Majestica Hotel in Shanghai

Presented by - Liaozhen PENG, Jin QIAN, Phuong PHAM

MANAGING GLOBAL ALLIANCES

-Introduction

-Majestica Hotel Inc.

-Commercial Properties ofShanghai (CPS)

-Alliance Specific Conditions

-Issues in the negotiation betweenMajestica & CPS

-Seminar Activities

-Negotiation Theories

-Learning from this case study

Content

Introduction

The trend of the modern hotel industry:

Modern hospitality industry’s growth has moved almost parallel to the natural outgrowth of globalization.

International hotel chains and luxury hotel have been expanding in the following decades.

Challenge:

It offers comparison and increases competition among the service providers.

Attending the desired experiences of very individualized customer, has become a tough challenge of this industry.

Introduction

However, accompanied with the Asian Pacific economy is developing rapidly, increasing number of luxury hotels into the Asia-pacific region.

Majestica hotel was no exception, they trying to look for opportunities to enter the Chinese market, and trying to alliance with the CPS in Shanghai.

Majestica Hotel Inc.

Majestica Hotel is one of the world’s largest operator of Luxury hotels and resort properties, it expanded to the UK, U.S. and North America.

Majestica’s superior hotel management results attracted the owners and developers of luxury hotels worldwide.

Majestica’s operating philosophy to have full control of the hotels under its management.

Commercial Properties of Shanghai (CPS)

A subsidiary of Commercial Properties Shanghai Investment (Holdings) (CPSIH), one of several overseas investment arms of the Shanghai municipal government.

CPS’s parent company was the largest overseas conglomerate wholly owned by the Shanghai municipal government with interests in Shanghai, Hong Kong, other parts of China and in cities spanning the Americas.

CPS was listed on the Stock Exchange of Hong Kong, and conducted several successful acquisitions. As well, the parent company also injected assets into CPS.

Alliance Specific Conditions

Political Aspect: Stable and high government support for FDI

Economic Aspect: China as one of the World’s largest economy Shanghai as one of top Asia’s finance centers Business and Leisure Activities

Social Aspect: Chinese mainland Population 1,37 billion Tourist spending increase 14.7% compared with 2013 Large opportunity for luxury hotels

Technology Aspect: Comprehensive manufacturing base One-third of China’s industrial output

Issues in the negotiation between Majestica & CPS

Length of Contract Term-Majestica: 55 years contract-CPS: 12 years contract

Pre-opening Assistance-Majestica: assume a substantial pre-opening role by sending senior people and want to retain the approval right over all design aspects relating to the hotel-CPS: welcome the help but don’t accept Majestica’s request of the retaining

Name of the Hotel-CPS: “Shanghai Oceania – Majestica Hotel”-Majestica: “Majestica Hotel, Shanghai”

General Manager-Majestica: general manager upon the opening of the hotel would be an expatriate-CPS: in the near future a Chinese general manager will be used

Expatriates-CPS: expatriate managers should be gradually reduced, replaced by local managers-Majestica: did not believe that local people have the prerequisite experience to perform well

Purchasing-Majestica: insist to use their centralized purchasing system and CPS should pay a modest fee-CPS: was concerned about the prices and insist to the domestic purchasing

Issues in the negotiation between Majestica & CPS

Issues in the negotiation between Majestica & CPS

Owners’ Access to Hotel Rooms-CPS: request access to hotel rooms as offices-Majestica: insist no privileges

Arbitration-Majestica: insist arbitration take place in a third country-CPS: insist and arbitration should take place in China-CPS: asked Majestica take a minority equity position in the hotel

Seminar Activity 1

As Majestica, where, if anywhere, would you make concessions?

Concession

Length of contract term: 30 years contract (Government Regulation)

Name of hotel: Majestica Hotel, Shanghai (possibly add Chinese characters)

General Manager & Expatriates: Must be Majestica for hotel operation.(Willing to reduce gradually after 12-15 years for transfer knowledge)

Purchasing: CPS responsibility BUT need requirement approval from Majestica.

Owners’ Access to Hotel Rooms: Limit usage of rooms to 2-3%.

Arbitration: Agree JV stake up to 25%.

Seminar Activity 2

As CPS, if Majestica refuses to make concessions, will you walk away? Why?

Alternatives for Majestica

Stay in Shanghai

CNY/Rate/night: 622.78*

Abandon Shanghai

Relocate to another city

Find another alliance

Concessions and strong negotiation

Beijing: 491.40*

Guangzhou: 422.75*

Seminar Activity 3

As Majestica, which way are you going to choose? Why?

Advantages Disadvantages

Stay in Shanghai

- CPS has both appetite and resources for further expansion in China.

- Economy of time (no need for another place and business partner)

- Access to China market- Higher future opportunities to expand in Asia- Political stability: CPS belongs to municipal

government- Business transparency and independence from

government influence- The hotel is under construction- Shanghai is 2nd attractive to Paris location choice- Hotel sector growth

- Length of contract term (only 30 years)

- Loss of full control of the hotel under management

- Another name of the hotel as a part of strategic expansion program

- Competence of high level of management.

Abandon Shanghai

- Keeping brand identify- Keeping standards (Outstanding service culture,

Design consistency, Staff control)

- Loss of big market potential- Loss of time- Loss of Investment in internal

resources- Challenges in finding new partners

for JV- New market analysis- Loss of future opportunities

Relocateto another city

- Keeping brand identify- Keeping standard

- Same law in China (10 years of operations for foreigners)

- Double loss of time and internal resources

- Uncertainty of new opportunities- Negotiating history in China

Possible Negotiation Outcomes

Source: Child et al. (1998)

The managerial grid of negotiation possibilities

Source: Child et al. (1998)

Learning from this case study

Alliance negotiations should endeavor to accomplish three things: Establish the potential partners’ mutual interest and test

their strategic fit.

Provide an opportunity to create a foundation of trust and to develop a problem-solving attitude.

Establish a business and operational plan for the proposed enterprise.

Compatibility should be realized.

Balancing interests and considering concession.

Understand the culture of your partner.

References

Child et al (1998), Cooperative strategy: Managing alliances, networks and joint ventures.

Ghimire, R. P. (2009), Hospitality Industry at the Cutting Edge of Globalization With Special Reference to the Hotel Industry in Nepal. [Online] last access on 16th March 2015 at:http://www.academia.edu/3887995/Hospitality_Industry_at_the_Cutting_Edge_of_Globalization_With_Special_Reference_to_the_Hotel_Industry_in_Nepal

LU, Janet and BEAMISH, Paul W. (2006), Majestica hotel in Shanghai. In: SCHAAN, Jean-Louis and KELLY, Micheál J. (eds.). Cases in alliance management: Building successful alliances. Thousand Oaks, Calif. ; London, Sage, 217-229.

Mike Bird (2014), China just overtook the US as the world’s largest economy. [Online] last access on 16th March 2015 at: http://uk.businessinsider.com/china-overtakes-us-as-worlds-largest-economy-2014-10

The Economic Times (2009), Asia’s top 10 financial centers. [Online] last access on 16th March 2015 at:http://economictimes.indiatimes.com/asias-top-10-financial-centres/hong-kong/slideshow/4243367.cms

The World Fact Book CIA (2014), [Online] last access on 16th March 2015 at:https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html

Travel China Guide (2014), China Tourism Fact & Feature. [Online] last access on 16th March 2015 at:http://www.travelchinaguide.com/tourism/2014statistics/