Amid recession, Covid-19 provides chance to reflect on Macau’s diversification failures

For a long time, Macau’s dependence on the gaming industry has been a concern shared by economists, politicians and the general public.
Even before the gaming liberalization and the transfer of sovereignty, talk of “diversifying the economy” was common and widespread. At the time, diversification meant “industrial diversification” for a territory that was reliant on the now-defunct textile industry.
But in these past two decades, the dependence of the local economy on Macau’s casinos has grown to the point where not only is the activity responsible for the major share of gross domestic product, but it also makes possible a range of other tourism products and services, including hotels, restaurants and retailers.
Less than half a year since the virus first emerged in the central Chinese city of Wuhan, the International Monetary Fund is predicting that the world economy will suffer a recession of about 3% this year. That comes as companies across the globe have seen their supply chains disrupted and their business evaporate in recent months.
At the same time, the economy of Macau could shrink by 30%.
That rate of economic decline is on par with the 2014 depression, which also prompted widespread discussion at the time over the urgent need for diversification.
Yet, diversification efforts since 2015 have been largely unsuccessful.
Without the large number of tourists drawn by the casinos, the city’s other tourism entities are struggling to survive. For many observers, this city cannot escape its current, coronavirus-induced economic downturn unless the gaming sector recovers first.
For local economist Albano Martins, the idea of diversifying the economy has long focused on the building of new sectors, particularly the cultural and creative industries, as well as the MICE sector (meetings, incentives, conferences, and exhibitions). But these two sectors have proved ineffective at establishing themselves at alternatives to gaming.
According to the government’s latest report on diversification from 2018, cultural and creative industries represented only 1.6% of gross domestic products, while the MICE sector represented less than 1%. Moreover, “on top of these results, we still need to bear in mind that around half [of the economic contribution] was made possible due to government subsidies.”
For Bruno Simões, President of MISE (Macau Meetings, Incentives, and Special Events Association), who has had a hand in developing the MICE sector for many years in Macau and Hong Kong, it is “obvious” that the measures to reduce the dependency on gaming have been unsuccessful.
“It is obvious that the results of the policies of diversification are poor. This is obvious for everyone and I am talking about the efforts on reducing the dependency from the gaming sector only, because to [build] another sector that is not related to the hospitality industry would be completely impossible,” Simões said.
Martins agrees. For the economist, it is almost impossible to achieve diversification without the gaming industry. “It is gaming that finds a way to generate other activities that are complementary to casinos and [… as a consequence] reduce our dependency on gaming.”
In his opinion, the development of a different sector that can reach the level of “importance” in the local economy is not likely to happen anytime soon. “Even if we have enough creativity to create new products in emerging sectors, we do not possess any productive capacity to grow them into large industries,” he said.
“It is politically correct to say that we want to diversify but that will not happen in the next 20 years – and I even doubt that will ever happen,” added the economist.
Questioned on which other sectors could be potentially developed by the government, Simões elected two. “The health sector could be an interesting bet although it requires a lot of time and resources. […] Also education, especially at the university level. We have some experience in receiving students from abroad and they like to live and study here. It could be interesting to have an education and research hub in Macau, although in terms of space we would probably have to use Hengqin as a location for that.”
Simões made these suggestions to the Times prior to Ho Iat Seng’s Policy Address last week, in which Macau’s top official elected to turn universities into profit-making centers and promote policies that encourage foreign students to stay and continue contributing to the local economy once they graduate.
“But then we would have to change our mindset in what concerns to the attribution of permits, blue cards, and residency, as people only stay if they feel welcomed to stay,” Simões had said earlier.
“What I think failed in this diversification process was the contracts with the gaming concessionaries,” continued Simões.
“Twenty years ago these concessionaires promised diversity and they claimed not to be exclusively gaming-oriented companies and the government accepted those claims without assuring that that was, in fact, true.”
Simões said that the casino operators built their infrastructure to serve gaming alone. Anything additional was merely complementary and only if the space allowed.
“To create some meeting rooms is not enough,” he told the Times. “The majority of the hotels do not have an interest in having a bar or any other kind of entertainment or leisure besides the gaming. They did not create those alternatives or complements, and the government did not force them to do so either.”
“In the MICE sector, we have a big problem. Even if we want to have a large- scale conference it is very difficult to find a hotel that can provide enough rooms that are not for gaming activities. They have many hotel rooms, but they will not provide them for group reservations for conferences and other events as they are reserving them for the gamblers.”
For Simões, Sands China and Melco Resorts and Entertainment are the possible exceptions because they have managed to promote some degree of entertainment outside the casino floor. “Sands still promoted some festivals, regular concerts, sports events [boxing and mixed martial arts], and Melco created the ‘House of Dancing Water’ show which was very successful and popular but it is difficult to find other examples among the remaining concessionaires,” he said.
“Nobody created any attractions as they did in Singapore, in Shanghai or even Hong Kong with theme parks and other activities. In Macau, all the facilities have the casinos as a centerpiece, and anything else is built around them.”
For Marco Duarte Rizzolio, a lecturer of International Finance, Risk Management, and Corporate Finance at the City University of Macau and Founder and Director of Follow me Macau, a company that provides an e-commerce platform for travelers in Macau, the impact of an event like the Covid-19 outbreak should be taken by decision-makers as a lesson. It should serve as an opportunity to “rethink” the economic diversification strategy, he said.
“The outbreak is an opportunity to rethink and implement strategies for the public and private sectors. Many entities are simply not prepared and need to develop, for example, digital capabilities to avoid business disruptions. New business models need to progress, especially in sectors such as online office, education, health, logistics, automation, entertainment, and retail.”
The gaming operators should also adopt this mindset. Rizzolio said they need to be “more innovative and less conservative,” considering new trends such as e-sports and sports betting arenas.”
Rizzolio said that the government target to have just 9% of concessionaire revenue derived from non-gaming sources is insufficient. That target, due to be achieved by 2020, has already been achieved but, as the Times previously reported, only under a calculation method recently revised by the government.
“Setting a 9% non-gaming revenue goal is not enough. The Macau government has the responsibility to establish smarter goals for the operators rather just than a number to be achieved,” said Rizzolio. “These goals need to be specific, relevant and bring advantages to both the community and visitors.”
For MICE sector expert Simões, government enforcement remains the only way to overcome the failure to diversify. “Forcing them to do it,” said Simões. “Without it being mandatory, they will not do it.”
Another way the government can partially help to solve the problem is by allowing the creation of budget hotels without casino facilities, which will help to attract other types of visitors come to Macau and enjoy other forms of tourism, said Simões.
However, a government initiative to shift Macau’s gambler demographic may have also hurt the local economy during the coronavirus pandemic. Though revenue from the mass market and VIP segment fell by proportionate amounts during the first quarter of this year, some analysts believe that high rollers will prove more resilient in the coming months.
“The diversification of the gaming through the mass market is good for the casinos because, in this way, they avoid paying high commissions to junkets [gaming promoters] to attract the VIP gamblers,” said Martins.
“It might also be good for some retail, hotel and food and beverage operators. But for the general population, it is not the best solution because it causes huge crowds [during the good times], yet if there is a crisis all the sectors suffer drastically.”
Rizzolio said that the measure to diversify the tourism source market has a lot of potential, but requires a big investment in marketing Macau to jurisdictions outside of the greater China region.
“China has become in less than a decade the fourth most visited country in the world, after France, the United States, and Spain. Macau manages to attract an average of 25% of all Asian travelers visiting China. In other words, a quarter of Asians who spent their holidays in China went to Macau,” said the analyst. “But when comparing to Western countries, Macau manages to capture less than a tenth of travelers coming to China. Most Westerners end up visiting Beijing, Shanghai, Shenzhen, Guangzhou, and Hong Kong, without passing through Macau.” Daniel Beitler, Renato Marques