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MANT 217

UNIVERSITY OF OTAGO EXAMINATIONS 2011

PREVIEW ONLY NOT THE REAL EXAM

DEPARTMENT OF MANAGEMENT MANT217 INTERNATIONAL MANAGEMENT SEMESTER ONE
(TIME ALLOWED: 2 HOURS)

This examination paper comprises 21 pages. Candidates should answer questions as follows: Complete the following sections: Section 1) Answer THREE Essays, each: 20 points. Section 2) Answer ALL aspects of the Case Essay: 40 points. Total value: 100 points. The following material is provided: NIL

Use of calculators: * Only calculators on the University of Otago list of approved calculators are permitted. (Subject to inspection by the examiners.) Candidates are permitted copies of: NIL (Subject to inspection by the examiners.) Other Instructions: NIL

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Section 1: Answer THREE out of six questions. Each question is worth 20% of the final exam.

Q1) ESSAY (worth 20% of exam) Q2) ESSAY (worth 20% of exam) Q3) ESSAY (worth 20% of exam) Q4) ESSAY (worth 20% of exam) Q5) ESSAY (worth 20% of exam) Q6) ESSAY (worth 20% of exam)

The essay questions have of course been deleted from this PREVIEW version of the exam. The essay questions draw on lectures, tutorials, and matching textbook chapters (refer to the course schedule on page 3 of the course outline). The essay questions are drawn from the topics covered by Virginia and will be marked by her. The case section of this exam, on the other hand, covers all material in the course; it was written by Andr and hell mark it. Material covered earlier in the semester remains useful as support and background for your arguments and points in the essays, and particularly in answering the case section. This includes lecture, tutorial, and textbook materials, which can furnish useful theories, concepts, and examples for use in your answers.

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The first two essay questions are on page 2 of the exam, while questions 3 5 are on page 3. (The reason for apparently wasting a couple of pages in this preview with these comments is that we are preserving the page numbering as shown on the exam to help you remember where something might be located in the case.)

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4 Question 6 is on page 4 of the exam.

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5 Section 2: CASE Essay (worth 40% of exam)

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(This case was co-authored by your lecturer, Andr Everett, and is taken directly from the textbook International Business (first edition, 2004) by Oded Shenkar and Yadong Luo, pages CA42-CA53. This case has been made available to you on Blackboard as a study and preparation aid for this examination. The exam question is different from those printed in the textbook. The content of the case has not been changed, although the References have been dropped as they are irrelevant in the context of this exam. The original U.S. English spelling has been retained. The case has been reformatted to better suit our examination paper conditions).

The essay topic for this case is: < Question deleted from PREVIEW version of exam. Be sure to read this question carefully, and answer ALL of its parts (it has several parts). The actual question bears some similarities to those in the text, so you may use those in preparation for the exam. All of the questions in the text are reproduced here in this preview (but not on the actual exam, to avoid confusion); you do not need to acquire or refer to the textbook in which the case appeared. > Questions in the textbook: 1. Do you agree with Disney's decision with respect to market entry into HK/China? Justify your choice. 2. Disney plan s to make certain adaptations to its previous strategies to enter the European (Paris) and Japanese markets. Do you agree with its decisions? Why or why not ? 3. What are some of the key challenges Disney HK will face in implementing these strategies? Suggest methods of dealing with these challenges. 4. Do you agree with Disney's decision to pursue a centralized control global strategy? Discuss. (The case commences on the next page.)

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CASE Hong Kong Disneyland

by Beatrice S. Leung,* Yim-Yu Wong,* and Andr M. Everett** *San Francisco University, **University of Otago (New Zealand) (Case Copyright 2004 John Wiley & Sons, Inc., as part of the course textbook, International Business by Oded Shenkar and Yadong Luo) INTRODUCTION With its latest move to build Hong Kong Disneyland, Disney is taking a major step in opening up the vast Chinese market as part of its international expansion. Disney had learned some hard lessons from its Paris operations: Tokyo Disneylands phenomenal success could, clearly, not be taken for granted in other theme parks outside the USA. For its third international foray, Disney has limited its risk exposure by experimenting with a joint ownership model involving local government and being more sensitive to the community responses in the host country. Michael Eisner, chairman and Chief Executive Officer of the Disney Company, remarked that their move to Hong Kong was the result of an extensive worldwide review and that they had come to recognize Hong Kong as a unique city in an extraordinary nation at a remarkable time. China has seen steady growth in its economy in recent years and is set for even more dramatic growth with its admission to the World Trade Organization (WTO). In locating its first Chinese venture in Hong Kong, Disney has sought to take advantage of both its central location in Southeast Asia and its role as gateway to Mainland China, allowing it to draw visitors from both Mainland China and neighboring countries, maximizing the potential revenue sources. Now Disney was faced with additional strategic decisions relating to its choice of site and the most appropriate form of organizational structure, source of funding, and the degree to which the company needed to respond to local market requirements. THEME PARKS AND DISNEYA BRIEF STRATEGIC BACKGROUND A theme park is a capital-intensive investment, with around half the capital normally spent on acquiring land and the remainder on equipment and operational funds. Most theme park operators reinvest the majority of their profit into upgrading and refurbishing park facilities and equipment in order to attract repeat customers. Admission fees usually make up 60% of park revenue, but some parks earn more from food, beverage and merchandise sales. Small parks usually charge on a pay-per-ride basis while large parks usually sell day passes with unlimited rides and access so as to keep customers in the park longer, spending more on site. The three distinct market segments for theme park business are local residents, regional or national visitors, and corporate customers. Each of these segments is most TURN OVER

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approachable through the use of distinct marketing efforts. Local residents, specifically annual-pass holders, are targeted through local advertisements, radio promotions, direct mail, and discounts. Many parks targeting the regional and national vacationer employ co-op advertising or marketing efforts with competing parks in the area or through a convention/tourism bureau to offer discount passes to all parks. Parks in the business-to-business segment offer their facilities as a location for company outings or promote purchase of admissions tickets as sales rewards or other employee incentives. In most cases, the key to any marketing program is sponsorship, which theme parks relied upon to stretch promotion budget and advertising exposure. Disneys seven theme parks dominated the rankings of the top ten amusement parks worldwide in 1999, which are listed in Table 1. A brief chronology of the parks is provided in Table 2, and the three international parks are summarily compared in Table 3. Disneys corporate strategy for both domestic and international expansion reduces the impact of economic setbacks in any regional market while achieving long-term growth through international expansion. Its international growth is mainly achieved by selling Disney merchandise, setting up Disney cable channels, showing Disneys movies, and selectively building theme parks. Apart from its overwhelmingly successful Tokyo Disneyland and the improving Disneyland Paris (formerly Euro Disney), Disney has focused on Asia, China in particular, for its third non-US theme park. Eisner recognized that Disneys greatest opportunity for expanding the Disney brand lies overseas: In addition to more aggressively exporting our movies and our consumer products, we are actively looking at several countries around the worldmost notably Chinaas venues for our next full-scale theme park. The theme park and resort business is an important growth engine for Disney. Bearing in mind that one of Disneys corporate strategies is to crosspromote each divisions businesses, new theme parks will help promote consumer products as well as new animated pictures. Hong Kong Disneyland is Disneys third effort towards internationalization. The Disneyland Paris experience does not necessarily prove that their successful service concept is not transferable. Rather, its failure highlights the vulnerability of the theme park business to economic, cultural, social, and political environmental factors. The key to success is to choose the right product to enter the right country or site at the right time with or without local adaptation. Among other things, one of the major reasons for the early failure of Euro Disney was poor timing; it commenced operations at a time when the French economy was spiraling into a recession. As for operational efficiency, it appears that Disney theme parks will not make any substantial gains through either integration or expansion of global operations. There is also little need to make substantial adaptation to local conditions. After all, the most valuable and inimitable asset of Disney is its brand name, synonymous with fantasy and closely integrated with cartoon characters from its popular animated movies and fantasy stories. It is basically an American product and therein lies its appeal. If Disney makes substantial TURN OVER

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adaptation to acculturate theme parks with host countries, offering a European face in Paris, a Japanese face in Tokyo, and a Chinese face in Hong Kong, the parks will lose their unique appeal to their guests, who are drawn precisely for the foreign, meaning American, flavor. Having balanced the force for local acculturation against the force for global integration, the best operational strategy for Disney is a global strategy. This means that decision-making is centralized at the corporate level and that knowledge and technology developed in the home country can be disseminated abroad without undue delay. The standard design of the theme park (the usual hub and spoke design), operational procedures, and staff training program will help to attain the goal of offering the same Disney theme park experience, regardless of location. It also helps to achieve greater economies of scale through the cross promotion of Disneys different business segments. Disneys core competence lies in its quality service. For this reason, it exercised tight operational control in Tokyo Disneyland and Disneyland Paris (through thick operating manuals), and plans the same approach for the forthcoming Hong Kong Disneyland. Equally, Disney plans the same centralized control when it moves forward to its next overseas theme parks in Latin America and other European countries. DISNEYS STRATEGIC CHOICE OF HONG KONG China has been undergoing a series of structural, financial, and economic changes in recent years. The government has strived to privatize its giant state-owned enterprises and is opening more and more business sectors to foreign competition. An estimated extra US$80 billion in fresh capital is expected to flow into China during the first six years after joining the WTO. It is expected that leisure and travel operators will benefit from increasing international trade, and the presence of foreign businesspeople in China. China also has a big domestic tourism market. As the economy grows, more people can afford domestic travel. In 1999, there were a total of 719 million domestic travelers spending a total of RMB 283 billion. To boost domestic consumption, the Chinese government mandated five-day workweeks in 1999 and increased the number of public holidays from 6 to 10 days in 2000. Many tourist destinations reported large revenue gains. As for Chinas theme park business, the last five years have seen the failures of the American Dream Park, a $50 million project in Shanghai, and Frobelland, built as a German theme park by a Taiwanese investor. This led some analysts to predict an end to theme parks in China despite the anticipated explosive tourist growth in the new millennium. Investors misjudgments have been many. Estimates of the number of customers were far too high, costs soared out of control, and bureaucracy weighed projects down. Other factors contributing to these failures include the rural location of the parks (which is customary in the West) and lack of clusters of middle-class residents in major cities. Chris Yoshii of Economic Research Associates on the other hand opined in 1998 that China was still the theme park market for the new millennium.

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Hong Kong, with about 7 million residents, is among the most populous cities in Asia. However, even this number is far too small to support a Disney theme park on its own. Disney also took into account the total number of visitors going in and out of Hong Kong and in particular the visitors from Mainland China. One of the biggest sources is the 72.7 million people, 5.8 percent of the total national population, living in Guangdong province, bordering Hong Kong. In terms of infrastructure Guangdong has more than 51 state-approved ports and 7 civil airports, with the Guangzhou Baiyun International Airport providing international services. The province is a major railway hub and has a good network of highways linking major cities. Its telecommunication network is one of the most advanced in the country. Guangdong is also the largest light industrial base in China and has developed into a major export-processing base for investors from Hong Kong, Macau, and other markets. It is the largest consumer market in China, though its population ranks fifth largest among all provinces, municipalities and autonomous regions. It also ranked at the top in attracting foreign investment. Apart from the Pearl River Delta Open Economic Zone and three Special Economic Zones in Shenzhen, Zhuhai, and Shantou, Guangdong has 11 statelevel economic and technological development zones, four bonded zones, and 59 provincial level economic and technological development zones. In the past 20 years, Guangdong has seen the largest GDP growth rate at 40.2% in 1993, and the GDP for the secondary sector gained over 60% in 1996. In short, Disney is stepping into one of the most affluent and densely populated areas of China with tremendous economic growth potential. Hong Kong is also a great city for tourists from all over the world. It is ranked in second place, just behind China, in the top ten East Asia/Pacific destinations with 11,328,000 visitors in 1999, an increase of 18.3% over the previous year. The National Geographic Traveler, an authoritative publication in the United States, also put Hong Kong on its list of the top 50 tourist destinations of a lifetime. Each visitor spent an average of $975 per trip. Tourists from Southeast Asia who cannot afford a long trip to the United States Disneyland or the relatively expensive Tokyo Disneyland, will find Hong Kong Disneyland a convenient alternative for the American theme park experience. A summary of existing regional theme parks is provided in Table 4. DISNEYS BUSINESS STRATEGIES IN HONG KONG Pursuing the Cautious and Growth Ownership Model Despite early concern about its viability as the first Disney venture in Asia, Tokyo Disneyland has become the worlds most popular amusement park. The Tokyo park was designed to closely resemble the Disney parks in America as the Japanese partner did not want Disney to do anything that was not Western. For instance, signs are in English, all but three of the park shows are in English and there is virtually no Japanese food sold. The secret of its success is providing visitors with a slice of unadulterated Disney-style Americana, according to Oriental Land president Toshio Kagami. The park TURN OVER

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brought huge economic benefits to the Japanese economy in terms of tourism receipts and employment. In retrospect, Disney appears to have profited least because it handed over licensing rights in return for a paltry 10% of admissions earnings and 5% of food and souvenir sales. Disneys noownership position in Tokyo Disneyland is a result of Disneys initially cautious overseas investment policy and its heavy financial commitment to building the Epcot Center in Florida. The consequence, of course, is that Disney also limited its potential return from the venture. To avoid repeating the same mistake, Disney was determined to be the primary owner for the European Disney theme park. In order to maximize its return, Disney took a 49% stake in the Paris project, but its high expectations foundered on the reality of economic recession and angry criticism from French intellectuals and social critics. French intellectuals called the project a cultural Chernobyl and disliked its promotion of an unhealthy American style of consumerism. However, the major cause of setbacks in Euro Disney lay in the economic recession and a miscalculation of revenue, i.e., visitors stayed in the park for much less time than was forecasted in the original projection. Disney also made operational mistakes such as serving no alcohol and underestimating the demand for breakfast. High employee turnover developed due to discontent over the strict Disney dress code and a tough Disney performance standard. In addition, the heavily leveraged Euro Disney needed to pay interest on its $2.9 billion of borrowed capital. For the fiscal year ending September 30, 1993, the amusement park lost $960 million. Disney quickly negotiated with its banks for debt restructuring, suspended 5 years royalty payments, and streamlined its marketing and operations. As a result, its ownership fell from 49% to 39%. Mindful of these costly missteps, Disney is taking a new path and trying out a third model for Hong Kong Disneyland. The partnership with the government will guarantee uninterrupted financial and governmental support to the construction of the project and in the parks initial years of operations. In addition, if there is any community concern or criticism to the project, the government, as the largest shareholder, will be as eager as Disney to fend it off. In fact, in view of the high capital layout, the high land price of Hong Kong and Disneys troubled consumer product and film business, it would be too risky for Disney to finance the project with its own capital. Under the current deal, Disney will totally control the operations of the park and have a 43% share of profits with small immediate cash investment. What Disney really needs is to display its expertise in the managing and marketing of its big brand in order to make the theme park a success. Euro Disney proved to be an over-ambitious project at the time of opening because Disney underestimated the impact of a downsizing economy and was over-confident in its Disney magic and operational forecasts. Judson Green, chairman of Walt Disney Attractions, admitted that they were risk averse in the Hong Kong Disneyland project. The new theme park is being planned in stages, with 5.6 million visitors in the opening year and with a plan to expand new attractions only when justified by attendance levels.

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However, it is evident that Disney is very cautious in avoiding over-investing while maintaining a solid share and control over the project. Sensitivity to Community Concerns and Work Place Issues Disneyland Paris has been criticized as a symbol of American cultural imperialism. Ariane Mnouchkin, a theater director, called Disney a cultural Chernobyl. A Paris union official accused Disney of suppressing French individualism through its strict employee dress code. The theme park was also a target for anti-Americanism and hundreds of farmers blocked the roads to the park in June 1992 because the protestors believed the United States was responsible for the proposed cuts in European Community farm subsidies. It seemed to the French that Disney was just too obsessed in its insistence on the American Disney style and ignored local customs such as serving wine with meals. Peter Murphy, a leading tourism scholar, emphasizes the importance of taking into consideration local attitudes and consultation with the community that includes local residents and tourism operators when developing tourism at the community level. In this context, Professor John Ap of the Hong Kong Polytechnic University conducted a pilot longitudinal study to monitor community perceptions and attitudes towards Hong Kong Disneyland and to assess its impact on tourism in the Pearl River Delta Region. As part of the study, two surveys were conducted in March and April 2000 (see Table 5). Of the 832 respondents, 75% indicated support for the project and 63% believed the benefits of Hong Kong Disneyland would outweigh the costs. Half of the respondents would tolerate the negative impact brought by the project. The social and cultural impact of the project also received positive ratings, while the environmental impact received the lowest rating. The major concern of the respondents appeared to be the fairness of the deal as about 39% of the interviewees tended to disagree with the arrangement and indicated the deal was not fair. Response to the influence of American culture upon Hong Kong society was also mixed. Professor Ap argued that for the project to be accepted, the community had to embrace, accept, and perceive it positively as well as to tolerate any negative impact of the project. Environmentalists are lamenting the loss of a green belt, the accompanying pollution caused by the project, and the threat to the endangered nepenthes (i.e. pitcher plants), white dolphins, and the loss of a probable historical site. Mei Ng, director of the Friends of the Earth asked for a sustainable development plan that could balance the environment, the economy, and social development. Environmentalists are also concerned about the cost and environmental impact caused by dredging and disposal of the contaminated mud at the Cheoy Lee shipyard that is necessary before reclamation work for the Disney site can commence. However, it appears that Hong Kongs environmentalists have less political influence over local issues than their Western counterparts. As such, the major community issues that remain to be resolved are whether the Disneyland project is a fair deal and whether the economic benefits are based on realistic projections. TURN OVER

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Local Competition Enhancing the Growth of Hong Kong as a Recreation Destination The primary competitor for Hong Kong Disneyland will be Hong Kong Ocean Park, a 23-year-old marine and amusement park in the southern part of Hong Kong Island. Ocean Park had 3.3 million guests in 2000, about 40% of whom were tourists, with 70% of those coming from Mainland China. Ocean Park planned major renovations over the next four years, including the addition of Pacific Pier, a viewing area featuring 17 California sea lions, a United States Zamperla Mine Train coaster, a Turbo Drop Tower and the Adventure Bay water park. According to Professor John Ap, Ocean Parks attendance will inevitably suffer in the initial years of Disneylands operations. As the market settles down, the two competing parks in the area will increase Hong Kongs drawing power as a recreation destination and result in attendance increases for all parks concerned. Randolph Guthrie, head of Ocean Park, commented that the key for their survival would be differentiating itself by focusing on ecology and conservation issues. In fact, the not-for-profit Ocean Park is unique in providing educational opportunities on marine life and promoting animal conservation program as well as amusement entertainment. In addition, its adult admission fee of US$19 is much more affordable than the premium price of about US$33 expected to be charged by Disney. The small scale theme parks clustered in the Shenzhen area, across the Hong Kong border, are designed to provide entertainment experiences with a Chinese flavor and are therefore differentiated from the American Disney dream. Officials in the Pearl River Delta area and Guangdong province are confident that Hong Kong Disneyland will bring in more tourists from both within China and overseas. As for other parts of Asia, Tokyo Disneyland is optimistic that Hong Kong Disneyland will not cannibalize its revenue as overseas tourists account for only 3% to 4% of its visitors. Tokyo Disneyland continued to perform well and the Tokyo DisneySea park opened in fall 2001. Everland, part of the Samsung empire in Korea, is not worried about the competition from Hong Kong. The Strategy of Differentiation Disney theme parks are seen as places for family entertainment. Linda Warren, Disney Worlds senior vice president of marketing, noted that Disney was about children and people who are children at heart. . . . We always have to be aware of our image. Tim OBrien, editor for parks and attractions coverage at Amusement Business magazine in Nashville, agreed that Disneys image is too squeaky clean to allow them to do Halloween right. Disneys appeal of fantasy and fun proves to be very successful in bringing in millions of guests for Tokyo Disneyland and its Paris counterpart since their openings. Japanese love Disneys cuddly and adorable wide-eyed cartoon characters. Cries of Kawaii (cute) are often heard throughout the park. By the same token, Japanese and American cartoon characters also appeal to Chinese and other Asian kids. Disney is now a veteran in re-creating the TURN OVER

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Pixie Dust magic and American dream on foreign soil. This involves the use of the same theme park design and construction as well as attention to such details as maintaining a no-fly and a no-anchor zone as well as a green belt so that non-Disney construction and objects that may be distracting or incoherent with the theme park will not be seen at the site. The prime objective is to nourish an atmosphere of purity and innocence so that the Disney dream and the big stage concept remain undisturbed. This is the slice of Americana and Disney fantasy that will pull in millions of Mainlanders to experience first hand in Hong Kong. One of the key success factors for Disney is its renowned quality service and efficiency. The so-called Disney look and Disney smile denote a unique service standard and practice that is built on a service oriented and pleasing culture. It is noted that Tokyo Disneyland is successful in instilling high service quality and the Disney spirit, due to a good source of young Japanese workers who are generally comfortable wearing uniforms, obeying their bosses, and being part of a team. As with its other theme parks, Disney would establish a Disney University in Hong Kong to provide on-the-job training and professional development for each theme park employee. This is also the place where its employees will learn about Disneys values, traditions, and standard of excellence. High quality service is indeed essential to the success of a theme park, as it links directly to the visitors intention to return. International hotels and shopping malls in Hong Kong are able to offer on-the-job training for their staff or hire graduates from tertiary or technical institutes. However, most front-line sales personnel, janitors or operators from other service providers receive little or no formal training. The quality of customer service may vary in different establishments. One of the biggest challenges for Disney is to instill the quality service concept among its locally recruited employees. All cast members have to commit themselves to creating happiness for all guests, irrespective of their color, race and place of origin. With a projection of 70% of guests from Mainland China, Disney has to focus on establishing Disneys management practice and motto starting with hiring, training, and development of its cast members. John Ap remarked that education and training is critical to reduce prejudice toward the Mainlanders and Disney has been good at training its staff. Synergy in Disneys Operations Synergy is very important for Disney, and its divisions have to promote each other. A writer commented that Disneys method of conjuring valuein the form of Mickey Mouse and his sidekicksfrom his own imagination and those of his viewers, and then fashioning a self-reinforcing cycle of promotion and sales. The main strategy for Disneys home operations is media-diversification while achieving synergy in operations. However, Disney will not replicate this strategy in Asia at this stage. Disney president Robert Iger said, this market (Asia) has lots of potential for media companies . . . but our primary focus is on the Disney brand. He notes that Disney is developing a Disney.com for Hong Kong, but this is a means to help TURN OVER

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support the theme park by allowing customers to buy Disney merchandise on the web instead of offering full-fledged Internet services similar to what AOL and Yahoo! have been doing. Ultimately, there will be a Disney TV channel for China and Japan aiming to support Disneys operations in Asia. The three main operations, namely, theme park, merchandizing, and videos, will crosspromote each others performance. One segment of operation serves as advertisement for the others, and most Asians are more familiar with Disney movies and merchandise than Disneys Internet operations. Disney is eager to exploit the enormous potential of its brand image to improve the corporations overall performance. Another method that Disney has developed in order to maximize its return on operations is DisneyQuest, a three- or four-hour amusement center experience. The first two were opened in Walt Disney World and Chicago in 1998. A third was scheduled to open in Philadelphia in the spring of 2001, but the project was abandoned. DisneyQuest offers a combination of storytelling and interactive entertainment for guests of all ages. Inside the facility, guests can enjoy virtual attractions such as Cyberspace Mountain (a roller coaster), ride in a 360-degree pitch and roll flight simulator, battle Hades in a 3D realtime video underworld, or draw their favorite Disney characters on computers. DisneyQuest is Disneys attempt to tap into extra revenues from city and neighboring kids whose families do not have the time or budget to afford a long trip to Disneys theme park resorts. Unless Disney proves to have overdone the DisneyQuest leading to cannibalization of theme park sales (attendance), the mini-scale amusement centers may well serve as an extra source of revenues and a big advertisement of Disneys brand in addition to being a testing ground for new rides and features. It is therefore of strategic importance that Disney seeks more exposure of its products and names in Mainland Chinese cities to test the markets. The scale of investment and operations is easier to control and more affordable, while response and feedback are valuable for adjusting Disneys overall and long-term expansion plan into the Asian Pacific market in the future. This is particularly beneficial for the Chinese market since the business environment there is not mature enough to offer adequate information and legal infrastructure on which to venture an intensive and large-scale theme park at the current stage. Strategic Alliance with the Hong Kong Government Unlike Disneyland Paris and Tokyo Disneyland, Hong Kong Disneyland is meant to be a partnership between Disney and the local government right from the beginning. Even though the French government made significant concessions to the project in terms of extending highways and the railway, reduction in value-added tax, provision of $6 billion loans, and sale of land at agricultural value in 1971, the theme park was initially owned 49% by Walt Disney with the remaining 51% owned by a separate company called Euro Disney S.C.A. which traded on the French Bourse. There was French government support but not the strong support founded on coownership. As Disney prepares to take on the 1.2 billion Chinese market for TURN OVER

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its movies, cable channels, merchandise, and theme park, it must be more sensitive to the political environment and avoid irritating the Chinese government. The Hong Kong government may act as the intermediary to channel critical issues and concerns for Disney to reposition its overall expansion strategy and to make tactical adjustment while marching into the Chinese market. By the same token, such a partnership will hopefully help divert any fallout from friction in Sino-American relations that are not directly related to Disney. These relations are experiencing ups and downs lately, with such thorny issues as human rights, Tibet independence, Taiwan, allegations of Chinese spying relating to nuclear weapons, and Chinas adhesion to its World Trade Organization commitments. Stricter Copyright Enforcement and Development of Formal Distribution Channels The main pillar supporting the Disney dream is its brand name. Disney has been very careful in managing and protecting its image and brand name. Apart from holding off scary Halloween celebrations and thrilling rides that are incongruent with its themes of fantasy and fun, Disney is aggressive in combating copyright infringement and protecting its image. Disney has strict codes for its licensees to follow so as to reduce the extent of damage such as the sweatshop problem that other multinationals experienced in recent years. However, intellectual property rights in China are a different story. Since Chinas open door policy with respect to foreign investment began in the 1980s, efforts have been made to bring intellectual property rights protection in line with international standards. The Chinese government has revised its Trademark Law, Patent Law, and Copyright Law. However, the enforcement measures are less than effective, and pirated American consumer goods, including Mickey Mouse products, are openly sold to millions of Chinese. In terms of intellectual rights protection, Hong Kong has been doing a better job recently. In February 1999, the United States removed Hong Kong from its international piracy watch list, and it has remained off the watch list since. Promoting and Expanding Hong Kongs Inbound Tourism The Special Administrative Regions (SAR) support in promoting and expanding Hong Kongs inbound tourism is a prerequisite to the success of the theme park. The SAR government is taking a number of steps to facilitate the development of tourism. Four major strategies have been identified and presented in the booklet, 2000 Policy Address, Tourism, Policy Objective for Economic Services Bureau. These measures are designed to develop and improve tourism infrastructure, facilities, and products, to improve Hong Kongs tourism friendliness and quality of service, to promote Hong Kong as an attractive tourism destination, and to enhance consumer protection. The Disney theme park and the accompanying development of Lantau Island are included as part of the major efforts in improving tourism attractiveness.

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The SAR government is also negotiating with Guangdong officials with a view to increasing the quota of two-way permits from 1,500 to 2,000 daily in order to allow more Mainland tourists to visit Hong Kong. The Guangdong government has pledged to ease visa application for Mainlanders traveling to the SAR. In addition, both sides agreed to unify diesel standards for a better air quality and to reduce water pollution in Deep Bay. Another important step for Disney is to secure its resort hotels as one of the designated choices for Hong Kong tours. Ensuring a Minimum One-Day Theme Park Experience According to a survey conducted by the Hong Kong Tourist Association, 76% of Mainland vacation visitors and 80% of vacation visitors from all places of origin stayed in Hong Kong for three nights or less; 61% of the Mainlanders and 50% of all visitors chose an all-inclusive package to Hong Kong; 71% of the Mainlanders were on a multi-destination trip to Thailand, Macau, Singapore, or Malaysia for an average nine-day tour with Hong Kong as one of the main stops. As packaged tours for Mainlanders tend to use Chinese-owned or -operated hotels in Hong Kong that are cheaper, Disneys hotels, with higher rates, will have to target overseas visitors. Disney will therefore be in a better position if Mainland guests stay in the park for at least one whole day so that they will spend enough money on souvenirs and food before they move on to other city attractions or to Ocean Park. Adaptations to Hong Kong and the Chinese Environment Disney theme parks have a long-standing smoking ban policy in their stores, restaurants, queues for rides, and on their buses and monorails. Smoking is only allowed in restricted areas outside the main stream of traffic. However, given the wide use of cigarettes among Mainland Chinese, Disney is seriously considering being flexible about the rules on smoking in the Hong Kong theme park. Another challenge lies in crowd management and maintaining cleanliness in the park. Again, Disney has to display its expertise in maintaining a clean and orderly environment in the park with a high volume of tourists. As far as adapting to Chinese culture, it does not appear that Disney needed to make any significant adjustments as the Disney dream is basically a product of the American culture. Signs and restaurant menus will be in English as well as in Chinese. Cast members must be able to speak English, Cantonese, and preferably either Mandarin (the official language of China) or one other Chinese dialect to cater for the needs of the majority of the nonEnglish speaking Mainlanders. Hong Kong people are being criticized for their deteriorating English ability and insufficient Mandarin skills. This touches on a much deeper and complicated social and educational phenomenon in Hong Kong where Cantonese is the daily communication tool of the people, although English and Mandarin are also official languages. To maintain competitiveness in international trade and tourism, Hong Kong has to revamp its educational system to train more capable bilingual people. To TURN OVER

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offer an authentic American experience to guests and to differentiate the theme park from its counterparts in the nearby Shenzhen area, it is not necessary for Disney to sell Chinese food. With growing numbers of McDonalds and KFC restaurants on the Mainland, American hamburgers, French fries, pizzas and Coke all help to make the Mainlanders stay in the theme park a more Americanized experience. Visitors from the Mainland or overseas go to Hong Kong mainly to enjoy its mix of East and West. They will be happy to see an American theme park on Chinese soil. If they want authentic Chinese culture and scenery, they can conveniently cross the border to Shenzhen or other Pearl River delta cities. This does not imply that Chinese festivals should not be celebrated in the theme park. As a legacy of British rule, Hong Kong has been celebrating both Western and Chinese festivals. Public holidays tie in with New Year, Chinese New Year, Easter, Christmas, and several others traditional Chinese festivals such as the Dragon Boat and Ching Ming festivals. Local residents usually join overseas trips or board trains to the Mainland for short vacations during these holidays. Hong Kong Disneyland may be able to draw these locals as well as the Mainlanders and overseas visitors with its festival celebration events. After all, Hong Kong Disneyland is positioned as a family entertainment resort for both overseas and Mainland visitors. Ensuring Top Theme Park Safety Operations Lately, United States commentators have been highly critical of Disneys closed-door operations and silence on accident reports and figures. Disneys safety record made headlines three times in the second half of 2000 when a 37-year-old man died in the Splash Mountain ride at Disney World on November 6, a 4-year-old boy was critically injured in Disneylands Roger Rabbit cartoon spin on September 22, and a separate accident in the Space Mountain roller coaster injured nine persons on July 31. Disney recently settled a lawsuit with an undisclosed sum paid to the family of a man killed and his wifes face shattered by flying metal ripped from the parks sailing ship Columbia in December 1998. There is a clear pattern as to how Disney handles these matters. It is clear that Disney focuses first on image, not firstaid. Park officials said in October that Disneyland was updating its safety and emergency procedures, including employee training on 911 calls. Industry operators would argue that the fatality rate is still low compared to the number of person-rides per year. Although there are several years before Hong Kong Disneyland commences operations, Disney needs to improve its safety measures as well as to establish a responsible and open park operator image.

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18 Table 1 Top 10 theme parks in the world for the years 1995 and 1999
Rank in 1999 1 2 3 4 5 6 Attendance 17,459,000 *15,200,000 *13,450,000 12,500,000 *10,100,000 8,700,000 Rank in 1995 1 3 2 4 4 6 Attendance 15,509,000 12,900,000 14,100,000 10,700,000 10,700,000 9,500,000 Park name and location TOKYO DISNEYLAND, Tokyo. MAGIC KINGDOM at Walt Disney World, Lake Buena Vista, Florida. DISNEYLAND, Anaheim, California. DISNEYLAND PARIS, Marne-LaVallee. EPCOT at Walt Disney World, Lake Buena Vista, Florida. DISNEY-MGM STUDIOS THEME PARK at Walt Disney World, Lake Buena Vista, Florida. EVERLAND, Kyonggi-Do.

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Country Japan USA USA France USA USA

7 8

8,640,000 *8,600,000

7,300,000

9 10

*8,100,000 *6,900,000

7 9

8,000,000 7,200,000

South Korea DISNEYS ANIMAL KINGDOM at USA Walt Disney World, Lake Buena Vista, Florida. UNIVERSAL STUDIOS FLORIDA, USA Orlando. BLACKPOOL PLEASURE BEACH. England

*Estimate Source: Amusement Business

Table 2 Chronological expansion of the Disney theme parks

Inauguration Dates July 1955 October 1971 October 1982 April 1983 May 1989 April 1992 April 1998 Spring 2001 Spring 2001 Spring 2002 2005 Theme Park Disneyland Resort Magic Kingdom Epcot Tokyo Disneyland Disney-MGM Studios Disneyland Paris Disneys Animal Kingdom Disneys California Adventure Tokyo DisneySea Disney Studios Paris Hong Kong Disneyland Domestic/International Domestic Domestic Domestic InternationalJapan Domestic InternationalFrance Domestic Domestic InternationalJapan InternationalFrance InternationalChina

Table 3 Comparison of the three non-U.S. Disney theme parks

Opening Duration of negotiation Total site area Hong Kong Disneyland 2005 9 months 180 ha of which 126 for Phase 1 2 hotels with 1,400 rooms Disneyland Paris 1992 2.5 years 1,950 ha of which 500 for Phase 1 (including 250 for public infrastructure) 6 hotels Tokyo Disneyland 1983 5 years 81 hectares

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Land Premium $4 billion for Phase 1 $2.812 billion for Phase 2

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Annual attendance initial year target: 5 million after 15 years, 10 million visitors are expected each year Disney investment HK$ 320 million Disney initial 43% of Hong Kong shareholding International Theme Parks Disney required 33% of initial share capital minimum holding for life of project Debt/equity ratio 60:40 Disneys royalties Admission: 10% (% of revenues) Participant: 10% Merchandise & food: 5% Hotel: 5% Base management 2% fee Variable management fee 2-8% of EBITDA (5% at Base Case)

Permitted to buy at 1971s Land owned by Oriental Land agricultural land prices ($5,000 per acre) initial year target: 11 17 million per year (only million but only 10 million 500,000 are foreigners) visitors realized now at 12.5 million a year $250 million A token $2.5 million 49% of Euro Disney S.C.A. 0% 17% for 5 years 76:24 ) ) ) Same ) 3% for years 1-5 6% from year 6 0-50% of pre-tax cash flow above a pre-determined threshold $0 commercial loan from bank N/A About 80:20 Admission: 10% Merchandise & food: 5% Hotel: 5% Licensing (45 years): 5%

Government Support Cash grant $0 Loan

Tax concessions

Infrastructure

$250 million (1986 prices, French francs 200 million) $5.6 billion (1999 prices) $6 billion (1986 prices) @6.75 - 8.5% @7.85% over 25 years from opening over 20 years from draw down Nil VAT at 5.5% instead of 18.6%. Accelerated depreciation MTR extension MTR extension plus high Approach roads speed rail station Water, Drainage, Sewage, Approach roads Pier Water, Drainage, Sewage, Solid Waste French and Europeans

N/A

Target guests

70% Mainland Chinese; 30% Hong Kong people and other South-east Asians Target experience American experience with slight modification HK$ 300 Pricing (single Mainlanders are expected to adult one-day comprehensive spend HK$ 1200 a day and local people to spend HK$ admission) 680 a day Cast members Mostly Chinese Community concern Weather

Mainly Japanese

American experience with minor European elements Expensive (skimming pricing) at 220 Francs (about HK$ 260)

Authentic American experience 5,200 Yen (about HK$ 394)

Diverse cast member from at least 35 different nations Unfair deal, break down of American cultural laissez faire policy imperialism Sub-tropical. Cool and Very cold and dry in winter. Cloudy half of the year. sunny in winter. Hot and humid in summer

Mostly Japanese Widely accepted and welcomed Warm and rainy in summer. Cool in winter.

Source: http://www.info.gov.hk/tc/statement/doc/comparison.doc and Riding the Black Ship Japan and Tokyo Disneyland, Aviad E. Raz

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20 Table 4 Theme parks in Southern China and Hong Kong

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Name Cities Theme Description Theme parks being planned/built in southern China Military Shenzhen of Converted from the Minsk, a part of the Military former Soviet Unions Black Sea Fleet, 273 Theme Park Guangdong meter long. Features an aircraft museum showing five Russian MiG fighters and military helicopters The latest in virtual reality games and a soccer pitch on deck 8.1 square kilometers Dinosaur Zigong of Dinosaurs RMB 400 million project. Chengdu, Kingdom Sichuan Add to the existing petrified forest Petrified Kunming of High-tech attraction. Forest Yunan A $6.4 million project. Overall concept is roofed in local folklore and the legend of Arshima, a beautiful young woman for whose hand a contest is held among local men. Playa Maya A seven-acre park with water slides and Shenzhen Waterpark Waterpark tropical landscaping. Major theme parks in Shenzhen Splendid Miniature of Largest miniature park in the world with Shenzhen China Chinese wonders more than 80 attractions China Folk Shenzhen Cultural 180,000 square meter park presenting the Culture folk art, ethnic customs and traditional Villages dwellings of the Chinese minorities Windows of Miniature of 480,000 square meter-park featuring world Shenzhen wonders, historic sites, natural landscapes, the World world wonders folk customs, and international song and dance performance. Adult: RMB 100, Child: RMB 50 Happy Shenzhen Entertainment A 170,000 square meter entertainment park Valley featuring attractions and rides. Built in 1985 Overseas Shenzhen Cultural Chinese Town Existing Hong Kong theme parks Ocean Park Aberdeen Aquarium and Ocean Park is planning to add a HK$500 million Adventure Bay attraction to their water park existing park. $19.24 for adult, $9.62 for children. Snoopy Sha Tin Peanuts theme 40,000-square-foot playground in the 15playground year-old New Town Plaza (shopping center) World undertaken by Sun Hung Kai Properties. Theme Parks being planned/built in Hong Kong Planned by Sun Hung Kai Properties on N/A Ma Wan Education 21.73 hectares as part of its residential project Planned by Concord Land Development Lok Ma Chau Indoor Space Space Island The theme park will be part of a 13 millionborder theme park square-foot commercial/resident project Construction cost is HK$10 billion. Interactive Planned by Kerry Properties and is part of a N/A Tai Po Kau residential project cultural theme A 9 ha park will have an education center park with a lake, rivers and mangroves. Pak Mong and Ecological A 130 hectare ecological park planned by N/A Ngau Kwu Swire Properties and Sun Hung Kai Long Property

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20 Table 5 Hong Kongs opinion polls on the Disneyland project

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1. Dr. John Ap of Hong Kong Polytechnic Universitys Hotel and Tourism Management Department conducted a survey on the Hong Kong Disneyland project. Of the 832 respondents, 582 were polled randomly by telephone while the rest were Lantau and Peng Chau (both are outlying islands in Hong Kong) residents who gave lower ratings for the project than the first group. Other highlights are as follows: Nearly 40 per cent of people disagreed with the statement that it was a fair deal for the government to provide a HK$5.6 billion low- interest loan for the project and HK$13.6 billion for reclamation and infrastructure works. Between 53 and 69 per cent of respondents said they disliked the prospect of a negative impact on the environment and wildlife at Pennys Bay. The waters are the natural habitat for the Chinese white dolphin. About half of the respondents said they would tolerate the negative impact, reschedule their activities or avoid the area due to crowding. 80 per cent of the people were positive about the revenue expected to be generated within the local economy. Source: South China Morning Post, Hong Kong, July 13, 2000. 2. A survey conducted by the Sun News (with 234 respondents) on 11/3/1999 has the following results: Does the HK Governments investment of $20 billion on Hong Kong Disneyland mean Disney is taking all the advantages while HK people foot the bill? Yes vote: 126 (53.8%), No: 44 (18.5%), no comment: 64 (27.4%). Who is the biggest winner in the deal? Disney: 99 (42.3%), HK Government: 63(26.9%), Dont know: 72 (26.9%) Do you agree to build Disneyland? Yes: 164 (70%), No: 64 (19.6%), No comment: 24 (10.4%) What would be your ideal price for the ticket? HK$300 (190, 81.2%), $400 (32, 13.6%), $500 (12, 5.2%) Source: http://www.the-sun.com.hk/channels/news/19991103/img/0311a1g3_ big.jpg 3. An opinion poll conducted by the Sun News (with 4,553 respondents) as of 10/15/2000 has the following result: Should Disneyland Hong Kong blend American and Chinese culture? Yes: 27.7%, no. 34.8%, no comment: 1.8% Source: http://www.the-sun.com.hk/cgi-bin/polling.cgi?input_polling_id=1999 1103033328_6288&dirsect=news) 4. Michael DeGolyer of Hong Kong Baptist University is conducting an academic study of political and economic change in Hong Kong between 1982 to 2007. As a part of the project, he discovered that an overwhelming 90 per cent of respondents to a survey knew of the multibillion-dollar project; 40 per cent described the deal with Disney as unfair, 33 per cent felt it was fair, with 15 per cent neutral and 12 per cent having no idea. Source: Jimmy Cheung. Tung deeper in doldrums, South China Morning Post, Hong Kong, November 24, 1999.

END OF EXAMINATION