China's Hotel Boom

The

view from the top of Beijing's newest and tallest skyscraper is to die for. Still a year from completion, the upper floors are a mess of flapping safety nets and tangled steel wires, but there are glimpses of what will be a spectacular, 360-degree panorama. The outlook to the west is particularly stunning—a sweep down the wide swath of Chang'an Avenue, past the Forbidden City over roofs and parks all the way out to the hazy crests of the Western Hills. It's the best view in China's booming capital, and you'd expect one of the country's corporate titans to be taking up residence on the top floors. But it's a testament to the rising prominence of one of China's hottest industries that the top five floors of the building will, in fact, be occupied by the lobby of a Park Hyatt that promises to be Beijing's snazziest hotel.

Even by China's skewed standards, the surge of foreign interest in launching and managing new mainland hotels is astounding. "It's stratospheric," says Patrick Ford, president of Lodging Econometrics, a U.S.-based industry-research group. "China is the most attractive place in the world right now for hotels. That's why investment capital is racing there and why the major international brands are racing there too." Indeed, 188 new hotels are under construction in China, says Ford, and 145 of them are four- or five-star offerings with more than 200 rooms. Even if some of these projects aren't completed, this building spree could bring as many as 30,000 new rooms to China at a cost of more than $8 billion.

China has, of course, seen its share of gold rushes before, many of which ended with little return (or large losses) for investors who stampeded in. But this time many foreign companies seem set to make a tidy profit, not least because this is one industry in which the Chinese are ill-equipped to undercut overseas rivals while also providing the requisite quality of service. "You can knock off Prada or Montblanc," says Ralph Grippo, China manager for Ritz-Carlton hotels. "But there's no way you can knock off luxury service. It's about human beings and experience. That's not something you can duplicate." Ford agrees: "There's no Chinese company right now that can go toe to toe with Marriott," or with other big chains such as Hyatt, Hilton and Westin. "They just don't have the brand name or international drawing power." As a result, local firms are eagerly teaming up with the foreign giants, which contribute their names and expertise, and also ensure that the hotels are designed to exacting standards. The local partners tend to put up the cash for construction, while the foreign firms earn steady management fees for running the hotels.

Heady projections about the future of China's travel industry also help to explain this frenzy of hotel building. Already the world's fourth most popular tourist destination, the country is expected to move into second position within a decade, according to the World Tourism Association. By 2020, China is forecast to overtake the U.S. as the world's most-visited country, pulling in some 130 million visitors a year. China's burgeoning domestic-tourism market is also critical in the bullish calculations of hotel companies. By 2010, the number of domestic tourists is forecast to soar from 1.2 billion to about 1.8 billion.

Further fueling this domestic-tourism boom is the dramatic rise in car sales and the rapid construction of a national highway network, making travel more practical and alluring. China has about 34,000 km of highways, a number that's expected to more than double by 2020. "The highways linking cities in Inner Mongolia are better than the road between Sydney and Melbourne," marvels Bruce McKenzie, who oversees China operations for the U.K.-based InterContinental group, which is among the most aggressive of the international players in China. It currently runs 54 hotels there, mostly under the Holiday Inn marque, and it plans to triple that figure by the end of 2008. Appropriately, Holiday Inn rose to prominence amid another boom, profiting from extensive highway construction across the U.S. after World War II. The chain started with four hotels in Memphis in 1952, expanding to about 1,000 by 1968. "We see the opportunity to replicate what happened in the U.S.," says McKenzie.

It may be a decade before business really starts to boom in some of the secondary cities now being targeted—metropolises like Hefei, Harbin and Chengdu. But early movers such as InterContinental hope to reap the benefits of choice locations and greater brand awareness by getting there first. Eric Wong, a property-sector analyst for UBS Hong Kong, observes: "If I'm a big hotel company, the question is, should I wait ten years to plant my flag in China now? The big chains have all decided, and are in the midst of a flag-planting race."

Yet with so many hoteliers vying over the same territory, an industry shakeout may be inevitable. "A lot of the newcomers are going in because the head office says, 'You have to be in China,'" says Wong. But there's a risk that this will lead to overbuilding and that many rooms will go empty in secondary cities. Even in primary markets like Beijing, Shanghai, Shenzhen and Guangzhou, demand may not keep pace with supply. "It's already difficult to get a good location in the gateway cities," says Wong. "Some of the new grand palaces will be pulled off the market later on."

Less exclusive segments of the market are already getting crowded. The Hilton, Marriott and Hyatt chains all have plans for big pushes within the "economy" segment of the industry, defined as three stars and below, importing brands such as Marriott Courtyard and Hilton Garden Inns from the U.S. Several Chinese hotel companies, notably the Jinjiang Group, are chasing after the same market, intensifying the sense of urgency. "It's amazing how fast things move in China," says Brian Deeson, head of China operations for the French lodging group Accor, which has four Ibis Hotels on the mainland and plans to have 50 of them in operation by the end of 2008. "You have to keep moving very fast to keep your advantage."