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, buoyed by a 47% increase in Chinese visitors. Danang resorts, built in anticipation of these new Chinese tourists, began filling up. The amount of direct flights from China to Hanoi, Danang, and Cam Ranh increased almost weekly. Peter Ryder, the CEO of Indochina Land said, “Right now we’re at an inflection point with supply and demand. But I see demand outstripping supply within the next 12 months.” 1
Vietnam hospitality was poised to have a huge year.
At first it did not look so bad; at least from an outsider’s perspective. When the tourism numbers were announced 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. People in the business handling the thousands of cancellations and seeing the empty rooms didn’t believe the numbers.
But those numbers included the first half of May in which Chinese arrivals were most likely up around 50%, meaning the second half of the month experienced a precipitous drop. Another factor leading to a lack of understanding of the impact was how VNAT reports statistics. Monthly international inbound statistics are released around the 25th of the month-meaning they estimate the final few days using data from the entire month.
The Actual Cost
As the summer wore on it became very apparent to everyone that the East Sea dispute had significant implications for tourism. Vietnam’s inbound growth rate began sinking like a ship taking on water; steadily dropping 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 visitors cross the northern border to trade, but that proportion has been decreasing. China’s burgeoning middle-class’s economic influence on Vietnam is hardly surprising as most countries throughout the world are experiencing large growth in the number of Chinese inbounds. China's government is also aware of the flow of outbound riches and it is well equipped and prepared to stop this flow to meet political objectives.
Chinese Arrivals to Vietnam
What is important to understand and very few people have noticed, is that the growth rate in Chinese arrivals to Vietnam is not only growing, but the growth rate is growing as well. In calculus it’s called the second order derivative; in real life it is called accelerated growth.
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
|Expected Growth (48%)
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 five months.Like rotting fruit, that inventory is lost forever. 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 20132. That would seem to indicate the Chinese travelers will come back rapidly once relations begin to normalize.
2: The Chinese government re-instated its travel warnings to The Philippines last month.