By Steve Shellum 

The race is on as hotel chains jostle for position in the run-up to the Beijing Olympics in 2008. But, as the field gets increasingly crowded and competitive, there are likely to be many also-rans and laggers who will get left behind in the mad dash for gold and glory in China.

When Beijing's winning Olympic bid was announced, China's TV screens were filled with images of crowds thronging the city streets in jubilant celebration beneath a sky lit up with fireworks. Although the hoteliers of China's capital may not all have been literally dancing in the streets that night, they were all feeling pretty jubilant.

Town planners in the Beijing Municipal Government are already busy at the drawing boards. The city is going to need more hotels to host not only the Olympics but also the hordes of business visitors expected over the next seven years. 

While many will be going to Beijing in some connection with the Olympics, the main springboard for growth will be business: over the next two decades, China will become the world's largest global economy. 

The Games are only the icing on the economic cake, but they offer huge prestige and an unprecedented opportunity for China to show the world what it has achieved.
Economists are predicting that the Olympics will add between 0.2 and 0.3 percentage points to China's annual economic growth in the run-up to the Olympics but, despite the euphoria and prestige of clinching the Games, there are many hurdles ahead, and there are likely to be as many losers as winners as more and more hotel groups join the fray.
 

The biggest international hotel player in China, Six Continents Hotels, plans to operate 60 hotels in the country by 2005 - nearly double the number it operates currently. But none of the planned expansion has anything to do with the Olympics. In fact, the group's MD for Asia Pacific, Richard Hartman, worries that hotel operators and investors will "go all loopy" about the event and start building hotels in the capital. As it is, he believes Beijing might already have enough hotels to handle the Games. Olympic cities have a track record of having to cope with massive oversupply after the event. It happened in Atlanta, Barcelona and Sydney, says Hartman. "We could go back even further to see the almost irrational frenzy to add inventory which takes years to recover.

'Olympic cities have a track record of having to cope with massive oversupply after the event. We could go back even further to see the almost irrational frenzy to add inventory which takes years to recover. If anyone reading this thinks otherwise, they should call me, because I can tell them a lot of stories about what happened' Richard Hartman Six Continents

Although Hilton International is excited about the prospects for China, it plans to "keep a cool head" on developments, and is reviewing its strategy there.

The review process has just started, and the group's president for Asia and Australia, Koos Klein, and VP operations for Asia, Simon Barlow, will be visiting China in the next two months "to look at all the projects we have on the way and all the destinations we have on our strategic list, just to reassess: is this where we want to go?"
 

Asked why he is reviewing China, Klein says: "In the past few years, we have been chasing projects so hard that we think the time has come to take a step back and ask ourselves, 'Does all of this really fit in with what we need to do to be successful in China?'" The Beijing Olympics, China's entry into the World Trade Organisation (WTO), the fact that the country's economic performance is a rare bright spot on the global economic stage and a huge potential market for both domestic and outbound travel have combined to make the country the darling of hotel investors and chains eager to grab a slice of the rising pie. The country is preparing itself for what it says will be "one of the greatest building projects undertaken in China since

'In the past few years, we have been chasing projects so hard that we think the time has come to take a step back and ask ourselves, 'Does all of this really fit in with what we need to do to be successful in China?'  Koos Klein Hilton International

A 1,215-hectare Olympic park will be constructed in the northern part of the city, on the same axis as the Forbidden City and Tiananmen Square. The park, to be called Olympic Green, will be the site of the Olympic Village and the venue for 15 events.
With traffic congestion one of the biggest problems Beijing faces, proximity to the ring roads is a key issue for hotels. The capital promises that it will treble the length of expressways, and complete a fifth ring road to alleviate traffic problems. The fourth ring road, running through an area where 80% of the Olympic facilities will be built, was recently completed.

There is confidence that Beijing will rise to the task of solving its massive infrastructure problems, however daunting they may seem from the perspective of a Beijing traffic jam circa 2001.

Beijing currently has around 200 hotels in the 3-, 4- and 5-star categories, and it is estimated that the total number of hotels in this range will increase to about 300 by the time the Games open. 

About 35 of these are "5-star", of which perhaps just 10 are of international 5-star standard. 

According to the Beijing Olympic Committee, the current 85,000 hotel rooms in the city will grow to 130,000 by 2008. This is a total growth of 52.9%, or a compound average annual growth of 6.3%.

Meanwhile, the influx of hotels and hotel groups into the Chinese capital continues.
The Grand Hyatt opened last October in the Oriental Plaza on Chang'an Avenue, just next to the Beijing Hotel in one of the city's prime locations near the Wangfujing pedestrian shopping street. 

Accor has acquired a second property in the old Xinqiao Hotel, which was rebranded as a Novotel. Several other groups are negotiating entrance to the market, including Ritz-Carlton, Four Seasons and Marco Polo. 

A prime location for many of the newer hotels is the eastern stretch of the third ring road, which is already the location for the China World, the Great Wall Sheraton, the Hilton and the Kempinski. 

Over on the western side of the city, the Shangri-La is in the enviable position of being the only hotel in its competitive set, and there are no projects planned in the area in the near future that could threaten it. 

Of the group's nearly 8,000 guestrooms in mainland China, nearly 2,500 are in Beijing alone, and its four hotels in the city are in the early stages of determining promotions and rates for the Olympics period.  

Raffles International's chairman and CEO Richard Helfer believes China's fundamentals are right for expansion. 
 

"In a world economy that is softening, China grew about 7% last year, and the Olympics are going to give it that extra impetus. In Beijing, that typically means overbuilding, and a bit of a trough after the event - as shown in many previous Olympics," he says.  "It's important to be there before the Games, and we're already there through the Swissotel Beijing. The positive thing is that the event will give China the exposure it would not otherwise get, as well as infrastructure improvements.  "From what I read, China is so excited about the Olympics it has probably promised even more [than what is expected]. "The other part about China is that the Chinese people themselves are travelling more. Previous Olympics have shown that, during the event, locals tend to stay away, but I expect the domestic market will return to the destination after the event."

'In a world economy that is softening, China grew about 7.5% in the second quarter of this year, and the Olympics are going to give it that extra impetus. In Beijing, that typically means overbuilding, and a bit of a trough after the event - as shown in many previous Olympics' Richard Helfer Raffles International

Accor is planning massive expansion in China, according to David Baffsky, chairman of Accor Asia Pacific. "Hotel companies looking to pass the finishing line as China gears up for the 2008 Olympics will need to build a comprehensive network of at least 100 properties," he says. 

"If you don't have the vision to come up with a minimum of 100 hotels in an acceptable time frame of, say, five years, then you can forget about being a market leader.
 

"If one just looks at the increase in air travel within China over the past 22 years - a remarkable 29-fold increase to 134 million airport passenger movements - you can appreciate the scale of the opportunity. "While Beijing and Shanghai are remarkable, there are cities in provincial areas that are growing just as rapidly with vast overseas investment, particularly from Europe. "China represents the new frontier - a country steeped in history and culture, and yet offering the most exciting future of any country in the world.  "Accor aspires to be a market leader in China's mid-scale hotel sector and for that you need a comprehensive network."

'Hotel companies looking to pass the finishing line as China gears up for the 2008 Olympics will need to build a comprehensive network of at least 100 properties. If you don't have the vision ... then you can forget about being a market leader' David Baffsky Accor

Starwood, meanwhile, plans to bring its Westin, Four Points and W brands to Beijing, and to set new Westin standards in China.

Eric Waldburger, CEO of the Harbour Plaza Group, estimates that a 20% increase in room stock is required, bringing the total to about 130,000 rooms in new 4-star and 5-star properties. "Although there is a world economic decline, China is perceived as having tremendous promise," he adds.

For a city looking forward to a virtually guaranteed future boom market, the increasing competition is not necessarily a bad thing, according to hoteliers in the city. With the huge increases expected in both business and tourist travellers into Beijing as the Olympics approach, they say it's hard to see how they can lose.

"[An influx of new hotels] has a positive effect in a lot of ways," says Leon Larkin, GM of the International Club Hotel St Regis. "It helps the industry grow, markets the area more and brings in higher quality of standards of staff training."

Peter Carmichael, GM of the China World Hotel, voices the general feeling. "Right now for Beijing, whether it is the WTO, Olympics, or business, everything is positive."
The city's hoteliers understand well the long-term benefits that the Games will have - up to, and well beyond, 2008.

"It's a great development for the hotel industry, in that it basically implies that there will be a lot of emphasis on the sector in the years to come," says Herman Smit, DOSM at the Radisson SAS Hotel. 

"At the same time, we will see great growth in new hotels and conversion of existing hotels to reach the standards required of the Olympic Games.

"There will also be an influx of new regulations, which will make it a little harder to operate, but will definitely raise the standards."

James Lee, of the Marriott-run Jingguang New World Hotel, says: "2005 will be the real boom year. By that time, hotel construction will be in full swing, attention will have shifted from Athens (host of the 2004 Games), and the service and retail industries will be stepping up the pace in preparation for the Olympics."

But Adriano Severi, GM of the Great Wall Sheraton, adds a word of caution. "Although we may be getting an increase in business [through the WTO and Olympics], there will also be an increase in hotels, either local or international, which will present us with the same sort of challenge we have now. The competition will become even fiercer."

Part of the problem is that, jumping in alongside the long-term players - who can make a lot of money by running hotels over a considerable period of time - are the short-term developers who aim to make a lot of money upfront by building them. It's enough to skew any inventory. 

A rush to build in Beijing will have disastrous consequences for the capital city, Six Continents' Hartman warns. "It's going to have a very serious effect on the city's economy and on the expectations of the workforce - they get all trained up, get jobs, then get laid off - as well as on anyone who's made investments there.

"They are going to skew tax revenues in the city, and increase all sorts of real distortions. If you want to stimulate the construction industry, you must do it on a long-term, continuous basis. You don't do it in a lumpy manner like this because, once the Olympics are over, no one will build anything for years, until demand catches up with supply."

Even the expected growth from China joining the WTO is beside the point, he says. 
"The point is, demand for hotel rooms is a function of many factors, all of which are interlocked - such as the pace of growth in air travel, which in turn is a function of growth in airport facilities.

"Even assuming that post-Olympic demand for Beijing will fill it up, how do people actually get there? 

"Even with the domestic market, it's still an air issue. And it's not just Beijing - suppose you want to fly from Chongqing to Beijing to take advantage of this excess supply: someone's got to build the infrastructure to Chongqing airport. "We can't look at demand generation in a vacuum; we've got to make sure that the distribution systems are as well developed as the inventory."

China is, indeed, a bewildering market, if only because it is so huge, fast growing, opening itself to the world, evolving and attracting investors' attention worldwide. 
Serious hotel groups base projects on fundamentals such as demand and supply, and long-term sustainability, and a China that is changing and evolving so rapidly can keep even the most adept of them guessing.

So what are the real difficulties of entering the China market? "Finding the right partners is a bit of a challenge," says Hilton's Klein "There are a lot of hotel projects going up, and it is a lot easier now to find the location, borrow money, etc, and part of that has to do with the loosening up of the economy and giving homegrown companies the opportunities. 

"We do, however, see that some of these entrepreneurs don't always have the money to complete a project or - after building it - don't have the financial muscle to carry it through in the build-up period until it has reached sustainable occupancy.

"Conducting due diligence is not always easy and it can be difficult to get the amount of transparency that is normal in the West - who's behind it, how much financial muscle does it have, etc?"

Klein believes it is naive to think that China's pending entry into the WTO will solve all the problems, and he envisages "a few incidents and setbacks". "[WTO entry] is certainly going to be good for the country, but it will be a gradual rather than  sudden change," he says.
 
What lessons can China learn from previous Olympics, particularly the impact on the hotel sector?

A recent study by Jones Lang LaSalle Hotels of the last four Olympic host cities - Barcelona, Seoul, Atlanta and Sydney - shows that all experienced growth in room supply in the two years leading up to the Games and during the years the Olympic were held. Much of the new supply was concentrated in the international-standard segment of 4-star and above.

Room supply almost doubled in Barcelona, and increased an average of 35% in the other three host cities.

According to the study's author, Melinda McKay, the combined effect of supply and demand resulted in some interesting occupancy movements. Although all host cities suffered a decline in average occupancies during the Olympic year - largely due to the increased level of room supply - they typically recovered in the years following the Games.  

Despite the fall in occupancies, all host cities experienced a substantial increase in average daily rate (ADR) during the Olympic year, averaging 22.6% - although Sydney recorded an increase of just 11.1%.

All host cities recorded a decline in ADR in the year after the Olympics, with Barcelona falling sharply.

The increased room rates were generally sufficient to offset lower occupancies (as a result of increases in supply), and all recent host cities recorded an increase in hotel performance in terms of revPAR during the Olympic year.

Movements in hotel performance in the post-Games period have varied significantly as the markets have resumed their normal cycles. 

Sydney is the only market where revPAR in the second year after the Games is expected to be higher than during the Olympic year itself. In contrast, Barcelona saw revPAR tumble by almost 60% in the two years following the Games, reflecting an oversupplied market in a recessionary environment.

Although jobs and revenue are created in the short-term, the greatest effects are seen in longer-term changes in the host city's urban form and governance: urban regeneration; the creation of Olympic villages; improvements to city infrastructure; growth in tourism and convention business; and heightened awareness of environmental and sustainable development issues.

According to McKay, the key to success (or otherwise) of hosting the Olympics is largely dependent upon the ability of the city to leverage off the images and perceptions created during the event itself, and to "continue delivering on the dream long after the circus has left town".

"How well can the city take advantage of the transient and fickle world focus? How indelible are the images? How can they best be sustained? 

"All of these are questions a host city must answer in a strategic approach to leveraging the event."

All the stops have been pulled out to make the Beijing Olympics a success, and the hotel industry is being asked to play a major role. But many of the existing properties are in need of capital reinvestment, says Donald Harrington, GM of the Palace Hotel, which is operated by the Peninsula Group.

"Hotels constructed in the late 80s and early 90s are clearly showing their age," he says. The Palace has decided to "get ahead of the curve" with a strategic renovation programme that started last month to keep the stately hotel state-of-the-art. 

"Hotel updating is needed to keep up with present demands," he says. "Add the Olympic factor, and it's essential. 

"The challenge for hotels will be to provide services that match those offered in any major city in the world -  and then some."

Sven Isberg, GM of the Beijing Hilton, says the Games make the city an "unprecedented focus of the world" and create enormous opportunities for the hotel industry. Investments will increase demand from corporate accounts for hotel rooms in the very near future.

Lo Young, regional director of marketing in North Asia for Six Continents, says the China Tourism Bureau predicts 800 rated hotels in Beijing when the Games open. This means, at the most conservative estimate, opportunities for foreign groups to participate in advising, managing, investing or having some role in 400 new properties.
"According to some analysts, it's the biggest potential hotel goldmine in world history," says Lo.

Accommodation is a key criteria for selecting which city gets the Games and, back in March, the Olympics Committee randomly inspected a number of hotels. 
"Beijing's victory shows that the keen-eyed critics from the Games' organisers were satisfied with hotel standards," says Lo.

"Indeed, hotels in Beijing are usually well facilitated. Big convention and exhibition centres complement MICE needs and, since many hotels are relatively new compared to the other major cities in developed countries, the equipment and facilities are usually quite advanced."

An example? Broadband internet will become a norm in Beijing hotels.

The city government is notoriously strict about hygiene and guest safety at international hotels, and carry out frequent stringent site inspections. What's most needed? "English-language training," says Lo. 

The Beijing Hotel Association will be meeting officials soon to form a "plan of action" on increasing courtesy awareness. "The hotels and hospitality industry must play their part," says  Harbour Plaza's Waldburger. "It's a golden opportunity to impress the world with the courtesy and efficiency of a world-class metropolitan city."

Numerous hoteliers, however, point out the sting in the tail of all this enthusiasm. 
The eyes of the world will be on China. There will be enormous publicity across the country. A steady stream of consultants, investors, developers and service management companies will visit strategic locations around the country. The press will have eyes everywhere.

Additional waves of investor interest will flow, particularly if the Games are impressively administered, organised and executed. 

But - and here is the danger for Beijing - if any of the vital ingredients are mishandled, the same immense publicity machine that is putting China on the world stage will be there to tear it down.