Up Front With Martin B. Deutsch
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China Cruises: Whole Lotta Shippin’ Going On
July 30, 2015 -- With a population of 1.4 billion, China is potentially the world's largest passenger cruise market. It also represents a great opportunity for some American companies to put a profitable oar into its waters. China has been testing its toes, as it were, in various cruise markets and appears to be going full-scale into this alluring industry with a growing number of U.S. partners.
"China presents the next great frontier for cruising," Carnival Corporation chief executive Arnold Donald recently told Wall Street analysts. "It's just a matter of time before China becomes the largest cruise market in the world."
Florida-based Mitchell (Mitch) J. Schlesinger knows all about the vast potential of the China cruise market. The 35-year industry veteran has held executive sales and marketing positions at firms such as Norwegian Cruise Lines, Orient Lines, Voyages To Antiquity and Costa Cruises. As a consultant to Chinese cruise interests, he recently visited Shanghai and gave a multifaceted Chinese audience an intimate glimpse into how America has developed its lucrative market and kept it growing. At the same time, he has gained first-hand knowledge and insight into how China is developing its cruise potential.
I recently discussed the market with Schlesinger, now the principle of MJS Consultants. He's our helmsman on this Question-and-Answer China sailing.
MBD: How big is the Chinese cruise market?
Mitch Schlesinger: In 2014 approximately 700,000 Chinese residents cruised. With added capacity, and depending on ship deployment patterns, that figure will exceed 1.5 million by the end of 2017. Should others deploy ships in the 3,600-4,200-passenger range, it is reasonable to expect that the Chinese resident cruise market may be near three million by 2020.
MBD: That means today's China cruise market is almost as large as all of the other Asian markets combined. How did you become involved with the Chinese market?
MS: The Shanghai Maritime University has an executive MBA program. As part of that curriculum, in 2014 it offered a series of educational programs that included cruise marketing and sales management lectures and presentations. I got a call to participate and presented over a three-day, weekend-long series. It was similar to previous presentations by a number of other veterans of the U.S. cruise industry, including Marc Mancini, a longtime educator; Tom Russell, a cruise sales and marketing innovator and Bill Johnson, former executive director of the Port of Miami. The class consisted of about 25 adults from a variety of businesses and industries (crew servicing, tourism development, terminal operators, construction and ferry operations, etc.) with an interest in cruising and a mix of entrepreneurs looking to start cruise operations.
MBD: What topics were covered?
MS: Bill Johnson talked about terminals, how they worked, the technology. Others talked about how to run cruises from an insider's perspective. I literally walked them through product segmentation: How different types of audiences fit on different types of ships. What the onboard experience has to offer. How to develop a brand and brand marketing. The foundations for making good advertising that appeals to clientele. I talked about how to deploy vessels. [I discussed] the reservation process in terms of what it takes: X number of calls to get X number of reservations to finally book X number of passengers for a cruise. I walked them through travel agency distribution systems and how important they are.
MBD: Is the Shanghai Maritime University (SMU) building on this program?
MS: Yes, half of the class came to Miami in March to attend the Seatrade Cruise Conference. They also visited some destinations on short cruises. This was an opportunity to see, up close and personal, how a port and the cruise industry work. And I've been asked to lecture again on marketing and sales management issues sometime this year.
MBD: Is anyone other than SMU offering educational or training programs in China? There have been published reports that Royal Caribbean has hired more than 3,000 people to work on ships in China and to service Chinese guests on their ships worldwide.
MS: Royal Caribbean has created a curriculum at the Tianjin Maritime College to train culinary and restaurant workers and other staff.
MBD: Who is the audience for cruising in China and how are the Chinese enticing them into cruising?
MS: China has some 660 million adults aged 25 to 54--a cruise sweet spot and more than twice the total U.S. population Another 185 million people are age 60 and over. And there is the growing "affluent audience." According to a study, 15 percent of the Chinese population today is upper middle class. In five to ten years, that number is expected to rise to 55 percent.
China is primarily looking to create ships and cruise experiences for Chinese residents. We're talking about helping the Chinese develop a local cruise market, expand their ideas about what to offer and how to do it in terms of cuisine, entertainment and other amenities. You have to give them a product that fits their expectations. That includes tailoring the cruise length and the onboard "content." For the Chinese, three huge keys are cuisine, gaming and shopping. And we're talking about itineraries that are currently in the 3-to-6-day range with departures from Shanghai in the north and Hong Kong in the south.
MBD: Why short itineraries instead of 7-to-10 day or two-week cruises?
MS: Chinese citizens get less vacation time than the rest of the world and they take fewer vacation days. And the geography [location of the ports] restricts the itinerary development to a 3-to-6 day cruise. You will have to make those trips short and affordable to capture, motivate and grow the market. Over time those itineraries will lengthen a bit. For the upper-upper class, and certainly for retirees, cruises stretching out 7-to-10 days are something that will clearly happen over the next 5-to-10-year period.
MBD: How have U.S. cruise lines been pursuing business in the China market? How will they help build the overall market in the future?
MS: To unlock the market, you are going to see brand new and refurbished ships that are going to be between 2,000 and 4,000 passengers in size. A new Chinese ship is being built in a Chinese yard to hold 2,000 guests. The 2,000-passenger Celebrity ship that was sold to C-Trip [a China-based travel agency] is sailing as a new brand called SeaSky Cruises.
MBD: Which U.S. lines have cruise ships in China?
MS: Costa (Carnival) was the first line out there in China promoting cruises specifically for local residents. Carnival started with a small 800-passenger Costa ship in 2006, then replaced her with two larger ships carrying 2,400 and 2,700 guests. It added a 3,800-passenger ship in 2015. Royal started service in China with two 3,100-passenger ships and then decided to place Quantum class ships carrying 4,200 guests into the market.
MBD: What about joint ventures?
MS: U.S. cruise lines have created joint ventures with some Chinese companies such as the Royal Caribbean venture with C-Trip. Carnival recently signed a memorandum of understanding with state-owned China Merchants Group [and Italian shipbuilder Fincantieri] to look into forming two joint ventures that will build cruise ports and ships.
MBD: MD: Are ships being built in China?
MS: There aren't a lot of yards building ships for the Chinese. In November, 2014, it was announced that a Chinese company was building its own 2,000-passenger ship--a ship that will take the yard in China 48 months to finish. But if you sign a contract with Meyer Werft or Fincantieri, the two biggest cruise builders in Europe, you can get a 2,000-passenger ship built in 20 months. For those in China who want to start their own lines, they will start shopping with existing cruise lines to see if there are ships that the lines are willing to part with. So let's say you bought a ship and get it refurbished someplace, you can start in about a year.
MBD: Have any of the U.S. operating lines commissioned ships to be built in China?
MS: Not yet. Carnival signed what they call "a memorandum of understanding to explore the possibility of a joint venture with the Chinese state shipbuilding corporation." That memorandum was for them to discuss the potential to create a joint venture to build ships in China over the next 5-to-10 years.
MBD: The news has focused on what our cruise industry is doing to capitalize on the Chinese market. But what other American companies can profit now, and in the future, from doing cruise-related business with the Chinese?
MS: If you think about all of the subsidiary businesses that impact the cruise industry, China doesn't have things such as ready-to-implement, state-of-the-art, cruise-based reservations systems. Companies like RESCO or New Vision Systems can literally switch all the labels on their protocols and processes to Chinese and then they can do business with Chinese companies. It is also an opportunity for a company like Steiner that already controls the majority of the onboard spa market.
MBD: What does it take for an American cruise line to succeed in this market? How will they grow? How will the market expand?
MS: As the industry in China develops, the American lines could use older ships for certain destinations just to start the deployment in those geographies of the world. As those geographies get more attention, it would require putting newer ships in place. So the companies that originally thought 'Oh, we can start with older tonnage in China,' well, other companies like Royal and Princess have already raised the bar by committing new ships in the market. That's another reason lines like MSC and Norwegian Cruise Lines are perhaps looking to deploy one of their ships currently on order to China.
If you make a decision that one of these ships is going to be earmarked for China, then you have to reorient the inside of this vessel in terms of design, decor, the kinds of restaurants, etc. You can still build lots of restaurants, but the kitchens have to be set up properly. Entertainment has to change--karaoke is huge for a Chinese audience, especially for younger people. The Chinese want to see exciting live shows and they want entertainment in which they can participate.
MBD: Royal Caribbean is often singled out for its initiatives in developing this market. Does Royal Caribbean have a jump on its competitors?
MS: In my opinion, yes. Royal acted first...and really threw down the gauntlet in China by putting the brand new 4,200-passenger Quantum of the Seas out there and then announcing the placement of the Ovation of the Seas for 2016.
MBD: It seems as if activity is revving up in terms of development. How dynamic is the situation now?
MS: Royal's Ovation of the Seas is its second newbuild to be deployed to China. Royal is also planning to explore dry-dock facilities to make modifications to the Legend of the Seas and establish logistic centers to supply ships based in China. This is all in recognition of how fast the market in China is growing.
Princess Cruises also announced that its 2017 newbuild, a 3,650-passenger ship, will also be deployed In China starting in the summer of 2017. All of this will clearly motivate other competitors to modify deployment plans and earmark ships scheduled for completion between now and 2019 for the Chinese market.
This column is Copyright © 2015 by Martin B. Deutsch. JoeSentMe.com is Copyright © 2015 by Joe Brancatelli. All rights reserved. All of the opinions and material in this column are the sole property and responsibility of Martin B. Deutsch. This material may not be reproduced in any form without his express written permission.