Terrie's Take 812 -- Japan About to Overtake Korea as an Inbound Tourist Destination?

Terrie's Take terrie at mailman.japaninc.com
Sun Jul 12 22:59:29 JST 2015

* * * * * * * * TERRIE'S (TOURISM) TAKE - BY TERRIE LLOYD * * * * * *
A bi-weekly focused look at the tourism sector in Japan, by Terrie 
Lloyd, a long-term technology and media entrepreneur living in Japan.

Tourism Sector Edition Sunday, July 12, 2015, Issue No. 812

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+++ Japan About to Overtake Korea as an Inbound Tourist Destination?

The Nikkei ran an interesting tourism story today, talking about how the 
Middle East Respiratory Syndrome (MERS) outbreak in South Korea has 
knocked the stuffing out of the tourism industry there. Apparently the 
number of Chinese tourists fell by 54% in June, to 260,000 travelers -- 
probably about half the number who visited Japan in the same month (I'm 
extrapolating, the figures are not out yet). Since the Chinese are the 
biggest spenders in South Korea, dropping about US$2,070 per person 
while they are there, this translates into a JPY75.8bn revenue loss for 
last month alone. And since 82% of every inbound tourist dollar (won?) 
stays in Korea (only 18% is needed to import goods and services to 
support those tourists), it is "high grade" national income with few 
strings attached. No wonder South Korean government is concerned about it.

But then the article goes on to delve deeper into South Korea's other 
tourist problems, and comes up with two other significant contributors 
-- a lack of hotel rooms and a lack of cities and transportation outside 
Seoul for visitors to visit and spend their money. We're not so sure 
about the hotel shortage claim, in that a quick check around other media 
shows that the hotels situation has been chronic since at least 2010. 
Five years is plenty of time to build more hotels, so we believe the 
"shortage" is probably self-inflicted to the benefit of local operators 
-- meaning that the government and local interests are limiting the 
efforts of foreign investors to participate in the sector. We say this 
because here in Japan there are now a number of foreign funds putting 
billions of dollars into the hotels sector, and there are plenty of new 
buildings being planned. So it's not like there is a shortage of 
outsider interest in the North Asia market.

For the last few years South Korea has been a worthy competitor to Japan 
for inbound tourists, and in fact in 2014 there were 14.2m arrivals in 
South Korea versus only 13.4m in Japan. However, now in 2015, with the 
first quarter numbers confirmed, the picture is very different and if 
annualized it is likely that there will be around 16.5m arrivals in 
Japan and possibly a fall to just 13m in South Korea.

So is this just the MERS effect or is there something deeper going on?

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We have always thought that the South Korean government runs a very 
capable inbound tourism operation. They are putting money in the right 
places, and for years have been dressing up the country with attractions 
and events that make foreigners want to come. At the forefront of their 
efforts has been turning Seoul into a shopping mecca, and making it easy 
for nationals of other Asian countries to make the quick hop to enjoy 
the latest in fashion, food, beauty, and electronics. It certainly 
helped them when Japan had the 3/11 Tohoku disaster, as the radiation 
fears caused the Japan-bound flow to move slightly to the West instead. 
In that year, Japan's inbound numbers fell almost 27% while South 
Korea's rose by a similar amount.

But the reality is that South Korea is fundamentally one large city and 
a lot of not-so-well-connected smaller ones. Furthermore, through no 
fault of their own, there are few authentic historical locations that 
can match Kyoto for color and atmosphere. This means that going to South 
Korea is either going to be a one-time visit to Seoul for the curious, 
or people are repeat traveling for a specific reason. We have covered in 
a previous Take how Japanese housewives are fulfilling their weekend 
fantasies by attending idol concerts and getting plastic surgery done at 
cut-rate prices. The food is also pretty good as well... :-)

But perhaps the biggest point to be drawn from South Korea's softening 
tourism sector is the country's over-reliance on Chinese tourists, a 
problem that Japan also suffers from. Without this free-spending group, 
profits quickly fall and there is a big knock-on effect on the economy. 
This is particularly so in South Korea where inbound tourism directly 
accounts for about 3% of all exports (including goods and services), 
versus 1.8% for Japan. A lot of people are employed downstream of the 
tourism sector there, and any slow-down puts significantly more pressure 
on the rest of the economy to make up for the shortfall.

Therefore it is understandable that there is concern. But perhaps both 
South Korea and Japan need to wake up to the fact that the Chinese 
inbound market is an unreliable one and is fraught with risk. In fact, 
we think they both need to diversify as quickly as possible because the 
Chinese are so sensitive to negative news and public views. Whether it 
is the threat of a viral health outbreak, a war over some remote 
islands, a falling stock market, or gripes about inadequate hotels and 
inconvenient transfers, China is a market that has few loyalties and 
which will quickly find another outlet to satisfy it.

While MERS has been a negative news item for South Korea, in our opinion 
the June rout in stocks will have a more dramatic impact in the number 
of Chinese tourists traveling abroad over the coming months. Already, 
auto makers in China are experiencing a significant fall in June sales, 
with GM reporting almost no growth in June despite a massive 20% price 
cut, and Ford having an actual 3% drop in the same month. What is 
happening in the auto market will soon spread to other discretionary 
spending items over the coming weeks. Given that the Chinese stock 
market has lost about US$3trn in value and there are many people who 
were trading on margin, rather than buying cars and taking overseas 
spending trips they will instead be fighting to keep possession of their 

Our guess is that inbound Chinese tourism to either Japan or Korea will 
fall by 20% or more over the coming months, which will impact South 
Korea more than it will Japan. This coupled with the Japanese government 
finally getting their act together in terms of visas and currency 
adjustment means that Japan will probably overtake South Korea for 
inbound tourists in 2015 for the first time in seven years. But before 
the Japanese government starts crowing over South Korea's misfortune, 
they should put things into proper perspective. Basically both countries 
are fighting over a minor share of the overall world market. In 
comparison in 2014 France had 84m international visitors, the USA had 
70m, and Spain had 61m.

Heck even in Asia, both Malaysia and Hong Kong had 27m inbound foreign 
tourists and Thailand had 25m. North Asia has a long way to go to catch 
up and depending on China alone to fill the gap is pure folly.

...The information janitors/

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Written by: Terrie Lloyd (terrie.lloyd at japaninc.com)

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