Mark Gwyther from MGT Management Consulting in Vietnam contributed this post.
I’ve been asked several times just how badly Vietnam’s hospitality business was affected by problems resulting from the East Sea dispute with China. From the investor’s point of view, it is much worse than most people realize. Back in April (the anti-Chinese riots occurred mid-May) Vietnam’s inbound international arrivals were up 27% for the year compared to the previous year. This was buoyed by a 47% increase in Chinese visitors. In our January newsletter, my firm predicted 8.9 million foreign arrivals in 2014 (18% growth) and by April it had looked like we might be slightly low. Others such as the CEO of Indochina Land, were saying “Right now we’re at an inflection point with supply and demand. But I see demand outstripping supply within the next 12 months.”.
Vietnam hospitality was poised to have a huge year.
At first it did not look so bad. When the tourism numbers came out at the end of May the Vietnamese media reported the East Sea dispute was not having much of an impact since the number of Chinese arrivals was still up 30% for the month compared to the year before. But in the first half of May, before the troubles began, Chinese arrivals were likely up more than 50% compared to the first half of May 2013. So the effect in the 2nd half of the month was actually very significant.
Growth of Chinese Inbound Arrivals (vs. Previous Year) – Jan 2012 to April 2014
Another factor leading to a lack of understanding of the impact was how VNAT reports statistics. Monthly international inbound numbers are released around the 25th of the month-meaning they estimate the final few days. VNAT most likely uses the growth rate of the first 25 days of the month and applies it to the final few days. This method becomes very inaccurate when a mid-month event changes everything. Applying a 30% growth rate to the final five days of the month would add a significant amount of inbound arrivals compared to a 30% decline.
The Actual Cost
As the summer wore on it became very apparent to everyone that the East Sea dispute had significant implications for tourism. The cumulative growth rate versus the previous year steadily dropped from 27% in April to 10% by the end of September. Still, most media didn’t recognize or didn’t report the real damage of opportunity costs.
In 2013, more than a quarter of all international visitors to Vietnam were Chinese. The Chinese market is bigger than the next three countries combined. Of course many of those visits are cross-border trading, but that proportion of cross-border traders is decreasing as a percentage of the total number of Chinese visitors- indicating a shift to more traditional tourism. That’s hardly surprising as most countries throughout the world are experience large growth in the number of Chinese inbounds.
Chinese Arrivals to Vietnam
Almost as importantly, this rate has been increasing over time, signifying exponential growth. The trend line for monthly growth rates from January 2013 to April 2014 shows an average monthly increase in the rate of growth of about 1.5%.
Monthly Increase in Chinese Tourism Growth
January & February always have large spikes due to the Tet Holiday moving.
When estimating how many tourists Vietnam lost, we must forecast the regular growth plus the additional amount from increasing growth rates. For the first four months of 2014, Chinese increased 48% from the previous year. This growth rate was accelerating at about 1.5% per month, which means if we had forecasted Chinese arrivals back in April, we’d have come up with this prediction.
|May 14||June 14||July 14||Aug 14||Sep 14||4 Month Total|
|2013 Chinese Visitors||148,606||129,577||173,257||190,358||169,682||811,480|
|Expected Growth (48%)||71,331||62,197||83,163||91,372||81,447||389,510|
That’s over 450,000 visitors that should have arrived but didn’t. If the average stay is over 4 nights with double occupancy, we are discussing a million room nights lost in four months. Developers and investors were anticipating growth in the Chinese outbound market and instead it suddenly shrunk dramatically.
This is not the first time the Chinese Government has used its outbound tourists as an economic weapon against another country. In May 2012, they advised travel agencies (many which are state-owned) to cancel tours to The Philippines because of protests at the Chinese embassy in Manila. They lifted the ban several months later and Chinese arrivals to The Philippines increased by 70% in 2013. That would seem to indicate the Chinese travelers will come back rapidly once relations begin to normalize.
 The Chinese government re-instated its travel warnings to The Philippines last month.