China’s new law hits tourism industry

2013-10-20 15:48

China’s new law hits tourism industry

By Kim Bo-eun

A new Chinese law is taking its toll on Korea’s tourism industry. From Oct. 1, Chinese travel agents are banned from selling cheap travel packages that include stops to overseas shopping centers, including those in Korea. The law is feared to create a kink in Korea’s plan to attract 12.5 million foreign tourists this year, a 12 percent increase from 2012.
It is designed to protect its own citizens traveling abroad, but could significantly decrease the amount of tourists and money spent in Korea.Most Chinese tourists come to Korea on a group package, which had often been priced at lower than actual costs. Chinese travel agencies recruit travelers and send them to Korea. Once they arrive in the country, local agencies guide them. Travel agencies and guides make up for the shortfall by encouraging Chinese visitors to spend money at local shopping centers, from which they receive commissions.

Chinese travel agencies have raised the rates to compensate for the loss in commission. In some cases, they have jumped 40 percent.
Since the law went into effect at the beginning of the month, the number of Chinese visitors coming to Korea has so far dropped by as much as 60 percent compared to last month, according to Hana Tour, the nation’s largest travel agency. Korea is expected to host fewer-than-previously-expected Chinese visitors for the remainder of the year.
However, government officials and tourism industry experts believe the drop in Chinese tourists will be short-lived and that China’s law would bring up the quality of tourism in Korea in the long run. In light of the Chinese law, the Korean government is also preparing to take measures to upgrade the nation’s tourism industry, but loopholes remain, and the feat will prove to be a hard one.

Fewer Chinese tourists
With the spike in the price of package tours, the number of Chinese tourists to Korea is dwindling.
Hana Tour has seen a plunge in inbound Chinese tourists this month. While it had some 11,000 Chinese visitors in August and 10,000 in September, it only had 4,000 as of Thursday, despite the Golden Week National Day holiday in early October.
Comparing the figures with last year’s monthly figures, while August and September saw a 30 to 40 percent growth, October marked a 30 percent decline, according to a Hana Tour public relations official.
“The demand for package tours has definitely dropped,” Hana Tour assistant PR manager Cho Il-sang said.
According to the Korea Tourism Organization (KTO), some 12,000 tourists visited Korea during China’s National Day holiday, considerably less than the 15,000 it had estimated for the period.
The trend is forecasted to continue for the time being.
“As people are sensitive to price hikes, it’s inevitable that the number of tourists on package tours will fall, at least temporarily,” said Ryu Han-sun, deputy director of KTO’s China team. He believes the decline will continue through the New Year.
In the meantime, the state-run agency promoting tourism in Korea, is taking steps to counter the decreasing number of Chinese tourists. Its Beijing office is working with local travel agencies and providing financial support to develop new packages and advertise them.
But according to Ryu, the number of Chinese tourists will eventually recover, and that the long-term effects of the measures will benefit the Korean tourism industry.
“In time, people will start realizing that the raised price of package tours are essentially the same as what they would have spent on low-priced tours, which required extra expenditures during the trip in cash,” he said.
By eliminating dumping practices and getting rid of shopping-centered package tours, the Korean tourism industry will have healthy competition, which will produce higher quality tourist packages. This will attract greater numbers of tourists and generate greater profits for the travel agencies, Ryu added.
“If before the law, agencies were competing to get a larger piece of the pie, in the long-term, the law will  increase the size of the pie, ultimately enlarging each of the pieces,” he said.
Cho of Hana Tour also said despite the initial fall in customers, the law will prove to become an important turning point for the Korean tourism business.
“Honestly, it has been tough to make profits in the travel agency business, and that’s why agencies have been resorting to shopping or other additional fees. However, in the long run, the law will make agencies develop better quality package tours, and this will fix the negative image foreign tourists may have had of tourism in Korea,” he said.
Goals of new law
Jennifer Wu, a schoolteacher in the U.S., went on a package tour to Korea through a Chinese travel agency last June. The five-day tour, which jumped from Seoul, Busan to Jeju Island, cost a mere 1,800 yuan ($295).
“We did a lot of shopping for name-brands since it was cheaper than in China, but I didn’t really like that,” said Wu.
“I felt the tour brought us mostly to very foreign-catered areas. My impression was that the places we went to were those that actual Koreans might not usually go to, as most of the people around us spoke Chinese.”
While the number of Chinese tourists has increased in previous years, customer satisfaction has declined due to the poor quality of package tours.
Chinese tourists spent a record $102 billion last year, surpassing Germans to become the world’s biggest-spending travelers. This trend mimics the country’s growth in outbound tourism.
According to the United Nations World Tourism Organization, the number of international trips taken by Chinese travelers grew to 83 million in 2012, up from 10 million in 2000. These skyrocketing statistics make China the fastest-growing market in the world. Package tours remain the prime method of travel for the Chinese.
The tours arranged by travel agencies, which provide transportation, food and lodging at an inclusive price, is a popular option for Chinese travelers. However, in an effort to attract more customers, Chinese travel agencies were offering package deals at deep discounts. To make up for the losses, agencies relied on commission fees paid by souvenir shops, mainly in countries such as Korea, Thailand and Taiwan.
These shops, operating exclusively for foreigners, offer everything from cosmetics, jewelry to health products made from local specialties, with an exemption of value-added-tax. The products, which are not necessarily of good quality, are typically sold at exorbitant prices. The company, travel agency and travel guide share the profits.
The new law has decreased customers for souvenir shops in Korea.
“Ever since early October, group Chinese tours have visibly decreased,” said an employee of L&A Cosmetic, a souvenir shop in Yeonnam-dong, northwestern Seoul.
The store was empty on Thursday, aside from several shop assistants chatting at the back of the store.
Contrary to popular belief, the souvenir shops operate within legal boundaries, as they open with the permission of district offices in the city. The souvenir shops initially opened to meet the needs of foreign tourists several decades ago when Korea had few shopping centers. However, now, with plenty of duty-free shops, department stores and retail chains to shop at, these ailing souvenir shops have been relying on travel agencies to provide them with customers.
While souvenir shops are feeling the pain, there are ways around the regulations. For example, even if the package does not officially include a visit to a certain souvenir shop in its itinerary, the agencies could easily manage to unofficially squeeze in a visit. From there, they could continue to collect commission fees like they had in the past.
New regulations
In April, the Chinese government approved a law to tackle these issues, and it came into effect starting Oct. 1. The new law bans agencies from attracting travelers with unreasonably low priced package tours, collecting commission fees from tourists’ shopping expenditures, and designating particular places to shop.
There are penalties for the agencies that fail to abide by these regulations. Agencies that violate the new law are subject to fines of up to 300,000 yuan ($49,000). Depending on the degree of violations, they can be banned from running an outbound travel business or be forced to suspend their entire business.
Travel guides that work with the agencies are also subject to punishment. When the violations occur on tours of Korean travel agencies, their Chinese counterparts with whichwhom they work are penalized.
Following the enactment of the law, crackdowns have been launched by the Chinese government, and travel agencies are on alert. Perhaps owing to such tension at the initial stages of law enforcement, there haven’t yet been any reported cases of violations by agencies.
Upgrading Korea’s tourism industry
Chinese tourists have become increasingly important for Korea’s tourism industry.
According to the Ministry of the  Culture, Sports and Tourism, Chinese visitors constituted 25.5 percent of inbound tourists to Korea last year. This year, some 4.5 million Chinese are forecasted to visit Korea. If that happens, the number of Chinese tourists will surpass the number of Japanese tourists for the first time.
The Korean government, therefore, is also stepping up its efforts to end bad practices by travel agencies here.
In Korea, there are government-designated travel agencies that only deal with Chinese tourists. To be selected, an agency must register with the government and pass a screening test before it can cater to Chinese tourists. Currently, there are around 180 government-designated agencies in business. Before the new law passed, the Korean government focused on increasing the number of such travel agencies to deal with the surging number Chinese tourists.
Recently, the tourism ministry announced plans to introduce an audit system. Every two years, the government agency will investigate travel agencies to see if they are successfully bringing Chinese tourists into the country, whether the price of their package tours are reasonable, and whether they are complying with government policies, and weed out agencies that don’t meet the qualifications. It is also planning to close down the souvenir shops which had been supported by travel agencies by the end of the year. These shops have been advised to alter their business to expand their customer base to include Koreans as well.
The ministry also launched a special police force on Oct. 15, which will focus on tourist hubs like Myeong-dong, Itaewon and Insa-dong.
Tour guide qualifications
However, an important issue that remains concerns tour guides. Unqualified tour guides have been an issue, especially those associated with low-priced tour packages. Tour guides currently need to get a state-certified license to become an official tourism interpreter, and it requires a certified English test score as well as passing a state-administered test and an interview. The test itself consists of four subjects including Korean history and tourism-related subjects, which according to an official at the ministry’s international tourism division, is difficult to pass. As a measure to make it easier for applicants, the ministry introduced a system, where a six-week instruction course can be taken to be granted exemption of two of the subjects.
There are about 4,000 official tourism interpreters in Korea, which if far from enough, considering the nation’s growth in tourism, according to officials. To keep up with demand, the ministry is planning to administer an extra test each year and may make the exam easier for people to pass.
However, this rush to increase the number of tour guides could lead to unqualified guides.
Long-term benefits
While issues remain, the ministry sees China’s tourism law as a catalyst to enhance the quality of tourism in Korea.
“In the past, Korea sold low-priced, shopping-driven package tours, and therefore, it tended to be perceived as cheap tourism. With the ban on below-cost packages, perceptions are bound to change for the better,” said Lee Kwan-pyoo, deputy director of the international tourism division of the ministry.
He said that a shift away from shopping would give tourists more time to experience Korea, which could elevate the quality of tourism. This would lead to higher satisfaction levels, and ultimately, higher re-visiting rates, according to Lee.
“Up until now, low prices were the competitive factor for the Korean tourism industry. However, the time has come for the nation to make quality tourist programs its competitive edge,” he said. “We believe that the enforcement of China’s tourism law came at the right time.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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