mant 217 2011 final examination preview

8/4/2019 MANT 217 2011 Final Examination PREVIEW

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UNIVERSITY OF OTAGO EXAMINATIONS 2011

PREVIEW ONLYNOT

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)






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 André and he’ll 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 inthe case.)



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Question 6 is on page 4 of the exam.



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

(This case was co-authored by your lecturer, André 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 astudy 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 André 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 takinga major step in opening up the vast Chinese market as part of its internationalexpansion. Disney had learned some hard lessons from its Paris operations:Tokyo Disneyland’s phenomenal success could, clearly, not be taken forgranted in other theme parks outside the USA. For its third internationalforay, Disney has limited its risk exposure by experimenting with a jointownership model involving local government and being more sensitive to thecommunity responses in the host country. Michael Eisner, chairman and ChiefExecutive Officer of the Disney Company, remarked that their move to HongKong was the result of “an extensive worldwide review” and that they hadcome to “recognize Hong Kong as a unique city in an extraordinary nation ata remarkable time.”

China has seen steady growth in its economy in recent years and is setfor 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 SoutheastAsia and its role as gateway to Mainland China, allowing it to draw visitorsfrom both Mainland China and neighboring countries, maximizing thepotential revenue sources.

Now Disney was faced with additional strategic decisions relating toits choice of site and the most appropriate form of organizational structure,source of funding, and the degree to which the company needed to respond tolocal market requirements.

THEME PARKS AND DISNEY—A 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 equipmentand operational funds. Most theme park operators reinvest the majority oftheir profit into upgrading and refurbishing park facilities and equipment inorder to attract repeat customers. Admission fees usually make up 60% ofpark revenue, but some parks earn more from food, beverage andmerchandise sales. Small parks usually charge on a pay-per-ride basis whilelarge parks usually sell day passes with unlimited rides and access so as tokeep customers in the park longer, spending more on site. The three distinct

market segments for theme park business are local residents, regional ornational visitors, and corporate customers. Each of these segments is most



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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.”

Disney’s 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.

Disney’s 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 Disney’s 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 Disney’s 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 world—most notably China—as 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 Disney’s corporate strategies is to cross- promote each division’s businesses, new theme parks will help promote consumer products as well as new animated pictures.

Hong Kong Disneyland is Disney’s 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



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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 Disney’s different business segments. Disney’s 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.

DISNEY’SSTRATEGIC CHOICE OF HONG KONG

China has been undergoing a series of structural, financial, andeconomic changes in recent years. The government has strived to privatize itsgiant state-owned enterprises and is opening more and more business sectors

to foreign competition. An estimated extra US$80 billion in fresh capital isexpected to flow into China during the first six years after joining the WTO. Itis expected that leisure and travel operators will benefit from increasinginternational 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 719million domestic travelers spending a total of RMB 283 billion. To boostdomestic consumption, the Chinese government mandated five-dayworkweeks in 1999 and increased the number of public holidays from 6 to 10days in 2000. Many tourist destinations reported large revenue gains.

As for China’s theme park business, the last five years have seen thefailures of the American Dream Park, a $50 million project in Shanghai, andFrobelland, built as a German theme park by a Taiwanese investor. This ledsome analysts to predict an end to theme parks in China despite theanticipated explosive tourist growth in the new millennium. Investors’misjudgments have been many. Estimates of the number of customers werefar too high, costs soared out of control, and bureaucracy weighed projectsdown. Other factors contributing to these failures include the rural location ofthe parks (which is customary in the West) and lack of clusters of middle-classresidents 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 thenew 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 state- level 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.

DISNEY’S 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 world’s 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



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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. Disney’s no- ownership position in Tokyo Disneyland is a result of Disney’s 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 park’s 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 Disney’s 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 Kong’s 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.



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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 Park’s attendance will inevitably suffer in the initial years of Disneyland’s operations. As the market settles down, the two competing parks in the area will increase Hong Kong’s 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 World’s 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 O’Brien, editor for parks and attractions coverage at Amusement Business magazine in Nashville, agreed that “Disney’s image is too squeaky clean to allow them to do Halloween right .” Disney’s 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 Disney’s 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



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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 Disney’s 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 Disney’s 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 Disney’sOperations

Synergy is very important for Disney, and its divisions have to promote each other. A writer commented that “Disney’s method of conjuring value–in the form of Mickey Mouse and his sidekicks–from his own imagination and those of his viewers, and then fashioning a self-reinforcing cycle of promotion and sales.” The main strategy for Disney’s 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



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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 Disney’s operations in Asia. The three main operations, namely, theme park, merchandizing, and videos, will cross- promote each other’s performance. One segment of operation serves as advertisement for the others, and most Asians are more familiar with Disney movies and merchandise than Disney’s Internet operations. Disney is eager to exploit the enormous potential of its brand image to improve the corporation’s 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 real- time video underworld, or draw their favorite Disney characters on computers. DisneyQuest is Disney’s 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 Disney’s 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 Disney’s 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 Disney’s 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 co- ownership. As Disney prepares to take on the 1.2 billion Chinese market for



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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 China’s 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 China’s 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 HongKong’s Inbound Tourism

The Special Administrative Region’s (SAR) support in promoting and expanding Hong Kong’s 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 Kong’s 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, Disney’s 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 non- English 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



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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 McDonald’s 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 Disney’s closed-door operations and silence on accident reports and figures. Disney’s 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 Disneyland’s 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 wife’s face shattered by flying metal ripped from the park’s 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 first- aid.” 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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Table 1 Top 10 theme parks in the world for the years 1995 and 1999

Rank Rank in 1999 Attendance in Attendance Park name and location Country

1995 1 17,459,000 1 15,509,000 TOKYO DISNEYLAND, Tokyo. Japan 2 *15,200,000 3 12,900,000 MAGIC KINGDOM at Walt Disney

World, Lake Buena Vista, Florida. USA

3 *13,450,000 2 14,100,000 DISNEYLAND, Anaheim,California.

USA

4 12,500,000 4 10,700,000 DISNEYLAND PARIS, Marne-La-Vallee.

France

5 *10,100,000 4 10,700,000 EPCOT at Walt Disney World, LakeBuena Vista, Florida.

USA

6 8,700,000 6 9,500,000 DISNEY-MGM STUDIOS THEMEPARK at Walt Disney World, LakeBuena Vista, Florida.

USA

7 8,640,000 8 7,300,000 EVERLAND, Kyonggi-Do. SouthKorea 8 *8,600,000 DISNEY‟S ANIMAL KINGDOM at

Walt Disney World, Lake BuenaVista, Florida.

USA

9 *8,100,000 7 8,000,000 UNIVERSAL STUDIOS FLORIDA,Orlando.

USA

10 *6,900,000 9 7,200,000 BLACKPOOL PLEASURE BEACH. England

*EstimateSource: Amusement Business

Table 2 Chronological expansion of the Disney theme parks

Inauguration Dates Theme Park Domestic/International July 1955 Disneyland Resort Domestic October 1971 Magic Kingdom Domestic October 1982 Epcot Domestic April 1983 Tokyo Disneyland International — Japan May 1989 Disney-MGM Studios Domestic April 1992 Disneyland Paris International — France April 1998 Disney‟s Animal Kingdom Domestic Spring 2001 Disney‟s California Adventure Domestic Spring 2001 Tokyo DisneySea International — Japan Spring 2002 Disney Studios Paris International — France 2005 Hong Kong Disneyland International — China

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

Hong Kong Disneyland Disneyland Paris Tokyo Disneyland Opening 2005 1992 1983 Duration of negotiation

9 months 2.5 years 5 years

Total site area 180 ha of which126 for Phase 1

2 hotels with 1,400 rooms

1,950 ha of which 500 forPhase 1 (including 250 for

public infrastructure)6 hotels

81 hectares



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

Permitted to buy at 1971‟sagricultural land prices($5,000 per acre)

Land owned by Oriental Land

Annual attendance initial year target:5 millionafter 15 years, 10 million

visitors are expected eachyear

initial year target: 11million but only 10 millionvisitors realized

now at 12.5 million a year

17 million per year (only500,000 are foreigners)

Disney investment HK$ 320 million $250 million A token $2.5 million Disney initialshareholding

43% of Hong KongInternational Theme Parks

49% of Euro Disney S.C.A. 0%

Disney requiredminimum holding

33% of initial share capitalfor life of project

17% for 5 years N/A

Debt/equity ratio 60:40 76:24 About 80:20 Disney‟s royalties (% of revenues)

Admission: 10%Participant: 10%Merchandise & food: 5%Hotel: 5%

))) Same)

Admission: 10%Merchandise & food: 5%Hotel: 5%Licensing (45 years): 5%

Base management

fee

2% 3% for years 1-5

6% from year 6

Variablemanagement fee

2-8% of EBITDA(5% at Base Case)

0-50% of pre-tax cash flowabove a pre-determinedthreshold

Government Support Cash grant $0 $250 million (1986 prices,

French francs 200 million) $0

Loan $5.6 billion (1999 prices)@6.75 - 8.5%over 25 years from opening

$6 billion (1986 prices)@7.85%over 20 years from drawdown

commercial loan from bank

Tax concessions Nil VAT at 5.5% instead of 18.6%.Accelerated depreciation

N/A

Infrastructure MTR extensionApproach roadsWater, Drainage, Sewage,Pier

MTR extension plus highspeed rail stationApproach roadsWater, Drainage, Sewage,Solid Waste

Target guests 70% Mainland Chinese;30% Hong Kong people andother South-east Asians

French and Europeans Mainly Japanese

Target experience American experience with

slight modification

American experience with

minor European elements

Authentic American

experience Pricing (singleadult one-daycomprehensiveadmission)

HK$ 300Mainlanders are expected tospend HK$ 1200 a day andlocal people to spend HK$680 a day

Expensive (skimmingpricing) at 220 Francs(about HK$ 260)

5,200 Yen (about HK$ 394)

Cast members Mostly Chinese Diverse cast member fromat least 35 different nations

Mostly Japanese

Communityconcern

Unfair deal, break down of laissez faire policy

American culturalimperialism

Widely accepted andwelcomed

Weather Sub-tropical. Cool andsunny in winter. Hot andhumid in summer

Very cold and dry in winter.Cloudy half of the year.

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 andTokyo Disneyland, Aviad E. Raz

http://www.info.gov.hk/tc/statement/doc/comparison.doc

http://www.info.gov.hk/tc/statement/doc/comparison.doc



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Table 4 Theme parks in Southern China and Hong Kong

Name Cities Theme Description Theme parks being planned/built in southern China Military

Theme Park

Shenzhen of

Guangdong

Military • Converted from the Minsk, a part of the

former Soviet Union‟s Black Sea Fleet, 273 meter long.

• Features an aircraft museum showing fiveRussian MiG fighters and militaryhelicopters

• The latest in virtual reality games and asoccer pitch on deck

DinosaurKingdom

Zigong of Chengdu,Sichuan

Dinosaurs • 8.1 square kilometers • RMB 400 million project.

PetrifiedForest

Kunming of Yunan

High-tech • Add to the existing „petrified forest‟ attraction.

• A $6.4 million project. Overall concept isroofed in local folklore and the legend of Arshima, a beautiful young woman for

whose hand a contest is held among localmen.

Playa MayaWaterpark

Shenzhen Waterpark • A seven-acre park with water slides andtropical landscaping.

Major theme parks in Shenzhen SplendidChina

Shenzhen Miniature of Chinese wonders

• Largest miniature park in the world withmore than 80 attractions

China Folk CultureVillages

Shenzhen Cultural • 180,000 square meter park presenting thefolk art, ethnic customs and traditionaldwellings of the Chinese minorities

Windows of the World

Shenzhen Miniature of world wonders

• 480,000 square meter-park featuring worldwonders, historic sites, natural landscapes,folk customs, and international song anddance performance.

• Adult: RMB 100, Child: RMB 50 HappyValley

Shenzhen Entertainment • A 170,000 square meter entertainment park featuring attractions and rides.

OverseasChineseTown

Shenzhen Cultural • Built in 1985

Existing Hong Kong theme parks Ocean Park Aberdeen Aquarium and

water park • Ocean Park is planning to add a HK$500

million “Adventure Bay” attraction to their existing park.

• $19.24 for adult, $9.62 for children. SnoopyWorld

Sha Tin Peanuts themeplayground

• 40,000-square-foot playground in the 15-year-old New Town Plaza (shopping center)undertaken by Sun Hung Kai Properties.

Theme Parks being planned/built in Hong Kong

N/A Ma Wan Education •

Planned by Sun Hung Kai Properties on21.73 hectares as part of its residentialproject

Space Island Lok Ma Chauborder

Indoor Spacetheme park

• Planned by Concord Land Development • The theme park will be part of a 13 million-

square-foot commercial/resident project • Construction cost is HK$10 billion.

N/A Tai Po Kau “Interactive” cultural themepark

• Planned by Kerry Properties and is part of aresidential project

• A 9 ha park will have an education centerwith a lake, rivers and mangroves.

N/A Pak Mong andNgau KwuLong

Ecological • A 130 hectare ecological park planned bySwire Properties and Sun Hung KaiProperty



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Table 5 Hong Kong‟s opinion polls on the Disneyland project

1. Dr. John Ap of Hong Kong Polytechnic University‟s 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 therest were Lantau and Peng Chau (both are outlying islands in Hong Kong)residents who gave lower ratings for the project than the first group. Otherhighlights are as follows:

• Nearly 40 per cent of people disagreed with the statement that it was a fairdeal for the government to provide a HK$5.6 billion low- interest loan for theproject 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 Penny‟s 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 begenerated 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 Government‟s investment of $20 billion on Hong Kong

Disneyland mean Disney is taking all the advantages while HK people foot thebill? 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%), Don‟t 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 apart of the project, he discovered that an overwhelming 90 per cent of respondentsto a survey knew of the multibillion-dollar project; 40 per cent described the dealwith Disney as unfair, 33 per cent felt it was fair, with 15 per cent neutral and 12per cent having no idea.

Source: Jimmy Cheung. “Tung deeper in doldrums,” South China Morning Post ,

Hong Kong, November 24, 1999.

http://www.the-sun.com.hk/channels/news/19991103/img/0311a1g3_

http://www.the-sun.com.hk/cgi-bin/polling.cgi?input_polling_id=1999

http://www.the-sun.com.hk/cgi-bin/polling.cgi?input_polling_id=1999

http://www.the-sun.com.hk/channels/news/19991103/img/0311a1g3_

mant 217 2011 final examination preview

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