Woman sits on deck watching sunset

The sky was the limit. According to the China Cruise & Yacht Industry Association, the number of cruises from Chinese home ports grew from 28 in 2008 to 927 in 2016. As recently as May 2017, Bloomberg ran an article entitled, “Cruises Boom as Millions of Chinese Take to the Seas.” That outlook is now being re-written.

The trade bulletin Cruise Industry News estimates that cruise traffic in China will fall from 2.8 million passengers in 2017 to 2.4 million in 2018, representing a 15% decline. The figure is likely to be conservative. Wealth trends are rapidly favoring independent itineraries over group arrangements.

As a sign of failed optimism, Royal Caribbean is withdrawing ships from the Chinese market, while Carnival is rethinking its China-built ship orders. Norwegian, the other mega-player, just announced a broad management reshuffle for its Shanghai- and Beijing-based operations. The impact on local operators is opaque.

What went wrong so quickly? The industry misjudged its risks, failing to decouple the cruise business from impressive growth trends in the overall tourism sector. Consider these points:

Political Risk. In March 2017, China issued a ban on cruise travel to South Korea to protest the installation of a US THAAD missile system. Ports of call included Busan, Jeju, and Seoul. The ban knocked out prime destinations, realistically leaving Hong Kong and Japan as the other short-haul options.

Business Risk. Cruises lines are prohibited from selling tickets directly to the consumer in China. They are required to use an ever-powerful cabal of online travel agents—key names include Ctrip and Qunar—further depressing tight profit margins. Tickets are sold to these distributors in bulk.

But the overriding issue may be how swiftly travel preferences have evolved. Where the Chinese market was once characterized by standardized group travel offerings, consumers are now drawn to tailored, personal experiences. The cruise industry missed that shift, relying on generalized penchants for gambling and shopping.

Our Vantage Point: Investors based in the West tend to parrot the idea that an expanding middle class in emerging markets will drive investment opportunities. In practice, that concept overlooks the local character of many consumer-based industries.

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Image: In China, the cruise industry missed an overnight shift to individual travel. Credit: Gyn9988 at Can Stock Photo Inc.