Disney Gets Closer to Shanghai

Shanghai Disneyland finally comes true. People are excited; people are worried: will the sixth Disney theme park in the world be like the one in Tokyo, or the one in Hong Kong?

On January 9, a declaration from the headquarters of the US Walt Disney Company said that the company had already signed a framework agreement with the Shanghai municipal government about Shanghai Disneyland. Shanghai government would submit the application report drafted by the both parties to China’s central government for examination and approval. On January 17, Han Zheng, Mayor of Shanghai, confirmed that declaration.

By then, Shanghai Disneyland, whose reality used to be hard to tell, finally came true. According to the source, Shanghai has prepared well enough for the construction of the Disney theme park. Principally, there are no hurdles in the project approval. Once done, this will be the sixth Disney theme park in the world.

No details about the agreement are available. However, many people believe that Shanghai Disneyland project can provide great stimulus to the economic development of Shanghai when the global financial crisis hit China’s economy. Some experts even forecast that such a project may generate billions of yuan of the GDP. However, some antagonists think that Shanghai have been frustrated by some large projects. The magnetic suspension and Shanghai International Racing Circuit for Formula 1 Racing failed people who used to believe that they can bring a lot of financial benefits for Shanghai. Hong Kong Disneyland, which has been suffering deficit since foundation, is a forewarning for Shanghai Disneyland.

A Long Road to Shanghai

The framework agreement was signed on the afternoon of January 8. It was known that the Vice Mayor of Shanghai Yang Xiong who is responsible for urban construction and the President of Disney Asia Bill Earnest attended the signing ceremony. But neither of them gave out any news that day.

On January 9, the city was infested with the reports with conjectures about the truth. That night, the headquarters of Disney in the USA broke the silence and confirmed the reality of Shanghai Disneyland. This was the first time that Disney gave the official confirmation about Shanghai Disneyland after more than ten years’ rumor.

Actually, the negotiation between Shanghai government and Disney started as early as 12 years ago. In October 1997, Disney said that it planned to set up the second Disney theme park in Asia after the first one in Tokyo. Then Shanghai had the willing to gain it but at last, Hong Kong was chosen. At the end of 2005, hearsays about Shanghai Disneyland caused waves in Shanghai and China again. Till the end of 2008, the negotiation was at a white heat. The highest-ranked management persons of Disney came to Shanghai personally. Both parties made compromise, which urged the first deal of agreement.

So far as we know, Disney, which used to be uncompromising in the negotiations, made a greater compromise. They usually asked for a high price, which was believed to be the main reason for the long-term stagnation of Shanghai Disneyland project. The decline of China’s economy and Disney’s profit resulted from the financial crisis provides the opportunity for the both parties to reach the initial agreement. The Disney theme parks and resorts, whose revenue accounts for 30% of Disney’s total income, is its second largest business after the media. In the fourth quarter of last year, the sales amount of this business was 2.9 billion US dollars, with a year-on-year growth of 6.5%, but the profit was only 410 million US dollars, down by 4.2%. Due to the continuous decline of the profit, as well as the forecast that the domestic consumption in the USA will be still under depression for a while, Disney is actively developing the overseas market.

After the end of the People’s Congress and People’s Consultative Conference of Shanghai, Han Zheng responded officially that Shanghai government had reached an agreement with Disney on the basic elements of construction. He also said that the State Council of China held the final examination and approval right. Shanghai would carry out the construction plan according to the determinations and directions of the central government.

The investment, according to the declaration, is 24.48 billion yuan (USD 3.58 billion). The first-phase project covers about 1.5 square kilometers. It will open to the visitors in 2014 or later. Disney holds 43% of the shares of Shanghai Disneyland while a company belonging to Shanghai government holds the other 57%. It is said that the total area of Shanghai Disneyland will be 6 to 8 square kilometers, much larger than Hong Kong Disneyland.

As for the location, though no definite location was shown in the declaration, it is said to be in the junction area of Chuansha Town, Pudong District and Nanhui District, not far away from Pudong International Airport.

According to the latest report about the structure of the shareholders, of the 57% shares held by the Chinese party, Lujiazui Group holds 60%; Jinwin Investment Co., Ltd. holds 30% and the other 10% belongs to a property development company based in Nanhui District. Jinwin Investment is a state-owned enterprise under the direct leadership of Shanghai Municipal Propaganda Department and the third largest shareholder of Oriental Pearl. Lujiazui Group is the parent company the listing Shanghai Lujiazui Development Corp., which is mainly responsible for the development of Lujiazui Trade Zone, Pudong District; in addition, the largest shareholder of the property development company is the government of Nanhui District. All in all, the Chinese party is compromised of enterprises with certain strength.

Great Stimulus to Domestic Demand?

Shanghai Disneyland has been confirmed to be true. It is a matter of time for it to be examined and approved. The details of the cooperation, such as capital contribution and supporting facilities, etc, are still under negotiation.

Though the 25-billion-yuan investment of Shanghai Disneyland has a small gap between the total investment of Shanghai World Expo (28.6 billion yuan or 4.2 billion US dollars), it is only the start of the total investment. According to the estimation, the total investment will reach at least 40 billion yuan (USD 5.85 billion). The price of the land for the theme park is 20 billion yuan (USD 2.93 billion).

Shanghai Disneyland will undoubtedly bring great influence on this city, functioning as a powerful push to the increase of the domestic demand. According to a forecast, such a large project will generate billions of yuan of the GDP. Besides the Shanghai World Expo, Disneyland will be the three “important engines” for Shanghai’s economic development with the big jet plan and magnet suspension. Among them, Disneyland functions best in promoting the development of Shanghai. It also plays an important role in heightening the status and confidence of Shanghai in the world.

The financial crisis has already exerted negative influence on Shanghai’s economic growth which used to be stable and fast. Its GDP growth rate in the first half of 2008 is much lower than a year ago and even lower than the average growth rate of the whole country in the same period. Therefore, Shanghai Disneyland, as well as the World Expo, receives a lot of attention.

“Shanghai is one of the first cities to try industrial shift and upgrade in China. The service industry must play a very important role in Shanghai’s economic development in the future,” said the source. An official of Shanghai government also thinks that Shanghai Disneyland will bring a lot to Shanghai, not only in the GDP growth.

Tourism industry is the mostly influenced. The number of visitors who visit the park soon after its open is estimated at 10 million, including 3 to 5 million visitors from other places, taking 2% to 4% of the total number of tourists to Shanghai in a year. Based on the performance of Disney theme parks in Tokyo and Paris, Shanghai Disneyland can attract at least 20 million visitors a year. This will bring not only a big ticket income for Shanghai, but also a great stimulation to the consumption of hotel, beverage and transportation of the city. Meanwhile, the project can provide millions of job vacancies.

Simultaneously, Shanghai Disneyland will stimulate the property market of Shanghai. The price of the houses in or near Chuansha Town has increased to 12,000 yuan (USD 1,756)/m2 from the previous 7,000 yuan (USD 1,024)/m2. However, some experts think that the influence may be limited. Take Hong Kong Disneyland for example: during its construction period from 1997 to 2005, the house price of Hong Kong kept decreasing. There was no stimulus function.

According to the economic specialist Yi Xianrong, Disneyland will not function as a catalyst to Shanghai’s economy in a short period. The drive of the GDP growth, if any, can only function several years later. He also exemplified Hong Kong Disneyland which had no obvious influence on Hong Kong’s economy.

It is known that Hong Kong Disneyland, after three years’ operation, could neither get out of the deficit situation, nor drove the economic development. Actually, among the five Disney theme parks in the world, the ones based in Los Angels, Orlando and Tokyo perform well, while the one based in Paris is also kept with painstaking.

An Object Lesson from

Hong Kong Disneyland

The cooperation of Hong Kong government and Disney on Hong Kong Disneyland may be a good lesson for Shanghai.

In the 1980s, Disney opened its first overseas theme park in Tokyo. With the worries that the Japanese may reject the American culture, Disney gave the Japanese government very favorable conditions in the cooperation: Disney only took 10% of the ticket income of Tokyo Disneyland and 5% of the beverage and franchise income. However, the extraordinary popularity of Tokyo Disneyland was really out of Disney’s expectation, which Disney regretted a lot.

In September 2005, Hong Kong Disneyland opened. In this project, Disney only contributed 314 million US dollars to get 43% of the shares and conditions much better than the ones in Tokyo Disneyland. Hong Kong government contributed 2.9 billion US dollars to get 57% of the shares. Unfortunately, this Disneyland never saw profit after its foundation.

Many experts believe that Disney charged too many franchise fees from Hong Kong government. This is the main reason of the long-term deficit of Hong Kong Disneyland. In 1997, Hong Kong was washed by the Asian Financial Crisis and hungrily needed stimulus to its economy. Disney just capitalized on such an opportunity to gain favors from Hong Kong Disneyland. “During the negotiation, we must not agree with the opposite party’s conditions which are too rigorous. This may much decrease the possibility of earning profit,” said an expert before the start of the negotiation.

According to the reports from some media, Shanghai Disneyland will not adopt the Hong Kong pattern; instead, it will use the Tokyo pattern, namely, the government provides land and most of the construction fund and holds the stock right; Disney is responsible for the daily management of the Disneyland. The government will pay for Disney the brand fee and the commission of operation income every year.

In addition, Hong Kong Disneyland, due to its small area, has only 5 million visitors each year, even fewer than one quarter of Tokyo Disneyland’s number of visitors. However, Shanghai Disneyland is much larger than the one in Hong Kong. And, Shanghai Disneyland will be the only Disney theme parkin China in quite a long while. So the visitors are from not only Shanghai, but also the other provinces of Mainland China, whose population is 1.3 billion.

But Shanghai Disneyland has its own difficulties. Apart from trying not to follow the same disastrous road of Hong Kong Disneyland, Shanghai Disneyland has to deal with culture difference and innovation in the tourism items. It may attract many people who haven’t been there before. But the number of returned customers plays a more important role. The statistical data shows that there are 400 theme parks with the total investment of over 100 million yuan (USD 14.6 million) in China. But 70% of them are suffering deficit; 20% of them are equal in expenditures and income; only 10% of them can see the profit.

Some antagonists even said: “Shanghai Disneyland is possibly like the magnet suspension and F1 racing circuit which never see profit. People don’t want to see another grand project do nothing but to burn money.” There are reasons for people’s worries. Frankly speaking, no one can ensure that such a large project can function as people expect. The government has to think carefully of how to avoid bad situation of Hong Kong Disneyland.