China's Travel eCommerce: A not too distant view

By Timothy O'Neil-Dunne
Managing Director, T2Impact Ltd.

China is emerging fast, the market for travel is expected to triple. The World Travel & Tourism Council (WTTC) estimates that travel and tourism spending in China will grow almost 3.5 times between 2004 and 2014, from $87 billion to more than $300 billion. The nation is on an accelerated time line. Initially slower to adopt the Internet and eBusiness practices, however it is now wholeheartedly embracing the value of the internet based Technology.

China is therefore on a new curve that differs significantly from those in Europe and North America. In this article we will examine briefly a view of how China could be different and how it can capitalize on its core strengths of its people and talents in travel and tourism eCommerce.

For many people in the west (and the author included) it is easy to forget that China has only recently emerged onto the global scene for eCommerce. Many still regard China as simply the manufacturing basket for the world’s economies. The sheer size of the population means that it will in time be a major consumer -- but that time still seems distant. There are however some underlying truisms that travel is a major driver of the economy. China has finally awoken to that fact and, in opening up the domestic and international markets to travel, and is seeing the benefits.

No legacy infrastructure

Other large economies have seen the benefits of lowering the cost of transportation and the resulting increase in total economic value. For example the rapid growth of low cost carriers in other parts of Asia and indeed highly protected markets such as Brazil have seen the benefits manifest in its economy and the improved quality of life of its citizens. There is an old saying that travel broadens the mind. Now it can help broaden the economy. China finds itself in a fortunate position has no little or no legacy infrastructure to protect. It can therefore capitalize on the eCommerce tools in a way that other traditional markets can only dream about.

China is indeed different. Clearly the government worries that unfettered growth could result in wasteful and debilitating side turns along the way. The risks of making the wrong decisions especially in a nascent set of markets could be debilitating. Scarce resources demand that all the assets available have to be fully utilized in the most efficient manner. Competing priorities for these resources are intense from different sectors of the economy. It is critical therefore that China, for its own selfish reasons, must lay out a program of managed growth that maximizes the value for its economy and its citizens as a whole. But China is not only a large market in its own right. The country has a distinct place in the region so it is not just domestic that has impact. Whatever China does, other near and far nations will watch.

How does this impact the travel and tourism market? In the dot.com boom of the last 1990s and early part of the millennium, the battle cry was scale and market dominance. The US market was notable by the weak nature of its distribution channels. The signs were already there in 1995 that there had to be a radical change.

Process of distribution

Major players such as Expedia and Travelocity sought to dominate the consumer market space. Vendors and traditional intermediaries did not embrace the new business models and only took on the technologies in a weak willed way. The result of a high influx of capital and smarts was a radical shift in the process of distribution. It should be noted that US based companies operate in a singular fashion, therefore their models support that. Market dominance by the few is common place. China being different is unlikely to replicate the oligopoly market control that has formed in US with the likes of IACI, Sabre and Cendant/Orbitz. It doesn’t need to. Nor is the market small where the pluralist market is unsustainable and special “relationships” are required to maintain some semblance of competition, for example such as Australia.

What could be a likely view of the near-future?

We believe that China will -- as it has shown to do in the past -- work on developing its self sufficiency by taking the best from outside and applying its own unique capabilities. Consistently we have seen that China has been able to leverage its future potential by grabbing immediate term value from those who wish to profit over the long term. Fortunately for China it can take the long term view. The G8 economies do not frequently possess that capability.

In the near term the GDS model which is now obsolete -- and in our view ripe for reformation -- will continue in a uniquely Chinese way. Firstly the economics of the GDS model in China is hard to replicate. Therefore it would be unwise to try and “buy” the current GDS technologies at today’s “price” -- i.e., the GDS current high transaction fee model. China finds itself at a clear decision point. It can upgrade its existing infrastructure with GDS derived technologies. That “price” is very high to the supplier community It unnecessarily adds cost whose value is unlikely to be sustained in China. The expectation that the current GDS technology is the current state of the art for all travel distribution has been shown in the last three years to be a false assumption. Rather China can afford to develop itself the technologies based on the new business driven standards such as XML for its next generation of travel distribution solutions. The market for this technology supply is plentiful and therefore highly competitive resulting in lower costs of acquisition and adoption. The results are lower overall costs with economic models better aligned with China’s own requirements.

Flexibility in distribution

The likely outcome of such a situation will be that China can create its own “Next Gen” platform tailored more closely to its markets. Suppliers will have more flexibility in their distribution. Intermediaries will have cost models that are clearer and more open. Consumers will be able to shop, compare and purchase irrespective of the channel or medium of access.

Rightly banished from the market should be artificially controlled pricing models that favor the few at the expense of the many. Should China continue its independent path and decide for the development of these lower cost distribution technologies then it will be able to grow its markets faster with resulting macro economic benefits. Should it decide however to adopt the old style GDS model with its resulting high costs, the value will be lost for at least a three-to-four year cycle possibly longer. China is in a good position today. It needs to craft its own way forward. The decision makers have clear choices.

So what will be the “Chinese Way” where the melding of culture and enterprise creates another model likely to be sustained for longer periods of time? In the Western Countries where the Internet penetration has taken hold, there has been not just a change in the method of communication but more fundamental ways in the Customer, Supplier and Intermediary interaction. In further articles we will examine the evolution of this interaction.

In the next article we will evaluate the desire and role of the external companies anxious to penetrate the China market.

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This article is written by Timothy O'Neil-Dunne, managing partner of T2Impact Ltd., a Global Travel eBusiness Consulting firm. He can be reached via email at timothyo@t2impact.com. Contributing to this article were T2 Associates Yeoh Siew Hoon in Singapore and Olivier Dombey in Beijing.