As the growth of international air travel out of China slowed down from the double digits in the last few years, cruises seemed like the next frontier for global Chinese travel. While international tourism as a whole continued growing at a similar pace of China’s now modest GDP growth, cruising rose by a staggering 70 percent in year-over-year growth between 2013-2016. This according to Goldman Sachs, which has served as an adviser for major cruise lines in China. Both in anticipation and in response to the staggering growth in China’s cruise market, major cruise lines entered into a wide variety of joint ventures and strategic partnerships in China, as well as started the construction of purpose-built cruise ships for the Chinese market.
By 2020, China’s Ministry of Transport expects 4.5 million Chinese cruise passengers, which albeit representing close to 100 percent growth from 2017’s figure of 2.8 million, still means substantially slowed year-over-year growth. In comparison, CLSA expects the total number of global Chinese travelers to reach 200 million by 2020—from 122 million in 2016—whereas China’s National Tourism Administration has a more modest forecast of 150 million international travelers by 2020.
The Cruise market is contracting in an otherwise growing Chinese tourism market
However, contrary to industry expectations, it looks like cruising is falling out of favor with Chinese tourists both faster and more dramatically than even the most bearish take on China’s nascent cruise industry. According to a Financial Times report, the Chinese cruise industry is poised for a drop by 14.3 percent in 2018—with cruise travelers declining from last year’s 2.8 million down to 2.4 million travelers in 2018.
Major cruise operators have been quick in their response to the cooling Chinese cruise market. According to the FT report, Princess Cruises are withdrawing its two China-based ships from China altogether, and the Royal Caribbean Mariner of the Seas’ China ambitions are facing a similar fate.
Cruise operators are pulling ships from the China market
The sudden downturn of China’s previously booming cruise industry isn’t only a setback for international cruise operators, but also the Chinese government which had lofty ambitions for a “made in China” cruise and shipbuilding industry.
The reasons for the downturn are multifaceted, and it’s impossible to put it down to one major reason alone. Instead, a potent mix of heavy-handed Chinese regulation, tourism bans, and downward price pressures proved enough to turn a booming industry into a declining one.
The boom years in Chinese cruising resulted in international cruise operators deploying substantial resources in the China market. Ships were relocated to China, repurposed for China, and even purpose-built for the China market. Today, the market is overflowing with cruise ships with varying degrees of China adaptations, leading to downward price pressures, but also the aforementioned withdrawal of some of the ships less adapted for the Chinese market.
Overcapacity, flailing demand, and downward price pressures are making China’s cruise market less attractive
Chinese regulation that blocks cruise companies from selling their products directly to Chinese consumers also meant that cruise companies were at the mercy of China’s highly competitive—and price sensitive—online travel agencies (OTAs). Left with no other option than selling tickets in bulk to these players (in addition to selling a handful of tickets to non-Chinese customers), per-ticket revenue in the Chinese market ended up significantly lower than in other markets.
While one might have expected these downward price pressures to be mitigated by the previously anticipated booming Chinese demand for Chinese cruise products, this turned out not to be the case. Instead, shifting customer preferences and a less-than-diverse range of cruise destinations proved critical factors in falling demand.
The overall shift toward independent travel and away from tour groups may be one of the factors behind falling demand. Cruises, often with strict itineraries and a limited range of entertainment options, may be too much like group tours for China’s increasingly independently-minded travelers. In a sense, spending days together on a ship along with fellow Chinese travelers with identical itineraries isn’t too much unlike being bussed around and staying at the same hotels as other group travelers.
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Crucially, lacking cruise infrastructure throughout much of Asia, and a limited number of short-haul cruise destinations (much preferred by China’s “money rich, time poor” travelers) have also made cruise options anything other than diverse. As a result of the South Korea travel ban, and poor relations with Taiwan’s independence-leaning government, viable short-haul “international” cruise destinations have essentially gotten cut down to Hong Kong and various coastal cities in Japan. With little diversity of destinations, the prospect for repeat customers is also undermined.
While all is not lost for cruising in China, there are undoubtedly good reasons to revise a bullish outlook on China’s cruise industry to a bearish one—at least until the Chinese government proves that it’s not all talk with it’s 4.5 million cruise passenger projection for 2020. As it turns out, tourism growth isn’t marked by decree but by providing an environment conducive to industry growth.