Rooms to Grow

By Simon Elegant / Beijing

The view from the top of Beijing's newest and tallest skyscraper is to die for. Still months from completion, the upper floors are currently enveloped by the usual chaos of construction, 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 to the hazy crests of the Western Hills. It's the best view in China's booming capital, and you would expect one of the country's corporate titans to be taking up residence. 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 hotels is astounding. "It's stratospheric," says Patrick Ford, president of Lodging Econometrics, an industry research group based in Portsmouth, N.H. "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, 310 new hotels are under construction in China, says Ford, and 210 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 might bring as many as 65,000 new rooms to China, at a cost of more than $17 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. This time, many foreign companies seem set to make a tidy profit, not least because the hotel business is one industry in which Chinese firms are not yet 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 the 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," he says, or other big chains such as Hyatt, Hilton and Westin. "They just don't have the brand name or international drawing power."

Thus 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 their usual standards. The foreign firms earn steady management fees for running the hotels, while the Chinese partners tend to put up the cash for construction.

Heady projections about the future of China's travel industry help explain this building frenzy. 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 travelers a year. China's burgeoning domestic tourism market is also critical in the calculations of hotel companies. By 2010, it's anticipated that the number of homegrown tourists will soar from 1.2 billion to about 1.8 billion as more and more Chinese make repeat trips within their own country.

Further fueling this national wanderlust is the dramatic rise in car sales and the rapid construction of a huge highway network that makes travel more practical and alluring. China's current 21,100 miles of highways are 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 InterContinental Hotels Group, among the most aggressive of the international players in China. The Britain-based company currently runs 54 hotels there, mostly under the Holiday Inn marque, and it plans to triple that figure by the end of 2008. Transportation booms have served Holiday Inn in the past. The chain rose to prominence in the U.S. following the extensive highway construction that occurred after World War II, exploding from four hotels in Memphis, Tenn., in 1952 to about 1,000 across the country by 1968. "We see the opportunity to replicate what happened in the U.S.," says McKenzie.

It may be a decade before tourism really takes off in some of the secondary, up-and-coming metropolises like Hefei, Harbin and Chengdu. But early movers like InterContinental aren't waiting. They hope to reap the benefits of choice locations and brand establishment 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 10 years or plant my flag in China now? The big chains have all decided, and are in the midst of a flag-planting race."

But 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. They face the risk of overbuilding and of rooms going empty, especially in second-tier 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."

Luxury hotels aren't the only hotly contested market in China. The Hilton, Marriott and Hyatt chains all have plans for a big push in the economy segment of the industry, which is 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 the same market, adding to 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 economy-grade Ibis Hotels on the mainland and plans to have 50 of them in operation by the end of 2008. Says Deeson: "You have to keep moving very fast to keep your advantage"--a good motto for most things in China's breakneck economy.