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Investing in the Growth of Travel in China

After a 4 percent drop in 2009, travel bookings in China will grow by 5 percent in 2010, projects a new PhoCusWright report, "Emerging Online Travel Marketplace in China." The same report predicts that travel will expand to become a $65 billion industry by 2011, and that 20 percent of that market would be online.

Where opportunities lie in that growth, and what kinds of companies might be positioned to seize them was one topic of discussion at the recent China Travel Distribution Summit, hosted by China Travel Daily at the OCT Interlaken Resort in Shenzhen in December.

Online booking may be growing, but for a well-established foreign company to make its mark in China’s online travel space remains a difficult task, experts at the conference said.

"Every single internet company that has entered the China market has failed." says William Bao Bean, a partner at venture capital firm Softbank China & India Holdings.

Fritz Demopolous, founder and CEO of Beijing–based travel media site Qunar.com points out that China’s market-leading sites for general search (Baidu), travel booking (Ctrip) and travel meta search (Qunar) are all local companies that were first movers in their space. All three have thrived despite the entrance into the market of competitors that were big-time leaders in the United States and globally.

"Look at Expedia’s failure," Demopolous says. Expedia owns online travel agency eLong.com, but has only been able to corner 10 percent of the market, compared to 57 percent for Ctrip, according to iResearch. "I don’t think there’s one company that has done well, but that’s not to say that looking forward, a foreign company may not do well."

As Demopolous explains it, a successful online venture requires capital, technical knowledge and local expertise. Chinese companies have access to as much capital as a foreign competitor, he says, and the proliferation of open source technology lowers that barrier to entry.

"In the consumer internet space, knowledge and capital are free flowing," Demopolous says. "Domestic companies aren’t at any disadvantage at all online. It’s a pure execution game, a numbers game."

Cyril Ranque, vice president of the partner services group for Expedia Asia-Pacific, spoke at the Shenzhen conference about some of the challenges Expedia faces in China.

"It’s all about making it relevant for the local market," he said. "For multinationals like us that’s hard to do, because we’ve been successful by rolling out processes and systems. And whatever we know from the outside that has worked to expand in the western world is not going to work here."

Ranque added that Expedia’s plans in China are long term, a position the company has backed up by expanding its China portfolio beyond eLong. This year, via TripAdvisor, it purchased travel meta search site Kuxun.com and set up a review site called Daodao.com. It also brought its corporate travel practice, Egencia, to China two years ago in hopes that Web-based corporate travel planning would grow.

Corporate travel is an area where there is one where there is some unmet need, speculates Softbank’s Bao Bean. "There is opportunity for helping companies save money and cut down on employee fraud and get the best price," he says.

Investment activity in the Chinese travel industry isn’t all going straight to the Web. Earlier this year, the China National Tourism Administration projected that Chinese travelers would take 50 million outbound trips in 2009, and domestic tourism revenue would grow by 8 percent. One recent entrant to the market here is low-cost Malaysian carrier Air Asia, which has been "aggressively" going after Chinese business for the last two years, in the words of Kathleen Tan, regional head of commercial for Air Asia.

"When the economy is down, people still need to fly," she says. "China is an economic powerhouse and a lot of people want to fly."

"The big airlines told us that our model will not work here," Tan says. "Because people don’t want to book online, and like to use cash. Elsewhere the key thing is the low fare. But of course we won’t change our model because the industry thinks it won’t work in China."

Today, Air Asia operates 200 weekly flights to nine Chinese cities. Tan says the airline has succeeded by listening to what Chinese travelers want, and then promoting that. Getting employee buy-in has also helped.

"When we hired local staff, it was important to get them to buy into our culture and understand the value proposition," Tan says. She even spoke of her own personal efforts to adapt to Chinese business culture, studying Mandarin and throwing back shots of baijiu at business dinners.

Adaptability and willingness to really listen to local partners are key to realizing return on investments in China’s travel industry, says Bao Bean: "If you try to control from abroad or put in international systems, you will have a distinct disadvantage in the Chinese market." And if for companies entering China via mergers and acquisitions, he advises: "Make sure you don’t buy the whole company. Make sure the people running it stick around."