Since Taiwan opened its doors to group tours from mainland China in 2008, plenty of eager travelers have crossed the Strait to visit. But not everyone has been happy — some parts of Taiwan's hospitality sector haven’t been benefitting as much as others from the warming cross-Strait ties. A big reason is that local group tour operators have kept an iron grip on the hotels, restaurants, sites and souvenir shops that are included on their itineraries. Now, however, thanks to a new agreement launched on June 28, mainland Chinese are allowed to travel to Taiwan on their own. That's giving a wider spectrum of the island’s service industry a crack at capturing more tourism dollars.

But for many of the island’s service sector — from upscale hotels to mom-and-pop seafood diners and tea leaf vendorsto all other businesses excluded from China’s group travel deals — wooing China’s travelers might not be as easy, or happen as fast, as some might like. So far, just over 5,000 solo mainland Chinese travelers have taken advantage of the new arrangements, far fewer than the island government’s quota of 500 arrivals aday.

Nonetheless, officials are optimistic that business will be picking up soon –according to the National Immigration Agency, some 8,440 solo applications from the mainland are in the pipeline. For many mainlanders, the attraction is clear. “It’s like going to any country in the world now since we face no restrictions,” said middle-aged businessman Lai Zhengyi, one of the first self-guided mainland visitors, upon arriving in Taipei after a one-hour direct flight across the 150 kilometer-wide Strait from his home in Xiamen.

All told, tourists like Lai — as well as students and medical tourists from the mainland — will form a key part of Taiwan's economy, which is currently overly reliant on its highly cyclical manufacturing sectors for GDP growth, noted Donna Kwok, an HSBC greater China economist, in a report published last spring. According to the report, "nearly one-fifth of Taiwan's workers are employed in the retail and wholesale sectors, and another 40% in other services-producing industries, sectors [that] should receive a substantial boost with the arrival of additional (and more independent) mainland visitors." That boost has been a long-time coming.

Wishing You Were Here?

Starting in the 1940s, when Mao Zedong’s Communists won the Chinese civil war and Chiang Kai-shek’s Nationalists fled to Taiwan, Taipei's officials banned most tourists from mainland China, fearing that they would overstay travel permits and seek work on the wealthier island or linger to spy for the Beijing government. Yet in 2008, the island government began allowing group tours as a way of stimulating the service sector, which was struggling. However, interest from overseas visitors was low, compounded by rising inflation locally and stagnating wages. Then came the pullback of consumer spending during the global financial crisis. And even today, the old concerns of the last century continue, alongside the occasional undercurrents of tensions between locals and mainlanders, despite their many linguistic and cultural similarities.

Beijing, for its part, has been encouraging tourism as a way to show Taiwan that it could help the island economy, an incentive for eventual political reunification. That's also where this year's new Economic Cooperation Framework Agreement between Beijing and Taipei comes in, with its scrapping of tariffson more than 500Taiwan-made goods and liberalizing 11 service sectors, including banking.

According to HSBC, mainland travelers overtook travelers from Japan, Hong Kong, the U.S., Europe and South Korea to become the biggest visitor group to Taiwan in 2010, at 22% of the total. Visitors from China have increased more than nine-fold since 2004, and about half of this increase happened only after mainland tourists were allowed to visit Taiwan directly without travelling via a third country after 2008.

With older mainland Chinese – those most likely to be interested in seeing the once off-limits island – joining group tours, Taiwan logged 2.34 million arrivals between 2008 and June this year, generating US$3.8 billion for the service sector, according to government statistics. But most tour groups have stuck to a routine of must-see places such as Sun Moon Lake, the Chinese art at the National Palace Museum in Taipei and a spot in the high central mountains known for sunrises. And bus tours often take groups to the same restaurants and mid-range, discounted hotels, sometimes far from the main sites, leaving visitors little, if any, free time.

Off the Beaten Path

So the trial allowing Chinese from three well-off mainland cities — Beijing, Shanghai and Xiamen — was welcome by many. “Tourism could be an important catalyst for Taiwan’s service economy,” wrote Wai Ho Leong, Barclays Capital regional economist, in a recent report. “[A] resurgence in tourist spending could set the stage for a longer-lasting virtuous cycle for real estate and consumption," while creating more jobs.

The new permits cost NT$600 (US$94)each, and like group permits, which vary in price according to the size of tours, have a maximum duration of 15 days. To qualify for a permit, applicants must be 18 or older and prove personal wealth of at least NT$500,000. HSBC predicts Taiwan’s opening to independent travelers will increase arrivals from China by at least 80% this year.

The hope is that China’s solo travelers will be more adventurous — and bigger spenders — than their group-traveling peers. Solo travelers "want to do a lot more, to go deeper like to small villages,” requiring, for example, individual tour guides and transportation, says Shen Ya-ching, deputy director of Green Travel, a Taipei-based agency that's now providing private services for mainland travelers.

Going off the beaten path, Lai of Xiamen stayed at The Lalu, Sun Moon Lake’s most expensive hotel. With rates starting at NT$15,500 a night, The Lalu has been host to around 50 solo mainlanders since June 28, mostly “high-end” customers like senior government officials or executives, says Joe Tsang, the hotel's general manager. The hotel expects to welcome more next year, he says, after a possible dip in the run-up to Taiwan's presidential election in January, since Beijing discourages its citizens from getting too close to island politics. Thus far, the new guests have helped "increase the economy of the Sun Moon Lake area.”

Taiwanese officials say that economic boost should spread to other merchants across the island. At a press conference in June, Lai Shin-yuan, Taiwan’s top China policymaker, said mainlanders have been spending 80% of their travel budgets on shopping, compared with 20% of U.S. and European travelers. Solo travelers from the mainland are forecast to spend an average US$245 per day, she said, generating between US$315 million and US$675 million annually. “We want to expand the existing policies, and expand them to the grassroots of Taiwan,” Lai said.

Analysts are optimistic about that happening. Ma Tieying, an economist with DBS Bank in Singapore, says independent tourists could generate US$616 million in revenues a year, with group and individual mainland Chinese visitors accounting for NT$100 billion this year.

Becoming Adventurous

Among the various Taiwanese businesses already factoring in gains from the new arrivals are the hotels, says Chen Chiong-hua of the island’s Tourism Bureau. Over the next two years, hoteliers will spend NT$80 billion to provide about 16,000 new rooms and could see about 182,000 solo mainland travelers over that period, she says.

Today, 363 hotels are registered in Taipei, just a small increase from the 339 registered before the first group tours arrived from Japan and other parts of the world in 2006. Analysts say there’s potentially demand for more, including for four- and five-star accommodations. “In fact, there’s a shortage of high-end hotels in Taiwan, so that will be positive for rates,” says John Brebeck, head of Taiwan research at Yuanta Investment Consulting in Taipei. “If we get four million Chinese visits per year, every hotel will be filled.”

Those growth prospects are not lost on developers. Local firm Farglory Group, for one, is developing a boutique chain in Taipei, while Tango chain is studying expanding its four business-oriented hotels over the next year or so. Hong Kong-based Mandarin Oriental Hotel Group, meanwhile, expects mainland Chinese to make up a sizable portion of its tourist clientele at its sprawling 300-room hotel site in Taipei when it opens next year.

Large retailers on the island, such as Pacific Sogo, Mitsukoshi and FE-21 Mega,are also likely to benefit as mainland Chinese shoppers head to department stores for luxury goods that either cost more at home or are less likely to be counterfeits than on the mainland. “Price would be a factor, and Taiwan’s stuff may be more reliable in terms of the risk of knock-offs,” says Liang Kuo-yan, president of Polaris Research Institute in Taipei. “Most of [the mainland] money will be spent in cities, on luxury goods, even international brands, and maybe watches and jewelry.”

Initially, Chen of the Tourism Bureau expects independent travelers to drop in on the shops of Taiwan's big cities of Taipei, Kaohsiung and Taichung. After becoming more familiar with the island, she predicts they'll venture further afield to small towns with historical districts, open-air markets and traditional arts, including the cobbled-streets of mining town Pingxi and the Hakka (Chinese gypsies) theme neighborhood of Neiwan. Restaurants of all levels should also see more business as mainland Chinese enjoy local cuisine that’s similar to their own but prepared differently.

Flying Solo

What Taiwan's hospitality sector wants is for China's solo travelers to become repeat visitors. Helping in that regard is the recent increase in direct mainland-Taiwan flights, from 370 to 558 every month. But more is needed than convenient flights to keep Taiwan attractive, say locals.

For sure, the island faces stiff competition. Mainland tourists have been flocking to nearby Hong Kong since 2003, largely to shop. It is easier for them to visit and Hong Kong's biggest tour groups are from the Mainland, with an average HK$6,600 (US$847) being spent per person in 2009. They account for 65% of Hong Kong’s tourism, according to HSBC’s research note.

Also beckoning mainlanders are other more exotic destinations, such as Southeast Asian countries, which issue visas with less hassle than Taiwan does, says Anthony Liao, standing supervisor at the Taipei Association of Travel Agents. He says another threat is that mainland travel agencies make less money with independent travelers than with group tours. “The agents don’t see high profits, because air tickets and hotel rooms don’t add up the same way,” Liao says. “So it could be [that] the solo travelers are being softly coaxed into joining tour groups.”

Taiwan, however, has something many other destinations don't: Medical services that are high quality, easily accessible and relatively inexpensive. That's a potential boon for China's medical tourists, who are being encouraged to seek treatment on the island since China and Taiwan signed a health care agreement in December. With treatments considered better than on the Mainland, Taiwan allows patients to drop into a hospital and pay as they go, with consultations costing between US$15 and US$30 for the uninsured, and diagnoses can be made within a week.

There is still the prospect that cultural tensions might erupt with an increase in solo visitors heading to Taiwan's hinterland. Merchants may overact to visitors bargaining as aggressively as they do back home on the Mainland and “you might see some random things happen,” causing the odd business transaction to fall through, says George Tsai, political scientist at Chinese Cultural University in Taipei. But like others, Tsai downplays the threat.

Because of their cultural similarities, adds Li Peng, assistant director at Xiamen University’s Taiwan Research Institute, "mainlanders will be left with a deep impression of Taiwan, yet not feel like it’s a foreign country.” If managed well, he says he sees no reason why that familiarity can't work to the advantage of the new visitors, and their hosts.