000 mainland tourists within a year,” says Chao.


Politics can impede the flow of tourism in other ways. One potential problem is mainland China’s tendency to stop issuing travel visas to a given destination. Tourism to Tibet has been abruptly shut down twice in the past year. Visas to Macau have been restricted as well, due to concerns about gambling, and travel from mainland China to Macau has dropped 30% in the first three months of 2009, compared with last year, partly due to the new restrictions. A minor flare-up in the cross-strait relationship, or a sudden desire to have tourists spend their money inside the country, might easily induce mainland China to restrict tourism to Taiwan or any other country with which it finds itself at odds.


Perhaps the largest threat to the continuing growth of Chinese outbound tourism is the worldwide economic slowdown, which has already caused global tourism to slow sharply. After growing 5.7% year on year in 2007, international tourism growth, as measured by the total number of arrivals worldwide, fell to 2% in 2008, even after posting 5% growth in the first six months of 2008. The downturn has worsened in 2009, and the UNWTO is now predicting an overall decline of 2% to 3% for 2009.


Cheap Hotels and Whirlwind Tours


However, analysts believe the current slowdown in Chinese tourism is temporary, because to a large extent, China has weathered the global economic downturn better than most countries. “Outbound tourism is declining, because income growth has slowed down and people have become more conservative,” says Wensheng Peng, head of China research at Barclays Capital in Hong Kong. “But over the long term, the trend is clearly for China’s tourism market to increase further.”


In macro terms, China’s outbound travel market is driven by powerful demographics. Its 1.3 billion people are becoming steadily wealthier, and they are increasingly free to travel outside the country. “Three factors are driving outbound tourism from China,” explains Dr. Peng. “One is income growth, and with per capita GDP of around US$3,000, you have a growing middle class, and for these people leisure, touring and visiting abroad is part of their consumption. Another factor is appreciation of the RMB not only against the U.S. dollar, but also against the Yen and most other Asian currencies, and that has increased the purchasing power of the Chinese, and that helps tourism also.”


Another positive factor, says Peng, is the steady relaxation on travel restrictions by governments throughout Asia. “Governments have basically relaxed some of the controls, not only on the part of the Chinese government but also on the part of many Asian governments,” he notes. Hong Kong, Japan and Taiwan are among the countries and regions that are slowly removing visa barriers and other restrictions on tourism from China.


Because they are in the early stages of outbound travel, and also because in many cases they are required to do so, Chinese tourists tend to travel in tour groups. They have other characteristics: They like to shop, they tend to stay in budget hotels and they often pack as many sights into their itineraries as possible. “First-generation travelers usually come with a group, and when they come to any country they try to cover as many sites as possible,” says Yen of Landis Hotels and Resorts. “There is a Chinese saying, “zou ma kan hua” – “you are riding on a horse looking at flowers, and you want to go through the garden at the fastest speed.”

Another feature of Chinese outbound travelers is their willingness to shop; they like to spend money on jewelry and electronics, which are heavily taxed in China, and they like to buy souvenirs. “Chinese travelers are extremely price sensitive,” explains Tom Doctoroff, CEO for greater China of advertising agency JWT, and author of the book Billions: Selling to the New Chinese Consumer. “They spend a lot of money, but they don’t spend a lot of money on hotels. They’ll spend more money on good food, and on things to buy and bring back. A trip abroad is an investment in forwarding status and advancement. That money has to be invested wisely, and spending too much on hotels is considered not wise, so people are going to be price sensitive.”

A Bright Future

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