Doing business in Asia is loaded with opportunities – and fraught with uncertainties
With the world’s two largest economies at loggerheads over trade and tariffs, “business as usual” is tenuous at best between the US and China. Flashpoints include cyber security and unfair trade practices related to technology transfer, intellectual property and innovation.
On the flip side, a burgeoning middle class in China, one that is interested in domestic and global travel and accommodations, have energized developments across the global travel and hospitality industries. Still, for US businesses engaged or thinking about trade or travel in China, the absence of stability creates a climate of risk.
An abundance of opportunities lay beyond China’s borders in Southeast Asia and India, where their respective economies are growing by leaps and bounds. Nevertheless, there are nuances and protocols that must be observed to achieve success both in China and elsewhere in the region. For corporate travel managers and other travel industry professionals who are planning to expand their businesses in these troubled waters, it pays to understand the challenges and opportunities of doing business in the Asia-Pacific marketplace.
“The region has a very large population with a huge consumer appetite growing at a rapid pace,” Pat Siow, regional director for Asia Pacific, Travel Leaders Network explains. “Numerous multinational organizations, especially fast-moving consumer goods have established offices in Asia to support their sales activities in the region. Many companies centralize their procurement activities in the region, usually in Singapore or Hong Kong, although lately there have been some shifts of these activities to China, India, Indonesia and Philippines.”
However, Siow cautions, “The region has its own unique challenges from multiple languages to multiple cultural differences that Western companies have to overcome to trade successfully.”
Without a doubt, the opportunity to grow business in Asia Pacific is huge: 2019 CWT Global Outlook reports APAC continues to be the most robust region in the entire global economy. The report, released in January, cites an International Monetary Fund forecast that projected growth here at 5.6 percent in 2019. However it’s a sign of the unsettled times that more recent forecasts for 2020 have backed away from those numbers.
Particularly noteworthy, the report cites staggering growth in tourism and business travel will have an “overwhelming effect on supply and demand dynamics across APAC, especially in China, which now ranks as the world’s largest corporate travel market.” If a trade deal can be reached between China and the US, the optimism around the overall Chinese economy may rally.
But reaching a deal is still a big “if.” As this goes to press, the herky-jerky trade talks make good-news/bad-news headlines almost every day. As a result, whipsawed stock markets are jittery, and global business confidence is in short supply. However in the daily fog of claim and counterclaim, there are signs the two sides are inching closer to some kind of phased agreement, where tariffs are lowered in stages even as a longer-term trade deal is hammered out.
The longer the trade dispute goes on, the less sanguine the outlook is for China’s vaunted growth targets; the economy is slowing, albeit still officially at sky-high levels compared to the West. Add in continuing political unrest in Hong Kong, and the Middle Kingdom is certainly facing its share of turmoil as it aspires to its stated goal of superpower status.
Getting There, Being ThereAt ground level, Siow says trade tensions are not seen as political in APAC. “Usually it’s governance, which is more of a challenge (and mundane) – the withholding of taxes, employment laws and obligations, insurance and banking requirements.”
Angeles Yugdar, vice president of international markets at Travel Leaders Network, says her first recommendation to anyone thinking of opening shop in China is to have a Chinese, international consultant to support any local negotiations. “Most business is regulated by the government, travel included, so it is key to understand not only what can and cannot be done, but also local regulations. Most negotiations are ruled by trust and knowing the people involved, so having a Chinese consultant will also facilitate the dialogue.”
The first challenge to doing business in APAC nations is getting there. Given new aviation technologies, faster and more fuel-efficient aircraft are rolling off the assembly lines daily, with a backlog of future orders. China Eastern Airlines offers a non-stop flight from Los Angeles to Shanghai is 13.5 hours. United offers also offers nonstop 13.5 hour flight from Chicago to Beijing.
Indeed, according to CWT’s 2019 Global Report, whether it’s domestic, inbound or outbound, “the demand in China remains high and increasing.” CWT reports that in 2016, China surpassed the US as the biggest corporate travel market, and is on track to become the world’s largest aviation market by 2024. Chinese carriers are also entering into more joint ventures, such as the Delta-China Eastern deal and Air China’s partnership with Lufthansa.
Expect more competition (and choices) on long haul flights as China relaxes its “one route, one airline” rule which was introduced in 2009 to prevent its state-backed airlines from competing on routes to the brink of unprofitability. According to BCD Travel’s 2019 Industry Forecast, 45 Chinese airlines currently operate scheduled flights, and most are majority-owned by one of four large airline groups: Air China, China Eastern, China Southern and HNA Group. China Eastern and China Southern, the report notes, lead the market with each holding a 22 percent passenger share.
An important fact for corporate travel managers to know to save costs, according to the report, is that China’s largest airlines require companies to provide “white lists” of passengers authorized to use discounted corporate fares. The lists apply to both domestic and international flights originating in China, except those leaving from Macau and Hong Kong.
One of the challenges BCD points out is around capacity – both in terms of seat availability and infrastructure in many of the region’s airports. “While this is helping to keep prices buoyant, we expect prices will rise as the pace of demand growth is currently outstripping supply growth.”
However, the report also states travel demand is weakening. This may be due to a slowdown in the Chinese economy or alternatively, China’s gradual liberalization of domestic airfares to create more competition and profitability. At the start of 2018, Chinese authorities extended flexible pricing to more than a third of its domestic routes, which altogether account for half of domestic air travel. This development led to increased fares on some routes. However, robust competition among Chinese carriers should limit fare increases on international routes.
Lodging BoomAfter business travelers get to China, the next question is where will they stay, and how much should it cost? The 2019 Industry Forecast by BCD reports demand for hotel accommodations in China is strong, especially for mid-range accommodations, but many new hotels are opening, ensuring that rate increases keep in line with inflation. There are good deals to be made at higher-end Western-branded properties too, particularly in Shanghai and Beijing.
Still these cities have rate hotspots. In Shanghai, for example, Nanjing Road and the Lujiazui financial district can be expensive. To put it all in perspective, total demand for hotel accommodation in China increased by 29 percent between 2012 and 2017, rising to 1.25 billion room nights.
Domestic travelers dominate the market, consistently accounting for around three-quarters of hotels’ business. Between 2013 and 2017, the number of chain hotels operating in China increased by 56 percent, according to industry research firm STR.
Global chains are turning their attention to China’s secondary and tertiary cities; recent openings include Radisson Blu Zhengzhou, Niccolo Changsha and Radisson Ningbo Beilun Hotel. Chinese chains are often the first choice for domestic travelers, and many have a global presence. Jin Jiang International, BTG Homeinns Hotels and Huazhu Hotel Group are among the world’s top 10 hotel chains.
Through 2020, hotel demand is expected to grow 4.4 percent a year, with domestic and international business expanding at a similar pace. Average daily rates could increase 2 to 4 percent, BCD forecasts.
However mounting trade tensions and higher oil prices are likely to cause a further slowdown in global economic growth. As pressure increases on accommodation providers, corporate travel buyers will face challenges in their ability to secure rooms at their preferred properties, much less at their preferred rates.
“As a result,” the BCD report says, “we expect an increasing clamor across APAC for dynamic pricing, or the ability to adjust prices based on current market demands, as corporate travel buyers see less benefit from traditional advance purchasing and last room availability.”
Where Next?One bright spot for domestic Chinese travel is the ability to get around has become easier. Didi Chuxing is the dominant ride-hailing player in China and is increasingly being used by business travelers. They find it easier to claim expenses for trips with Didi, as its drivers issue official tax receipts.
High speed rail is making great strides too. The BCD Forecast reports more Chinese business travelers are taking high speed trains where possible to avoid long air delays. The rainy season is especially vexing. A new generation of Fuxing train sets travel at up to 200 mph, reducing the 800-mile journey from Beijing to Shanghai to 4.5 hours.
Travelers also have use of WiFi, as Tencent helps China Rail introduce WiFi coverage across its high-speed offerings. Already claiming the world’s largest high-speed rail network, China is set to expand its rail network even farther from 15,000 miles in 2017 to nearly 24,000 miles by 2025.
In a 24-hour news cycle, nervous markets over trade threats today can instantly reverse tomorrow with breaking news that tensions have relaxed. Meanwhile, businesses must continue to maintain forward looking assumptions that circumstances will improve or adjust to new realities in the APAC region, especially in the midst of a product or service launch.
“To be successful in APAC,” advises Siow, “it is essential to have local, skilled labor onboard, understand the cultural challenges, nuances of body language, etiquette, formality – especially in Japan – and the ability to translate Western business objectives into the unique way of delivering the business locally. A western proposition and strategy may not always work best in the Asia Pacific region. Navigate and understand the environment, especially government regulations. Localize and translate content to resonate with customers. To overcome cultural differences, relationships, local talent and the right partner is key, especially in China.”
Finally, any attempt to downplay the trade dispute between the US and China may be delusional. BCD Travel’s report warns that the “single most important issue affecting global economic risks is trade.” Concerns about rising protectionism and a moderate slowdown in world trade growth have been around for some time, but as the report notes, “a steeper escalation of the dispute risks drawing in other countries, both directly, and indirectly through their links to the global supply chain.”