Hotel Industry Booming in China

China is a paradox, a blend of communism and capitalism. The harder the government seems to pull back, the faster Western hotel companies push forward.

The reasons are obvious. According to Edmond Ip, COO of InterContinental Hotels Group Greater China, the country will become the world's No. 1 tourist destination in the next 10 to 15 years with 183 million overnight stays. In those same 10 to 15 years, Ip notes, outbound trips from Chinese travelers will grow from 10 million to more than 100 million. Building a hotel — and brand — there today offers an immediate return, but bigger rewards may come when those 100 million are traveling abroad.

The methods, though, are different. Ownership is tricky in communist China. Simply put, real estate is state-owned, available to private local enterprises and individuals through land-use rights, which give the “owner” all rights to the real estate and content through a set period of time (40 years for hotels). There are plenty of complexities and exceptions beyond that, but foreign ownership is difficult and rare without local partnerships.

IHG has 86 hotels open in greater China — a mix of InterContinental, Crowne Plaza, Holiday Inn and Holiday Inn Express hotels and resorts — with another 100 in the pipeline, according to Ip. The majority of the hotels are managed, not owned, by IHG.

“China doesn't want foreigners to come in and start taking over the economy,” says Holland & Knight associate Ying “Geneve” DuBois, who specializes in hospitality and real estate law, with a focus on Asia. “One way to control that is to make sure when a foreigner comes in to buy something or get a use right, part of it has to be with a local company.”

Accor is unique in that it owns a portion of its 61 hotels in 29 different cities in greater China. The French company manages six brands in China, with ownership in nearly all of the Ibis brand and its upcoming Novotel locations, according to Robert Murray, SVP Accor Greater China. He says it acquired already-zoned land through local developers and in some cases, government auctions. The majority of the Sofitel, Pullman, Grand Mercure, Mercure and existing Novotel locations are under management contract. Accor has around 80 projects under development and plans to reach 180 hotels (40,000 rooms) by 2010.

Most companies focus strictly on management agreements like IHG because of the complications with ownership. “Nobody knows” what will happen at the end of those 40-year terms, says DuBois, who was born in China and grew up in Hong Kong. “You can apply for renewal, but the government doesn't have to give it to you.”

Starwood also has lofty goals in China: A January release stated the company had 36 hotels operating in China, with more than 40 waiting to open. Marriott has 31 hotels open there now and another 17 in the pipeline.

Hilton operates five hotels in greater China, but has eight more expected to open this year and another 14 under development in China and Mongolia. Hilton follows a franchise and management business model, rather than investing in real estate, according to Tim Soper, Hilton's vice president of operations in that region. A joint venture was formed last year between a global arm of Deutsche Bank and an Asian equity firm to develop 20 more Hilton Garden Inn hotels across China, with support from Hilton in site selection, development, training, operations support, brand management and marketing.

Vantage Hospitality, with the Lexington Collection and Chinas Best Value Inn, is also seeing record growth. Each brand has two hotels in China and another eight should open this year. Eleven more are in the pipeline. Vantage, in a joint venture with a local builder-developer, is running a full-fledged hotel company in China, offering reservations software and management, says Vantage President and CEO Roger Bloss.

Best Western, which has 30 hotels in China and another 10 in the pipeline, wants more than 200 properties in Asia by 2010. William Dong, CEO of Best Western Co. Ltd., serves as Best Western's master licensee in China.

Carlson, which operates seven hotels in China with another six under development, recently announced a partnership with Sunshine100 Real Estate Group. The Chinese developer will build 10 hotels across China that Carlson will manage through its Radisson and Park Plaza brands.

Hyatt, with 10 hotels in China and 12 more expected to open by 2011, offers full management in all its full-service brands there. Choice, which does not operate any hotels in China, has two franchises open and another two under development.

The biggest challenge for these companies is finding the manpower to manage their booming business. The IHG Academy has 22 locations across China, with training and education programs that should funnel 2,000 new graduates into IHG hotels every year, Ip says. Accor has a training program and will soon launch its own academy. Vantage and Hyatt work and partner with local universities. Hilton is exploring similar options.
Carlo Wolff provided additional reporting for this story.

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