SOLUTION: MGT 672 SEU Wk 4 Decision Theory Disney in Asia Problem Solving Model Case Study

274
Part 2 The Role of Culture
total in its first three and a half years, or about 4.3 million
a year. That figure fell short of the original projection of
more than 5 million a year.7 Although Disney did not
release financial figures to the public, Euromonitor estimated the park had an operating loss of $46 million in its
first year, and lost $162 million the following year.8
By 2008, Disney’s officials were publicly stressing the
importance of park expansion for the overall viability of
the project. At that time, the park occupied 126 hectares
and had only four “lands”—Fantasyland, Tomorrowland,
Adventureland, and Main Street USA—and two hotels.
Hong Kong Disneyland Managing Director Andrew Kam
emphasized that expansion would be vital to the park’s
success. In a September 2008 release, Kam said the park
had plenty of room to grow because it was only using half
of the land available: “Expansion is part of the strategy
to make this park work for Hong Kong,”9 At the time, an
expansion was estimated to cost as much as 3 billion
Hong Kong dollars, or US$387 million. In December
2008, the Sing Tao Daily newspaper in Hong Kong
reported that Disney, in what was deemed an unusual concession, might give the government a greater share in the
project in repayment of a cash loan of nearly $800 million
that the city had extended previously to the theme park.10
In 2009, unable to come to agreement with the Hong
Kong government, Disney put on hold its long-awaited
plans to expand the park. In a statement from Disney’s
Burbank (Calif.) office, the company said it was laying
off employees in Hong Kong after failing to reach an
agreement with the Hong Kong government to fund a
much-needed expansion. According to Disney, “The
uncertainty of the outcome requires us to immediately
suspend all creative and design work on the project.”
Thirty Hong Kong–based Disney “Imagineers,” who
helped to plan and design new parks, would be losing
their jobs.11 Business news sources at the time noted
that one reason Disney might be willing to end negotiations with the Hong Kong government was the company’s progress in negotiations with Shanghai officials
to open a theme park there that would be much larger
and an arguably more exciting China project. A Shanghai park would be easier for many Chinese families to
visit. However, the possible shift of mainland Chinese
visitors away from Hong Kong in favor of Shanghai
could mean a drop of as much as 60 percent in visitor
numbers to the Hong Kong park, according to Euromonitor’s estimates.12
In June of 2009 Disney and Hong Kong’s government
finally reached a deal to modestly expand the territories of
the Disneyland theme park at a cost of about $465 million.
Under terms of the deal, the entertainment giant contributed all the necessary new capital for construction as well
as sustaining the park’s operation during the building
phases. It also converted about $350 million in loans into
equity to help with funding, and agreed to keep open a
credit facility of about US$40 million. Hong Kong, which
shouldered much of the $3.5 billion original construction
cost, did not add any new capital. “Disney is making a
substantial investment in this important project,” Leslie
Goodman, a Disney vice president, said in a statement.13 Groundbreaking on three new “lands” for the park
commenced later that year, with “Toy Story Land”
­opening in 2011, “Grizzly Gulch” opening in 2012, and
“Mystic Point” opening in 2013. The three new lands
increased the overall size of Hong Kong Disneyland by
25 percent, and there are now more than 100 attractions
within the park.14 If these expansions will be enough to
bring profitability to Hong Kong Disneyland remains yet
to be seen, as future expansion at the park beyond these
three new lands remains uncertain.
Uncertainty in Mainland China
Shanghai, known as the “Paris of the Orient,” was an
attractive site for a second Chinese park to Disney officials because of its growing commercialization and industrialization and its already extant transportation access. A
Disney theme park in Shanghai would be mutually beneficial for the company and the nation of China. From
Disney’s perspective, it would gain access to one of the
world’s largest potential markets (and also compete with
Universal Studios’ new theme park). From the perspective
of Chinese government officials, Disney’s mainland
Shanghai park would be a long-awaited mark of international success for a communist nation.15
Initially planners hoped to have a Disneyland operating
in Shanghai prior to the World Expo in 2010. However,
a series of delays plagued the Shanghai park’s progress.
The Chinese government, fearing that a Shanghai park
would damper the success of the newly opened Hong
Kong park, intentionally delayed the park’s construction
in the mid 2000s.16 Additionally, in the wake of a corruption scandal within the Communist Party in Beijing in
2005, the necessary government approvals for the project
stalled to a halt. For a time, it appeared as though the
plans for the Shanghai park would not come to fruition,
leaving Disney to consider other options for the construction of its new park.17
Disney Gets Green Light for Shanghai Park
After a few years, Walt Disney Co. revisited its plans to
build a park in Shanghai, China. In January 2009, Disney
presented a $3.59 billion proposal to the Chinese central
government, outlining plans for a jointly owned park,
hotel, and shopping development.18 The timing could not
have been better for Disney to seek approval; in the wake
of the global economic crisis, the prospective creation of
50,000 new jobs amid a cooling Chinese economy was
especially attractive to the Chinese government.19
In-Depth Integrative Case 2.1b Disney in Asia
The preliminary agreement was signed in January
2009. According to the proposal, Disney would take a
43 percent equity stake in Shanghai Disneyland, with 57
percent owned by the Shanghai government, forming a
joint-venture company.20 The preliminary agreement outlined a six-year construction period for the first phase,
with the projected opening of the park scheduled for 2014.
Disney would pay $300 million to $600 million in capital
expenses for the park in exchange for 5 percent of the
ticket sales and 10 percent of the concessions.21 According
to the preliminary agreement, Shanghai Disneyland, the
first park at the resort, would incorporate Chinese cultural
features as well as attractions built around traditional
­Disney characters and themes. Additionally, the ownership
structure would contain some aspects of Disney’s Hong
Kong joint venture agreement. According to The Wall
Street Journal, a newly formed Shanghai company named
Shendi would hold the local government’s interest in the
park. Shendi is owned by two business entities under district governments in Shanghai, as well as a third company
owned by the municipal government’s propaganda
bureau.22 After almost a year of negotiation, in November
2009, Disney finally received an approval from the ­Chinese
government to proceed with its Shanghai park plan.23
Disney acted quickly to gather all other necessary
approvals and documents that were needed for the park
construction. In April 2010, the land needed for the
park was approved. In 2010, over 2,000 households and
nearly 300 companies were relocated to clear the way
for the first phase of construction. In an effort to keep
the public informed, the head of Pudong New District,
where the park is sited, announced that the first phase
of the project will span four square kilometers, with the
theme park itself covering a square kilometer. 24 Construction on the first phase, which includes the Shanghai Disneyland Park and two hotels, broke ground in
2011.25 Despite the initial difficulties that Disney faced
throughout the early 2000s in gaining approval for the
Shanghai park, the five-year construction phase proceeded relatively smoothly.
As the 2016 opening neared, public excitement for the
park grew. More than five million people flooded the
park’s official website following its March 2016 launch.
Tickets for the park’s opening two weeks sold out months
in advance, and, on a single weekend in May, more than
100,000 people traveled to the still-unopened park just
to peer through the gates and shop at stores on the
perimeter.26 The park officially opened to the public on
June 16, 2016.
Analysts see the move as an important step forward
for Disney and other Western media firms to make
inroads into the vast and untapped Chinese media and
entertainment market. “They’ve been laying the groundwork for a park for many years by exposing the population to Disney properties, film, TV and merchandising,”
275
said Christopher Marangi, senior analyst with Gabelli
and Co. in New York.27
Disney has implemented unique approaches to ticket
pricing at its Shanghai park in an effort to maximize
attendance and profit. Unlike other theme parks, where
the cost of entry remains the same regardless of the day,
Shanghai Disneyland features “demand pricing.” On
days that are more crowded, such as weekends and during the summer, “peak” prices are enacted. Though
ticket prices start much lower at the Shanghai park than
at the Hong Kong park, the peak pricing structure
results in admission price increases of over 25 percent
on certain days.28
There are certain public concerns that the new
Shanghai park, which is Disney’s sixth, will inevitably
affect the Hong Kong park. The main concern is that
the Hong Kong park’s revenue may be cannibalized,
worsening the financial perspectives of the alreadyunderperforming Hong Kong park.29 However, Disney
thinks that both parks will complement each other rather
than be competitors. Disney’s main points are that
Shanghai is close to a number of other major cities
within easy driving distance, including Nanjing, Suzhou,
and Hangzhou, and that Shanghai’s own population of
around 19 million, combined with tens of millions more
within a three-hour driving radius, would provide a
more-than-ample base of local users for the park. There
are analysts, like Paul Tang, chief economist at Bank of
East Asia, who share this optimism, projecting that
“visitors from Guangdong and southern China will still
find Hong Kong more convenient, while Shanghai will
attract visitors from northern and eastern
China.”30 Indeed, Disney reported a 36 percent increase
in profit at its Hong Kong park in early 2015.31
The critics of the Shanghai park, on the other hand,
are convinced that this project is a bigger threat to the
Hong Kong park than anybody can imagine. According
to Parita Chitakasem, research manager at Euromonitor
International in Singapore, who specializes in theme
parks, “Disneyland Shanghai will have two big features
which will make it more attractive than its Hong Kong
counterpart: Although it is still early days, Disneyland in
Shanghai will probably offer a much better experience for
your money than Disneyland in Hong Kong—Shanghai’s
Disneyland is three times bigger than Hong Kong Disneyland. Also, for visitors from mainland China, it will be
much easier to travel to Disneyland in Shanghai, as there
are no visa/cross border concerns to take care of.”32
Though only one phase of Shanghai Disneyland has
opened, its true impact on Hong Kong Disneyland will
not be known for several years; stagnant growth in attendance at the Hong Kong park validates the concerns that
many have expressed; in 2015, a year before Shanghai
Disneyland even opened, the Hong Kong park only saw
a one percent increase in attendance.33
274
Part 2 The Role of Culture
total in its first three and a half years, or about 4.3 million
a year. That figure fell short of the original projection of
more than 5 million a year.7 Although Disney did not
release financial figures to the public, Euromonitor estimated the park had an operating loss of $46 million in its
first year, and lost $162 million the following year.8
By 2008, Disney’s officials were publicly stressing the
importance of park expansion for the overall viability of
the project. At that time, the park occupied 126 hectares
and had only four “lands”—Fantasyland, Tomorrowland,
Adventureland, and Main Street USA—and two hotels.
Hong Kong Disneyland Managing Director Andrew Kam
emphasized that expansion would be vital to the park’s
success. In a September 2008 release, Kam said the park
had plenty of room to grow because it was only using half
of the land available: “Expansion is part of the strategy
to make this park work for Hong Kong,”9 At the time, an
expansion was estimated to cost as much as 3 billion
Hong Kong dollars, or US$387 million. In December
2008, the Sing Tao Daily newspaper in Hong Kong
reported that Disney, in what was deemed an unusual concession, might give the government a greater share in the
project in repayment of a cash loan of nearly $800 million
that the city had extended previously to the theme park.10
In 2009, unable to come to agreement with the Hong
Kong government, Disney put on hold its long-awaited
plans to expand the park. In a statement from Disney’s
Burbank (Calif.) office, the company said it was laying
off employees in Hong Kong after failing to reach an
agreement with the Hong Kong government to fund a
much-needed expansion. According to Disney, “The
uncertainty of the outcome requires us to immediately
suspend all creative and design work on the project.”
Thirty Hong Kong–based Disney “Imagineers,” who
helped to plan and design new parks, would be losing
their jobs.11 Business news sources at the time noted
that one reason Disney might be willing to end negotiations with the Hong Kong government was the company’s progress in negotiations with Shanghai officials
to open a theme park there that would be much larger
and an arguably more exciting China project. A Shanghai park would be easier for many Chinese families to
visit. However, the possible shift of mainland Chinese
visitors away from Hong Kong in favor of Shanghai
could mean a drop of as much as 60 percent in visitor
numbers to the Hong Kong park, according to Euromonitor’s estimates.12
In June of 2009 Disney and Hong Kong’s government
finally reached a deal to modestly expand the territories of
the Disneyland theme park at a cost of about $465 million.
Under terms of the deal, the entertainment giant contributed all the necessary new capital for construction as well
as sustaining the park’s operation during the building
phases. It also converted about $350 million in loans into
equity to help with funding, and agreed to keep open a
credit facility of about US$40 million. Hong Kong, which
shouldered much of the $3.5 billion original construction
cost, did not add any new capital. “Disney is making a
substantial investment in this important project,” Leslie
Goodman, a Disney vice president, said in a statement.13 Groundbreaking on three new “lands” for the park
commenced later that year, with “Toy Story Land”
­opening in 2011, “Grizzly Gulch” opening in 2012, and
“Mystic Point” opening in 2013. The three new lands
increased the overall size of Hong Kong Disneyland by
25 percent, and there are now more than 100 attractions
within the park.14 If these expansions will be enough to
bring profitability to Hong Kong Disneyland remains yet
to be seen, as future expansion at the park beyond these
three new lands remains uncertain.
Uncertainty in Mainland China
Shanghai, known as the “Paris of the Orient,” was an
attractive site for a second Chinese park to Disney officials because of its growing commercialization and industrialization and its already extant transportation access. A
Disney theme park in Shanghai would be mutually beneficial for the company and the nation of China. From
Disney’s perspective, it would gain access to one of the
world’s largest potential markets (and also compete with
Universal Studios’ new theme park). From the perspective
of Chinese government officials, Disney’s mainland
Shanghai park would be a long-awaited mark of international success for a communist nation.15
Initially planners hoped to have a Disneyland operating
in Shanghai prior to the World Expo in 2010. However,
a series of delays plagued the Shanghai park’s progress.
The Chinese government, fearing that a Shanghai park
would damper the success of the newly opened Hong
Kong park, intentionally delayed the park’s construction
in the mid 2000s.16 Additionally, in the wake of a corruption scandal within the Communist Party in Beijing in
2005, the necessary government approvals for the project
stalled to a halt. For a time, it appeared as though the
plans for the Shanghai park would not come to fruition,
leaving Disney to consider other options for the construction of its new park.17
Disney Gets Green Light for Shanghai Park
After a few years, Walt Disney Co. revisited its plans to
build a park in Shanghai, China. In January 2009, Disney
presented a $3.59 billion proposal to the Chinese central
government, outlining plans for a jointly owned park,
hotel, and shopping development.18 The timing could not
have been better for Disney to seek approval; in the wake
of the global economic crisis, the prospective creation of
50,000 new jobs amid a cooling Chinese economy was
especially attractive to the Chinese government.19
In-Depth Integrative Case 2.1b Disney in Asia
The preliminary agreement was signed in January
2009. According to the proposal, Disney would take a
43 percent equity stake in Shanghai Disneyland, with 57
percent owned by the Shanghai government, forming a
joint-venture company.20 The preliminary agreement outlined a six-year construction period for the first phase,
with the projected opening of the park scheduled for 2014.
Disney would pay $300 million to $600 million in capital
expenses for the park in exchange for 5 percent of the
ticket sales and 10 percent of the concessions.21 According
to the preliminary agreement, Shanghai Disneyland, the
first park at the resort, would incorporate Chinese cultural
features as well as attractions built around traditional
­Disney characters and themes. Additionally, the ownership
structure would contain some aspects of Disney’s Hong
Kong joint venture agreement. According to The Wall
Street Journal, a newly formed Shanghai company named
Shendi would hold the local government’s interest in the
park. Shendi is owned by two business entities under district governments in Shanghai, as well as a third company
owned by the municipal government’s propaganda
bureau.22 After almost a year of negotiation, in November
2009, Disney finally received an approval from the ­Chinese
government to proceed with its Shanghai park plan.23
Disney acted quickly to gather all other necessary
approvals and documents that were needed for the park
construction. In April 2010, the land needed for the
park was approved. In 2010, over 2,000 households and
nearly 300 companies were relocated to clear the way
for the first phase of construction. In an effort to keep
the public informed, the head of Pudong New District,
where the park is sited, announced that the first phase
of the project will span four square kilometers, with the
theme park itself covering a square kilometer. 24 Construction on the first phase, which includes the Shanghai Disneyland Park and two hotels, broke ground in
2011.25 Despite the initial difficulties that Disney faced
throughout the early 2000s in gaining approval for the
Shanghai park, the five-year construction phase proceeded relatively smoothly.
As the 2016 opening neared, public excitement for the
park grew. More than five million people flooded the
park’s official website following its March 2016 launch.
Tickets for the park’s opening two weeks sold out months
in advance, and, on a single weekend in …
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