Presented by: Katy Cheng Caroline Tsen Bryan Villamin

1. Disney in China Presented by: Katy Cheng Caroline Tsen Bryan Villamin

2. Agenda • Introduction • Hong Kong • Shanghai • Conclusion • Q & A

3. Introduction • Why China? • Steady growth of GDP • Receives the most FDI in the world • Untapped (amusement park) market • Strategic move against Vivendi-Universal • Two viable locations • Hong Kong • Shanghai

4. Agenda • Introduction • Hong Kong • Shanghai • Conclusion • Q & A

5. Hong Kong • Agreement Hong Kong SAR Government • The Walt Disney Company unveiled plans for a proposed Hong Kong Disneyland announced on 2 Nov 1999 after 1 year of negotiations • 126-hectare theme park • Development Proposal made up of themed lands • Fantasy • Excitement • Adventure

6. Hong Kong…cont’d • Hong Kong Government • Consist of 2 phases in the proposed plan • The Phase I include constructing 3-4 Disney themed resort hotels with up to 2,100 hotel rooms • 28,000 square-meter retail, dining and entertainment complex • Expected to create an estimated 36,000 jobs • The Phase II agreement also anticipates upon the completion of Phase I. • HK$11.9 billion package of infrastructure • land • road

7. Hong Kong …cont’d • Hong Kong has now become one of the most important financial centres in the Asia Pacific Region. • China’s adopting the open door policy • strong positive impact towards the stability of Hong Kong’s financial systems in the long run enjoy total flexibility in the movement and the repatriation of profits • “One Country, Two Systems” policy • Hong Kong has undergone very sharp challenges • Asian Financial Crisis • Per capita income in Hong Kong averages nearly US$20,000 per year

8. Hong Kong – Risks • Political Risk • Hong Kong Government • Based on the estimation of the Government, the projected economic benefits that will be generated from Hong Kong Disneyland are huge, despite billions to be invested (HKSAR, 1999b). • Hong Kong Government has to bear the major investment costs on land formation and infrastructure in respect of the Penny’s Bay site where the park is being built.

9. Hong Kong – Risks …cont’d • Political Risk • Hong Kong Government • the project as a gamble • the betting is mainly on the Asian economy that numerous travellers would be attracted to Hong Kong by the park if the economy in the region is prosperous, and on China’s in particular • However, the more the investment costs, the higher the risk involved • E.g. Paris Disneyland Experience • the deal is considered unfair because the total investment of Walt Disney Company in the project is only one-tenth of that of the Government (Far Eastern Economic Review, 1999).

10. Hong Kong – Risks …cont’d • Political Risk • Hong Kong Government • First, projecting the level and composition of attendance at the theme park; • Second, estimating the additional spending of attendees; and • Third, assessing the value added or income that can be derived from such additional spending.

11. Hong Kong – Risks …cont’d • Political Risk • Hong Kong Government • According to the Financial Services Bureau, the construction work relies heavily on imported raw material, machinery, equipment and expatriate professionals and skilled labour • The projected life of Hong Kong Disneyland is expected to be 40 years in line with the American theme parks because constant changes have to be introduced to the park over the intervening period.

12. Hong Kong – Risks …cont’d • Transfer Risk • Transfer problem • focused on import and export trading market • Moving good and services between countries at exchange rates which are unexpected. • Translation problem • creating an international market • Change in values, culture

13. Hong Kong – Risks …cont’d • Transfer Risk • Foreign Exchange Market • Effects on direct and indirect on the revenue & cost • The transaction of locally consumed capital only took up 1/7th of total foreign exchange transactions. • Based on the calculation of the foreign exchange market, Hong Kong is one of the four largest. • In 1992, the daily transaction rate was 600 billion US$, ranked sixth. • 3 years later, foreign exchange market transaction had in creased by 50%, being ranked 5th by the world

14. Hong Kong – Risks …cont’d • Transfer Risk • Taxation • Hong Kong taxes are among the lowest in the world, and Hong Kong’s tax regime is simple and predictable • corporate profits tax rate is 17.5% • No tax is paid by firms or individuals on foreign-sourced income • No tax dividends or bank interest • no capital gains tax, no VAT or sales tax • no estate duty tax on non-Hong Kong assets • Basically, only company profits, salaries and property rental income are taxable

15. Agenda • Introduction • Hong Kong • Shanghai • Conclusion • Q & A

16. Why Shanghai? • Recognized as the economic leader in China • Contributes 5% to China’s GDP • Highest GDP per capita in the country • Largest recipient of FDI in the country • Site of the World Expo in 2010 • making substantial infrastructure improvements

17. Shanghai - Risks • Expropriation:the involuntary transfer of property, with compensation, from a privately owned firm to a host country government • Expropriation risk is mitigated because the government would take a controlling equity stake • No other commercial or multi-lateral agency partners are involved in the project

18. Shanghai - Risks …cont’d • Currency risk is not mitigated because the Disney park would be conducting transactions in local currency • Ticket costs, staff salary, etc • However, China has maintained a steady exchange rate for the past 10 years Source: Asian Development Bank

19. Shanghai - Risks …cont’d • Labour Markets • Unskilled labour is cheap and plentiful • Rural workers • Skilled professionals are in short supply • Coastal workers • Unions – labour representatives must be approved by the state

20. Shanghai - Risks …cont’d • Because the project is in the tourism industry and involves an American cultural icon, the susceptibility to strikes or terrorism may be slightly higher than average • Political tension in the Korean peninsula

21. Cheating, Counterfeiting & Corruption • 50% of the 4 billion contracts signed in China are fraudulent • Economic corruption eats up 13% - 17% of the country’s annual GDP • Tax evasion accounts for 50% of taxes due in the private economy, while total losses from tax evasion are US$12 billion a year Source: Gilley, B. 2001, ‘People’s Republic of Cheats’, Far Eastern Economic Review

22. Cheating, Counterfeiting & Corruption • Two-thirds of the biggest state firms produce false accounts • The underground economy is the equivalent of 20% of GDP. Some independent estimates say it’s actually 40% of GDP • 15 – 20% of the spending on an average infrastructure or building project is lost to bribery, fraud, and poor-quality work Source: Gilley, B. 200, ‘People’s Republic of Cheats’, Far Eastern Economic Review

23. Shanghai …cont’d • China is a country with a significant level of risk for natural disasters, but Shanghai, a coastal city, experiences a reduced risk of natural disasters compared to other locations in mainland China • Severe Acute Respiratory Syndrome (SARS) • HIV/AIDS • Approximately 1.5 million people infected Source: www.avert.org

24. Agenda • Introduction • Hong Kong • Shanghai • Conclusion • Q & A

25. The Hong Kong Disneyland is in Risk if Disneyland invest in China: Competitive Risk Shanghai Park vs Hong Kong Park SARS Risk Effect factors Visa Access Financial Risk Tourist Industry

26. Thank You Any Questions?