Are Taiwan’s Hoteliers Building Castles in the Air?

Oasis Hotel Penghu

Despite declining visitor numbers, hotel companies are pushing on with expansion plans.

Takehiro Masutomo and his family enjoyed their Taiwan sojourn. A Tokyo-based freelance writer, Masutomo has covered cross-Strait relations over the years and traveled to Taiwan previously for both business and leisure. He brought his parents to Taipei for a long weekend in March. “Taiwan is fairly close to Japan and relatively safe, and I wanted to bring my parents somewhere they’d never been,” Masutomo says.

During the trip, Masutomo noted a thinning out in the throngs of mainland Chinese tourists that have become synonymous with Taiwan’s biggest tourist attractions. “I didn’t see the mainland tour groups like I used to see,” he says. “It was especially noticeable near Taipei 101.”

That was no coincidence. Amid political tensions, Chinese visitor numbers fell 18% to 2.73 million last year, and 50% on an annual basis in the first four months of 2017. It is true that Taiwan still managed to set a new record for tourist arrivals last year with 10.7 million, up 2.4% over 2015. But that increase occurred largely because Chinese visitor numbers did not start to plunge until after President Tsai Ing-wen’s inauguration in May 2016.

Currently, travel agencies in China are no longer actively promoting travel to Taiwan. As cross-Strait relations remain icy, there’s no telling how far Chinese arrival numbers could fall.

That development is squeezing the hospitality market. Occupancy rates at the Sherwood Taipei are down compared to a year earlier, observes the hotel’s general manager, Achim van Haake. “Certainly the industry is feeling pressure from the decline in Chinese tourists,” he says. But for the most part, arrivals from other markets remain stable or are increasing, he adds.

In southern and eastern Taiwan, where many hotels depend heavily on Chinese tour groups, the situation is worse. Occupancy in Kaohsiung tourist hotels fell from 70% in 2015 to 61% in the January-March period this year, according to property consultancy CBRE. In Hualien, occupancy plunged from 63% in 2015 to 43% in the first quarter.

In the Taiwan hotel market, “China is the largest slice in the pie, so even though visitors from other Asian countries are increasing, it’s not sufficient to offset the decrease in Chinese visitors,” says Harvey Thompson, general manager of the W Taipei.

In the January to March period, arrivals from South Korea, Malaysia, and Singapore all increased by double digits. Yet total visitors to Taiwan still fell 9.99% year-on-year to 2.53 million, according to the Tourism Bureau.

If that trend continues, Taiwan may see negative growth in the tourism sector for the first time since 2003, says Ping Lee, CBRE’s Taiwan research director. Tourism cratered that year due to the severe acute respiratory syndrome (SARS) crisis, which claimed 84 lives here.

Still, many hoteliers remain undeterred by the recent reduction in visitor arrivals. The Cosmos Hotel & Resorts Group, which operates six hotels in Taiwan, this year plans to launch a new Cosmos Creation (its boutique brand) outlet in Taipei and a luxury resort hotel in Hualien, and to expand villa facilities at its Yaward Resort in Taoyuan. Next year, Cosmos will open a Cosmos Creation property in Taichung.

At the bar at W Hotel

Union House Lukang, a new hotel operator based in Changhua County, will launch four premium properties over the next five years in central Taiwan. The company’s executives are betting that the local government’s plans to develop Lukang Township into a national historic and scenic area will spur an increase in demand for luxury accommodations.

That may be the case, as Changhua County currently has very limited hotel options. But in the crowded Taipei market, some of the firms jumping into the fray have no previous experience in the hospitality sector. For instance, the YC Group – a manufacturer of adhesive tape, plastic film and petrochemicals – has opened three hotels in Taipei over the past few years, and plans to launch another in the Xinzhuang district of New Taipei City.

Elsewhere, holders of prime real estate are seeking to partner with hotel operators. Last November, Taiwan’s national postal service, Chunghwa Post, announced it would work with the Regent Taipei to convert its building on XinYi and DaAn Road into a luxury hotel. The project, slated for completion by 2022, will include an NT$2 billion (US$62.5 million) investment from Chunghwa Post.

For that project, “the location is excellent and Regent is a very experienced operator,” observes CBRE’s Lee. But property developers entering the hospitality market assuming it will pay off quickly could be in for a surprise. “Running a hotel is completely different from being a builder of residential housing,” she says.

“It amazes me that they keep building new hotels,” says Mark Stocker, managing director of branding consultancy DDG, which has worked with many hospitality sector clients during Taiwan’s hotel boom. Given the potential for oversupply, he notes, “we have continued to stay clear of hotel projects with the exception of one we have decided to do because the company is one of Taiwan’s largest hospitality companies.”

Bucking the trend

Even as competition intensifies, some hoteliers say business remains brisk. For instance, fewer Chinese arrivals have had little effect on the Ambassador Taipei, one of Taiwan’s longest-established five-star hotels, says Steven Huang, senior manager of the hotel’s integrated marketing department. “We focus on the Japanese market,” he says. “We have for decades.” A total of 65-70% of the Hotel’s guests come from Japan.

The Ambassador Hotel

That strategy has allowed the Ambassador to maintain healthy occupancy rates over the long term. “We didn’t see a surge in business after 2008 [the beginning of the Chinese tourism boom] but we’re not suffering now as Chinese arrivals are decreasing,” he observes.

The Ambassador’s owners see its niche with the Japanese market as a driver of steady growth in the future, Huang says. The hotel has a sales office in Japan, cooperates with Japan’s largest travel agencies, and hosts business delegations from top Japanese companies like Sony, Mitsubishi, and Toyota. The hotel even hosts a birthday celebration for the Japanese emperor every December.

“The Japanese are very loyal. They emphasize long-term relationships,” Huang says. “It matches our business philosophy well.”

The Ambassador’s sub-brand amba, established in 2012, is also thriving, says Dino Chiang, general manager of the amba Taipei Songshan. “We are quirky, high-tech, and sustainable,” he says. “It’s a distinct positioning that’s popular with the younger generation of guests.”

The Ambassador Hotel

The ambience certainly feels different from the typical Taiwan hotel. Local artists have created functional installations as part of its decor, such as large paper lanterns that hang from the lobby ceiling. There is no Chinese restaurant, nor does the hotel have bellhops. Guests have access to laundry facilities so they can wash their own clothes. Rooms have a generous number of outlets for the various electronic devices guests now tend to carry, as well as reusable flip flops which guests can take home. Most unusually, an important event from the year corresponding to the room number is written below the number. For the year 2008, it’s the election of former U.S. President Barack Obama.

Amba’s largest market is Hong Kong, which accounts for 30-35% of its guests. Other important markets are Singapore, the domestic Taiwan market, and North America. In contrast, mainland China accounts for less than 10% of Amba’s guests. “Our business isn’t influenced much by fewer Chinese tourists,” Chiang says.

For hotels in the Gloria group, falling Chinese tourist numbers and the looming supply glut have not noticeably impacted the occupancy rate, says John Chen, the group’s vice chairman and chief executive officer. Gloria’s five hotel properties include the Gloria Prince, Gloria Residence, Hotel Quote, and Hotel Proverbs in Taipei, and the Gloria Manor in Kenting. Occupancy is roughly 70% in the four Taipei properties and 65% in Kenting.

“The supply glut is hitting us – and everyone in the industry, even if they don’t admit it – on pricing,” Chen says, adding that rates are down 15-25% from a year ago.

Interestingly, the number of guests among Chinese free independent travelers (FIT) is rising at the Hotel Proverbs, a luxury boutique property tucked in a quiet lane near the intersection of ZhongXiao and DaAn Roads in Taipei. With room rates beginning from roughly NT$8,000, the hotel caters to the premium market. “We have Chinese guests call to make a reservation, and they ask for our most expensive room,” Chen says.

Destination Taiwan?

To ensure that its hospitality market remains vibrant over the long term, Taiwan must ultimately become a destination for business travelers, industry observers say. “It’s nice that we’ve had more people coming to Taiwan since 2008, but they’ve almost all been leisure travelers,” Chen of the Gloria Group says. “The problem is that leisure guests don’t have the spending power of business travelers.”

Even though many enterprises trimmed travel expenses in the wake of the 2008-2009 global financial crisis, business travelers today still far outspend leisure guests on average. Guests traveling for business are more likely to use the hotel’s food and beverage outlets, such as for client meetings or presentations. In contrast, a leisure guest “might just go buy a drink from the convenience store across the street,” Chen says.

To be sure, falling business arrivals in Taiwan are part of a broader economic malaise that has steadily accelerated since the turn of the century. Given the sluggish growth, businesspeople mainly come in large numbers for the occasional major trade show – like Computex. Changing that dynamic will require an industrial transformation that for now seems elusive.

During the Ma Ying-jeou administration, warming cross-Strait ties suggested that business travel from China might surge. After all, in the headiest of those days, Taiwan’s China bulls talked of a common cross-Strait market. A bill that would have liberalized Chinese investment in Taiwan’s services sector nearly made it through the Legislative Yuan.

What a difference a few years make. Still, hoteliers say Taiwan could boost business arrivals if it were able to strengthen its offerings in the meetings, incentives, conferences and exhibitions (MICE) segment – incentives in particular. From the standpoint of incentive travel, the island is scenic, safe, and compact (and thus convenient for a short visit). It is also affordable compared to cities like Hong Kong, Singapore, and Seoul.

Taiwan is also rich in culture, offering lots of possibilities for meeting planners, who tend to look for destinations with good entertainment options. As part of a MICE Taipei program, the W Hotel’s Thompson suggests offering a private tour of the National Palace Museum, which has one of the world’s best collections of Chinese art. “That has the potential to be very interesting, and it’s something you can only do here,” he says.

Oasis Hotel Penghu

Yet compared to its erstwhile Asian Tiger peers, Taiwan is a MICE laggard. In the International Congress and Convention Association’s (ICCA) latest rankings, Singapore is the No. 1 market for international association meetings in Asia, followed by Seoul and Hong Kong. Taipei is in sixth place, behind both Bangkok and Beijing.

Why hasn’t Taiwan become more of a MICE hub? “Taiwan needs to be marketed more effectively to meeting planners,” says Thompson. “There needs to be a clear message about the benefits Taiwan offers to MICE travelers.”

Unfortunately, Meet Taiwan, the main website promoting Taiwan as a MICE destination, does not clearly communicate the island’s strengths. The “Why Taiwan” section of the site resembles an encyclopedia entry, with detailed information about climate and topography at the top of the page. Campy photos of what appear to be young leisure travelers appear alongside transportation information. Nowhere on the site is there a concise summary of the advantages Taiwan offers MICE travelers.

In contrast, the “Why Singapore” section of the city-state’s official MICE promotion site offers 10 reasons to pick Singapore for MICE events. The top reason is a convincing one: Singapore is the world’s easiest place to do business. More reasons to choose Singapore include world-class venues, links by air to more than 300 cities, excellent public transport, and ample opportunity to mix business and leisure.

Alongside more effective promotion, Taiwan should endeavor to hold events that drive more international recognition, like global sporting events, Thompson says. He notes that Taiwan has had some success in this area. In 2009, Kaohsiung held the World Games, which feature sports not contested in the Olympics. This year, Taiwan has held the Women’s Tennis Open and the Tower Running Challenge at Taipei 101 (participants run up the stairs of the world’s tallest buildings), and next month will host the 2017 Universiade, the largest international sporting event after the Olympics.

Meanwhile, the supply glut of new hotels is not set to ease. By 2020, there will be 1,000 new rooms added in Taipei, Kaohsiung, and Taitung respectively, observes CBRE’s Lee. A large number of new hotels will also be built in Yilan and Taichung.

Given current market conditions, adding new supply looks like a risky bet. “This is really quite a few new rooms,” Lee says. “I don’t know how the hotels are going to fill them.”