As Wanda introduces new luxury brand, China's state-owned hotels face scrutiny

While China is continually in the news for its seemingly free-market principles and and vast appetite, particularly for U.S. hotel assets, there is the little matter that the country is still under Communist Party rule. And though China may appear more open and free of government intrusion, state-owned enterprises still exist, and the hospitality industry is not exempt.

An interesting parallel: On the same day that Wanda Hotels & Resorts, led by China's richest man, Wang Jianlin, introduced and discussed plans for its luxury Vista brand, a scholarly study by the School of Hotel and Tourism Management at The Hong Kong Polytechnic University came out, centered on Chinese state-owned hotels and their need to enhance performance and market competitiveness.

To be sure, there is a striking difference between hotels under the Wanda moniker and state-owned hotels.

Yesterday, Qian Jin, president of Wanda Hotels & Resorts, (pictured), unveiled its Wanda Vista brand and future development plans at an event jointly organized with the China Tourist Hotel Association.

While the brand will have its roots in China—the first hotel under the Vista flag opened in Taiyuan, in 2012—future growth will be beyond China's borders, with plans to expand to overseas markets by 2018. The first six of these markets targeted for expansion will be London, Madrid, Sydney, the Australian Gold Coast, Chicago and Los Angeles.

"Wanda Hotels & Resorts is dedicated to its company mission to uphold Chinese values, build mutual respect, and perform beyond expectations. Even as we are shaping this international brand, we hope to stay true to this mission and bring Eastern hospitality to the world," said Qian.

By the end of 2014, there were a total of 10 Wanda Vista hotels operating in major Chinese cities, including Shenyang, Yantai, Tianjin, Taiyuan, Lanzhou, Changsha, Kunming, Nanning, Dongguan and Quanzhou. In November this year, another Wanda Vista will open in Hohhot city. Wanda Vista Resort Xishuangbanna, the company's first resort hotel, will open on September 26. By the end of 2020, Wanda Hotels & Resorts aims to own and operate over 160 hotels worldwide.

State-owned hotels
While Wanda Hotels & Resorts are a luxury product geared toward the affluent, China's state-owned hotels have a more universale appeal, but, according to new research, need to enhance their performance and market competitiveness.

The researchers from The Hong Kong Polytechnic University conducted in-depth interviews with managers and other employees of state-owned hotels in Hangzhou, and identify little distinction between the ownership and management of the hotels, the lack of a profit motive, the absence of staff incentives and the inability to match private sector competitors as causes of concern.

Yet stable workforces and entrenched locational advantages suggest that these hotels “have the potential to become profitable businesses”, the researchers argue.

Here's some thought:

As the first market opened to foreigners after the introduction of the open door policy in 1978, China’s hotel and tourism industry was once “considered a pioneer of economic reform,” the researchers observe. They note how the industry expanded rapidly with the help of strong government support and a favorable business environment, to the extent that by 2009 there were 14,237 star-rated hotels in China. As the industry expanded, the proportion of state-owned hotels reduced from 59 percent in 2001 to 38 percent in 2009.

Yet a major problem in the industry, the researchers note, is that many of these state-owned hotels continue to experience low profit margins or losses and suffer from inefficiency in their operations. Although state ownership is recognized as a major cause of such inefficiency, it seems that the Chinese government has no intention of privatizing large-scale, state-owned enterprises. Given that the ownership of these hotels is unlikely to change, the researchers highlight that it is “important to identify and remedy the problems plaguing” them.

Of the fifteen interviewees, three were general managers, two assistant general managers, four department managers and six non-managerial employees. They had worked in the industry for around 16 years on average, although the managers had considerably more experience than the non-managers, at 24 years versus three years.

The interviewees identified a number of problems arising from the lack of a clear distinction between the ownership and management of state-owned hotels. For instance, “constant intervention” by government officials results in “low efficiency, unprofitability and less of an ability to compete” with other hotels, the researchers report. Managers are not free to make their own decisions, and any decisions they do make are often subject to lengthy delays while awaiting approval.

Moreover, profit making is not regarded as an “important objective” for these hotels. Rather, the interviewees indicted that priority is given to providing hospitality services to government officials, which is in conflict with aims such as enhancing asset value and making a profit. The researchers argue that this priority has “become an operational burden” for the hotels, and “explains their underperformance” compared with privately owned hotels.

The interviewees all regarded international hotels as having “superior management systems” and “more experience” than state-owned hotels. Although the researchers note that some state-owned hotels have attempted to implement changes in their management systems, most such attempts have been thwarted by various obstacles, the most important of which is their inability to separate management from ownership.

To overcome these difficulties, the researchers suggest that managers should be given more power in the decision-making and implementation process. If they are to remain state owned, the operation and management of these hotels should resemble those of privately owned hotels. It is also important to remove the social objectives of state-owned hotels, argue the researchers, because the need to provide hospitality to government officials makes it difficult to determine whether such losses are caused by “bad management” or because the hotels must “fulfill these social objectives.”

Many of the interviewees noted that state-owned hotels have limited competitive power against other types of hotel, as they operate independently and lack the advantages of international hotel chains. The researchers thus suggest that management be shifted to the regional level, which would remove competition among local state-owned hotels and elevate their competitive power in the market.

The researchers conclude that because privatization “does not fit the political agenda of Chinese leaders,” state-owned hotels need to find ways to enhance their performance “without selling the major government assets.”