Shanghai JC Mandarin

May 27, 2005

Jessica Gamble
Nathaniel Rogers
Myriam Southgate

Hans Hauri is sitting pretty. Surrounded by high fashion, he enjoys lunch in the lobby of his
hotel. As general manager of JC Mandarin hotel in Shanghai, he enjoys varied challenges on a
daily basis. But so far today has been uneventful, and he is taking the time to enjoy a bowl of
congee and ponder the future of the JC Mandarin.

The Chinese hotel industry is booming. This growth corresponds to the rapidly growing
economy, which elicits stress and excitement for international businessmen and national
politicians alike. While the economy is growing at a fast rate, between eight and ten percent a
year,i the Chinese hotel industry has a compound annual growth rate in room occupancy of
fifteen percent. This reflects both the influx of international visitors and the new crops of hotel
rooms that seem to be appearing at an accelerated rate.

Shanghai hotel industry

Market size, supply, and demand
On February 21st, 1972 Richard Nixon and Henry Kissinger became America’s first ambassadors
to China and opened the gates to a thriving business relationship. Today, China annually draws
13.5 million international visitors, 2.725 million of which arrive in Shanghai.

Over the five-year period from 1998 to 2002, the compound annual growth rate (CAGR) for
room occupancy was 15%. This rate was exceeded by the demand increases of 22% CAGR
(Exhibit 1). It is important to note that demand increases are relatively smooth; however, supply
increases occur in spurts, or in a stepwise fashion. When a hotel project is completed, a large
number of rooms are suddenly thrown into the market. When this happens, it is possible for
supply to temporarily exceed demand until demand again surpasses the supply.ii

Trends
The Shanghai hotel industry experiences a 15% compound annual growth rate. Corporate visitors
and MICE (visitors for meetings, under incentive programs, conferences, and exhibitions)
comprise 75% of this demand (Exhibit 2). Hotels react by lowering prices to maintain occupancy
rates in the face of competition. The average visitor stays for 3.6 days.iii

J. Gamble, N. Rogers, M. Southgate

Page 1 of 29
While it seems that the hotel industry in Shanghai has pretty stable room occupancy rates, this
rate noticeably decreases at four times during the year: the Chinese New Year, the National
Holidays, the end of the calendar year, and Labor Day. At these times everybody, including the
expats, leave the city (Exhibit 3).

Major drivers of MICE demand growth for five-star hotels include the completion of the
Shanghai International Expo Centre in Pudong in 2005 and the World Expo 2010 located in
Shanghai. Major drivers of leisure demand include current attractions: the Bund, Oriental Pearl
Tower, and the Yu Yuan Botanical Gardens. Future attractions are a Formula 1 Grand Prix circuit,
the development of a Universal Studios theme park, and more shopping centers.iv

Peter Yesawich a consumer trends guru and Chairman/CEO of Yesawich, Pepperdine, Brown &
Russell provides the following insights into the future of the hotel industry:
 Demand for leisure travel service will exceed that for business travel services;
 Technology will enable guests to personalize their lodging accommodations;
 The most valuable currency in today’s world will be measured in hours and minutes, not
dollars, euros or pesos;
 More consumers will seek alternatives to conventional lodging accommodations;
 Growing use of the Internet will alter guests’ planning and buying habits; and
 Transparent pricing will amplify consumers’ growing vigilante spirit.v

Airline influence
Potential growth for hotels in the Asian market is very promising (Exhibit 4). The number of new
or low-cost airline carriers has exploded in recent years because of restructuring in the airline
industry. Cities and destinations on low-cost airline routes will benefit from the introduction of a
tourism infrastructure and the economic development that accompany it. Foreign investment in
these areas is being made at an accelerated pace, and infrastructure is necessary to support this
growth.

Nearly every region in the Asian market has introduced a new airline in recent years. These
airlines have generated new customers and opened up access to new airports and markets across
the globe. How can hoteliers leverage all the revenue opportunities from this burgeoning
segment of the airline industry? Particularly in Europe and Asia where the market is quite new
the challenge lies in knowing when and how to respond. This is risky because budget airlines are
not under strict contractual obligations to continue their routes in the same way the major carriers
are. If hotels are built where airlines fly, the risk that the route may be unprofitable and dropped
by the airline effectively cuts visitors’ access to the hotels.

The greatest impact of the airline restructuring has been on budget and mid-scale hotels that
appeal to leisure travelers. Airline routes and schedules are not yet conducive to corporate travel
needs in most destinations. With this stability, international business relationships will develop in
these geographical areas. Michael Issenberg, managing director of Accor Asia Pacific has said.
“Growth in travel has been almost entirely in the leisure sector and attracting travelers to the
mid-market and economy sectors.” vi Shanghai is an exception to this, with business and leisure
forecasted to grow at a similar rate. Within Shanghai, 2004 occupancy was strongest for
economy and mid-market hotels. For some hotel corporations, this strength in their budget hotels
came at the expense of their five-star hotels.

J. Gamble, N. Rogers, M. Southgate

Page 2 of 29
Pressing issues of the day
The International Hotel & Restaurant Association has historically operated with reserved
optimism. Although this has blossomed into full confidence in a complete recovery since the
industry shaking events of September 11th, 2001, the industry will not be returning to its pre-9/11
business models. The hospitality industry is in the process of completely reinventing itself. The
product has changed, business models have evolved, and today’s customers are increasingly
more informed due to the Internet.

The Internet has changed other aspects of industry as well. Intermediaries in the travel process
are being eliminated. Customers do not want to pay for information that is readily available
online, and many are willing to spend more time sifting through this information to save money.
The booking process is also changing. “Small chains” would work with any distributor that could
effectively drive its product to the international marketplace, but would remain vigilant to protect
the group’s brand and prices” says Kristie Willmott, director of distribution and e-commerce for
Jumeirah International, Dubai.vii

Happy customers
JC Mandarin operates in an environment where repeat business means everything. Gaining
customer loyalty is the key to maintaining its position as a successful hotel within the five-star
segment in Shanghai.

Within the industry, hotels often perform a cursory evaluation of customer satisfaction by asking
them about the following four areas: Was the check-in smooth? Did you sleep well? Are you
enjoying the food? Was checking out easy? Understanding customer responses in these four
areas allow hotels to identify and react to problems.

Cooperation
It is common for hoteliers to share business statistics and information of issues of common
interest with competitors in the market. This cooperative environment allows the hotels not only
to maintain the local market’s competitiveness in the global landscape but also to leverage their
buying power. For example, there was a cooperative effort recently by the Shanghai hoteliers to
negotiate favorable copyright fees for the music played in-house. The power of the collective is
much more effective in obtaining the end goal than if each were to have attempted it on his own.

There is not a fierce competitive environment in the Shanghai hotel market. The rooms in
Shanghai historically have an impressive occupancy rate of 80%. As demand for rooms
increases, new hotels are built to meet the needs of the market. This creates a five to eight
percent increase in rooms within the market each year. Currently there are 25,000 rooms
available in four and five-star hotels within Shanghai. As China’s economy continues to grow,
the level of international business conducted in and around the city will increase. This suggests
that the hotel market will continue to expand.

Hotel investment
The investment climate in China is quite different from the United States. It is common for
companies to pay off their debt as quickly as possible because the Chinese tax system does not
reward debtors as generously as the American system does.

J. Gamble, N. Rogers, M. Southgate

Page 3 of 29
Investors in China seek “organic growth” in their business investments. After a hotel is built and
its associated debts are paid off, its profits are invested in new business opportunities.

Joint ventures
When a joint venture is established in China, it is typical that a Chinese hotel company is seeking
the international expertise and financial backing of an experienced foreign firm.

Government policy changed in 1994. Since then, a foreign company looking to build a hotel in
China is no longer required to enter the market using a joint venture. The typical joint venture
had three elements. First, the local company provided the land for development. Second, the
management company entering the market provided hotel expertise. Finally, the bank provided
the money to fund the project.

Early Chinese companies attempting joint ventures with foreign investors valued and sought the
brand names tied to these investors. Many using this model failed to successfully establish
themselves and run a profitable business. In the initial phase of a joint venture, management was
typically composed of international managers, who were supposed to leave once the hotel was
operational. It has become more common for these managers to stay, and today there are
approximately 25 foreign managers per hotel.

Competition
Within the Shanghai market, sit the Hilton, Renaissance, and Grand Plaza as Hans Hauri’s major
competitors. JC Mandarin has a slightly different international clientele than these competitors,
with 50% of its business comes from the Asia Pacific region.

All hotels use marketing efforts to gain exposure and increased presence in the marketplace. By
promoting the advantages of their respective hotels, they seek to increase repeat business. Repeat
business is very important to hotels concentrating on business travelers.

Hotel selection
The brand of a hotel is very important to international travelers. This is because a brand is a
promise; association with the brand gives key indicators to the traveler about the type and quality
of service and accommodations they are to receive. Strong international brands typically draw a
large portion of international customers within the Shanghai market. This is true throughout the
Asia Pacific where the Meritus brand is well recognized. It is common for Chinese travelers to
choose hotels based on the number of stars they receive and the cost of accommodation.

J. Gamble, N. Rogers, M. Southgate

Page 4 of 29
JC Mandarin
Business organization: Overseas Union and Meritus Hotels
The JC Mandarin Hotel is owned by Meritus Hotels and Resorts, which is in turn owned by the
Overseas Union Enterprise Ltd. Group (OUE). OUE is based in Singapore and has operated
since 1973. During the tumultuous Asian Financial Crisis in 1997, OUE chose Meritus (derived
from the Latin word that means merit, excellence, and worth) as the new name for its hotel unit.
The Meritus hotel group operates 13 five-star hotels in key Asian gateway cities, such as
Shanghai, and seeks to offer “Oriental hospitality, complemented by Western elegance.” viii
Meritus is one of the five founding members of the Asian Hotels Alliance (AHA), which
competes with Western branded hotels through shared reservation and distribution networks as
well as reciprocal guest loyalty programs (Exhibit 5).ix

Hotel organization
The JC Mandarin has been operating since 1991. It has received awards from the Chinese
government as well as several foreign travel magazines. With its central location near Shanghai’s
Exhibition Center and premier shopping area, the hotel has regularly enjoyed an 80% occupancy
rate. Management focuses on five key aspects of a guest’s stay to evaluate customer satisfaction:
 Check-in time
 Check-out time
 Breakfast
 Bed quality
 Shower

Since most of its visitors are in town on business it is paramount that the hotel provides a restful
environment so travelers can sleep well and spend minimum time checking in and out. For this
reason, Meritus International does not franchise its hotels. Similarly, most other international
hotel brands also run their own hotels because it is crucial that the brand names ensure that the
guests have the most comfortable and smoothest stay possible. International hotels are set up in a
similar manner to the JC Mandarin with operations (rooms along with food and beverage) and
finances/resources being the main departments below the general manager. Also, they are run on
the Cornell hotel model, which emphasizes the chain of command.

Strategy
The JC Mandarin hotel is positioned in the market to serve primarily business travelers, with an
emphasis on serving customers from the Asia Pacific region. It has a history of success
establishing itself as a strong player in the Shanghai market by drawing on the varied
experiences of Meritus in Asian markets. The management of the hotel seeks to continue filling
80% of the hotel’s rooms and drawing business customers from around the globe.x

Hotel ranking system

The hotel industry in Asia has a five-star rating system that includes major and minor categories.
This system is based on physical facilities and services offered. Of a total 600 possible points,
525 are required to be ranked as a five-star hotel (Exhibit 6). In the five-star category, hotels are

J. Gamble, N. Rogers, M. Southgate

Page 5 of 29
further divided into five-star “major” and five-star “minor” rankings. JC Mandarin is ranked as a
five-star minor hotel in the Shanghai market. Five-star minor hotels charge lower prices than
five-star major hotels but are able to operate with less capital invested in facilities and services.
Many second tier five-star hotels, like the JC Mandarin, do not mind being below five-star
majors, since they can comfortably occupy a niche and learn by observation from the
experiences of the majors.

Collaboration in the hotel industry

Within the Shanghai hotel market, there is a surprising amount of cooperation among competing
hotels. A classic example of this camaraderie is hotels’ flexibility in pooling laundry services.
Unlike in the American hotel market, there is no economically feasible option to outsource
laundry in Shanghai. The current transportation infrastructure will not support efficient pickup
and delivery of laundry. Consequently, Shanghai does not have central laundry companies who
can take advantage of economies of scale and serve multiple hotels. As a result of this and the
low cost of labor in Shanghai, laundry services are almost exclusively handled within the hotel
itself. Thus, each hotel must maintain capacity to handle its laundry during busy seasons.

Hauri described an occasion when JC Mandarin’s competitors came to its aid when its critical
laundry operation suffered a mechanical failure that was not readily repairable by the hotel’s
service company (with whom Hauri held a 24-hour service contract). Instead of taking advantage
of the JC Mandarin’s situation, a nearby competitor agreed to run its laundry facilities for a
second shift so that Hauri could continue operations. Similarly, during the SARS crisis, there
was a 20% room occupancy rate in the JC Mandarin. Many other hotels suffered with the same
room occupancy rates. At that time, the hotel combined its laundry service with another hotel’s
to save money.

Beyond the type of sharing characterized by laundry facilities, there is a fraternity among
hoteliers to share statistics that are of mutual interest. Every month, Hauri shares critical figures
about occupation rates, room rates, and other critical data with his competitors, who reciprocate.
Additionally, the hotels in Shanghai unite (under Hauri’s leadership) to gain common negotiating
power as the International Branded Hotel Association in Shanghai.

Employees and staffing

Four and a half years ago, JC Mandarin had 155 possible job titles for its employees and fourteen
layers in its business structure. This complexity was the result of the Chinese lifetime
employment legacy: employees never left and the hotel needed many management layers to
accommodate the numerous “generations” of employees. There are now only five levels of job
categories, instead of the fourteen. This simplification streamlines communication.

All employees are hired on year-long contracts that are modified versions of the Iron Rice Bowl.
Every year the contract is up for re-negotiation. For this reason, all lay-offs come up at the end of
an employee’s yearly contract. Also, firing only happens if there are three documented incidents
that show fair cause. Hauri indicated that it is incredibly hard for a Chinese worker to gain
further employment after being fired. JC Mandarin provides all clothing to employees to ensure
the uniformity of hotel presentation and relieve the potential financial burden on employees.
Sometimes, during busy times, the hotel hires temporary workers from staffing agencies in
Shanghai, such as Manpower. Although there are plenty of potential employees in the country,
hiring is difficult. Traditional Western ideas, such as tipping the waiters, are not legal. These two

J. Gamble, N. Rogers, M. Southgate

Page 6 of 29
facts show the strong influence of socialism by emphasizing equality (no tipping) and guaranteed
employment (the difficulty of firing).

While it may take time to find qualified employees and hire them, the JC Mandarin takes
advantage of the relatively cheap labor pool it has compared to hotels in Western Europe and the
United States. Currently JC Mandarin employs about 725 staff, corresponding to 1.5 per hotel
room. This is comparable with other Shanghainese hotels. In the United States, there are about .
75 or .85 staff per hotel room. The difference in number can be explained by the 55 employees in
the full system maintenance crew, the 40 in security (hotels are expected to police themselves),
35 in the laundry, and 15 in the kitchen, areas often outsourced in the US. Without these inflated
labor areas, the ratio is the same as in the United States.

When Mr. Hauri started working at JC Mandarin, he instituted the hotel’s incentive-based pay.
There are three components that make up the system: business results (compare results to
budget), customer satisfaction (measured by referrals and repeat visits), and employee loyalty
(measured by turnover, English language capability, and good acts). The pay is 50% fixed, 10%
position grading (years of experience, trade certificates, and ratings by superiors), and 40% by
performance. Reviews are done quarterly, and the hotel strives to balance the base plus bonuses
to offer competitive pay. Monthly base pay ranges from 1,600 to 20,000 Chinese RMB.

Additionally, although the pay system was not popular when it was introduced, the Chinese
mentality of thinking ahead and figuring out “what I can make out of today for a better
tomorrow” is in play. For instance, there are environmental protection laws in place within China
but the hotel has to do little to conform. People, although not hotel employees, volunteer to sort
the trash in the hotel trash room, separating organic trash from recyclables. These people can sell
the recycling they find for a profit and use what they earn to prepare themselves for their next
job.

Food preparation
Historically the kitchen of a restaurant has been hidden behind walls and doors; what went on in
the kitchen was shielded from the customer’s eye. This has recently started to change with the
emergence of show kitchens and food preparation evolving into an event for the diner to enjoy.

Mr. Hauri said that the only place where the kitchen is better than the dining room itself is the
Spoon des Îles in Mauritius. The famed French chef, Alain Ducasse, designed this kitchen. His
philosophy was that the chefs must be kept happy to motivate them to prepare exquisite dishes.
Even in kitchens less elegant than the Spoon des Îles, a high quality kitchen ensures the best
quality food for the diners in the restaurant.

The importance of the kitchen is highlighted by the fact that there are three types of kitchens:
traditional kitchen, show kitchen, and an open kitchen, with the last gaining popularity in recent
years. The hotel’s main dining room, where breakfast is served, has had an open kitchen design
since 2003. This improves efficiency as well as the end product while providing assurance to the
customer that the preparation was sanitary.

Freshness is preserved in meats because the cooks in the back kitchen pre-roast many meats and
then roast it thoroughly in the front kitchen. Also, the buffet (popular in Western countries) is
very popular in the hotel. There are traditional Western, Chinese, and Japanese breakfast foods.

J. Gamble, N. Rogers, M. Southgate

Page 7 of 29
Everybody can have something comforting while trying new dishes as desired. The self-
refrigeration through an ice trough allows the fruit to be presented attractively and chilled while
on the buffet. The restaurants are designed to offer good ventilation, ensuring hygienic
conditions and pleasing smells. This idea is repeated in the small, updated western pub on the
second floor. However, in the pub, the kitchen is a show kitchen, not an open kitchen. Finally,
with a show kitchen and the open kitchen, the traditional system that pits the server against the
cook is broken. Now the cook has English training and customer contact and takes more pride in
his creations and their presentation.

The food offerings of the hotel’s restaurants are varied. There are traditional Western ovens as
well as Tandoori and traditional Chinese ovens. The chefs prefer Asian rice noodles to the Italian
variety. The management is lucky that the business traveler is more flexible with drinks than
other people are. The suppliers import a limited range of beverages, such as only a few selections
of wine and beer, thereby minimizing storage space. The suppliers are very efficient and can
deliver orders to the hotel on the same day as placed in many cases, not simply in the case of
emergency. This is an illustration that you can find anything in China. All you require is a
network and, at times, time and patience.

Unlike in Western kitchens, there is no line production in traditional Chinese kitchens (Exhibit
7). For banquets, food is partially cooked in the back kitchens. The food is then finished in front
of the guests.

There are three key individuals in a Chinese kitchen: the chef, the chopper, and the wok chef.
The head chef purchases the food, so the initial quality depends on him. Whether the chopper is
careful or careless impacts the cost (does he cut off meat along with the fat?) as well as the look
and quality of the product. Also, the wok chef determines the taste of a meal because there are
different levels for cooking different types of food on the wok.

Finally, while it seems that Western preparation styles have highly influenced the kitchens in the
JC Mandarin, it is interesting to note that the reverse has occurred as well. For instance, many
restaurants now use Western presentation combined with Eastern preparation. Vegetables are
increasingly not boiled, but steamed and sautéed. This is seen in the kitchens of chefs, such as
Alain Ducasse. Also many chefs from Lyon go to China to learn their styles of food preparation.

Dining rooms and lounges

Between the first and second tier five-star hotels, there are differences in room price but not in
food. This is a key product for the JC Mandarin. The main dining room seats 200. Every morning
approximately 240 people eat breakfast there. Lunch is quiet, and, for this meal, speed is
considered the most important factor. Approximately 160 guests are served dinner in the mail
dining room. Mr. Hauri indicates that he will remain happy if the numbers stay the same because
there is increasing competition in the city when it comes to restaurants as the Shanghainese are
always on the look out for the next big thing when it comes to dining. A typical Chinese
restaurant owner will start off with seating for 20 customers and will sell when he can move up
because the owner does not reinvest in the present space. JC Mandarin competes with other
hotels, not restaurants.

The past two years have seen the refurbishment and reconstruction of Cuba, the second floor
cigar bar designed as a men’s lounge. Previously the area was used as a storeroom for food.

J. Gamble, N. Rogers, M. Southgate

Page 8 of 29
Often it is used as a coffee break room for conferences. The other part of the second floor was a
service floor; now it serves as the front of the guest contact area. Also located there are three
small private rooms for the Club Lounge for breakfast, drinks, happy hours, and networking
purposes. The overriding purpose of the Club Lounge is to allow the business people access to
help themselves and feel at home.

The Chinese restaurant in the hotel serves Cantonese cuisine. This is reflected in the place
settings (with serving spoons placed beside chopsticks) as well as in the presence of areas that
can easily be converted to private rooms because of moving walls. Chinese customers prefer
having private spaces for combining meals with business.

The ballroom is the second largest ballroom in the city that is pillar-less. This serves as a
competitive advantage for the hotel when attracting business conventions and parties. An
intricate lighting system allows the atmosphere to be changed to suit any need, the availability of
four different tablecloth colors and even more available setting designs increases this flexibility.
Also, there are soundproof acoustic cloth panels. The marble floor is easier to clean up than a
carpet and is more attractive.

Customers
Customers can be divided between international guests and national guests. International guests
choose hotels because of brands, while Chinese choose hotels by ratings. These ratings are
assigned by points and focus on the facilities available, not on the people working at the hotels or
the services provided by the hotels. Mr. Hauri gained ten points for the JC Mandarin by moving
out the glass walls in the lobby and adding a street side café.

The guestrooms were designed in 1987. Four and a half years ago the customer base shifted from
75% being part of tour groups to being nearly all business travelers. The guests typically come
back every six to nine months. These repeat guests are crucial for the hotel and must be kept
comfortable and happy. Four and a half years ago, the beds were 95cm by 190 cm. Guests started
asking for larger, king-sized beds. Now the beds are being converted to larger models, 135 cm by
190 cm. In mid-2005 they will start with a second round of room renovations, keeping customer
needs, comfort and accessibility as priorities.

To make sure that the hotel does get guest opinions, there are questionnaires available in each
guest room. Typically, Americans fill out questionnaires, but other people ignore the
questionnaires. To get around this roadblock, each employee is asked to approach five customers
a day and ask the questions directly. The questionnaires take about five minutes, and afterwards,
the interviewed guest is given a gift certificate to be used at the hotel’s café (Exhibit 8). The
results are compiled by an administrative assistant and are regularly reviewed by the managers
and shared with the employees.

Services at JC Mandarin have typically been sold to customers in pre-determined packages with
moderate tailoring done to meet customer demands. Although this sales method is effective in
serving customers, Hauri mentioned that the JC Mandarin sales staff could potentially gain more
revenue for the hotel by doing more “suggestive selling.”

When it comes to banquets in Shanghai, it is important to bring in the top boss from the
customer’s company as much as possible to avoid him making last-minute changes. For this

J. Gamble, N. Rogers, M. Southgate

Page 9 of 29
reason, the hotel employees ask, “Can you think of something that might go wrong?” Asking this
question helps them come up with every possible outcome.xi

Growth pains in Shanghai: Staffing challenges

For all the departments at JC Mandarin, staffing is becoming an increasing concern. Despite the
enormous population in Shanghai (approaching 20 million residents according to local unofficial
estimates), the city’s rapid economic growth has outpaced the labor supply. As a result, JC
Mandarin is experiencing challenges in finding, training, and retaining employees and
simultaneously maintaining a consistent level of service. This trend is prevalent among
competitors as well, thus making staffing a shared challenge. Staffing challenges for all hotels
have economic, infrastructural, and socio-cultural roots; as the city changes, so do the staffing
issues. Although hotels in Shanghai currently rely more heavily upon labor than their Western
counterparts, as infrastructure and technology grows, each employee can contribute more. At
some point in the future, it is possible that the economy in Shanghai will shift so much that fewer
employees are needed within the hotel industry (more akin to the hotel industry seen in Western
nations, like the United States).

Incentive Pay System & Finding Employees

Recruiting is the first human resources challenge that the JC Mandarin encounters as a result of
these factors. Since current economic and demographic conditions favor employees in Shanghai,
the hotel competes heavily with many other employers, often in different industries, for workers.
Potential employees are able to negotiate higher wages and better benefits. For similar rates, JC
Mandarin is forced to recruit and hire less-qualified, less-educated workers.

A further complication of the recruiting process is JC Mandarin’s incentive-based pay system.

Despite strong results from the program, which began in 2000, the hotel is a pioneer in the
marketplace in terms of its pay structure. Typical compensation packages in the Shanghai hotel
industry are salary-only. This traditional pay system is a natural match for the Chinese cultural
norms that center on collectivist philosophies. In contrast, JC Mandarin’s incentive-based pay
system sometimes elicits complaints when people doing the same job receive different pay. For
workers accustomed to the guaranteed pay system of Maoist China, this system is unfamiliar,
unwelcome, and requires adaptation. For the new generation of workers that have grown up and
had experience with a more Western economic style, the adaptation can be easier.

In the initial stages of implementation, employees were very resistant to the plan. Feedback led
the hotel to change the incentive-based compensation package from a 40:10:50 ratio of fixed pay,
position pay, and performance pay to 50:10:40. After an adjustment period, this policy became
effective and the hotel noticed measurable improvement. Employees typically receive a total
compensation package that is competitive with offerings from other hotels in the city.

Despite this internal success, JC Mandarin still faces the challenge of selling prospective
employees on the incentive-based pay system. Since job seekers have many options, a job with
performance requirements may not be attractive in comparison to a salaried job that promises the
same competitive pay. Hauri is convinced that the program is positive for the company in terms
of productivity. However, in the tight employment market, it is not clear how the incentive-based
pay program affects the recruitment process. JC Mandarin must weigh these conflicting factors

J. Gamble, N. Rogers, M. Southgate

Page 10 of 29
to determine the current net impact of the pay system on the company. Additionally, if
recruitment challenges seem to justify a traditional pay system, the hotel must consider the cost
and confusion of changing compensation again.

Vanishing Iron Rice Bowl: Falling Employee Retention

Under Mao Zedong’s Iron Rice Bowl system, the Communist party controlled all Chinese
workers and guaranteed lifelong employment. During Deng Xiaoping’s economic reforms
during the 1980s, a great deal of business privatization occurred, resulting in the disappearance
of many lifelong employment opportunities. Although these changes initially resulted in many
jobless Chinese workers, the culture has slowly adopted personal opportunity as a desirable
alternative to lifelong employment.

For employers, this has meant a gradual change in the behavior of employees. Instead of looking
for a job to last a lifetime, many workers have begun to look for jobs that will act as a useful
stepping-stone in their career. In the last decade, this behavioral change has been strongly
supported by Shanghai’s economic conditions. With thirteen straight years of double-digit
economic growth, the city has become an ideal environment for workers looking to change jobs
and improve their opportunities. The political and economic shifts are effectively reversing the
mindset created during Mao’s rule.

For JC Mandarin, this trend has made retaining employees increasingly difficult. To add to the
Tarzan-like characteristic of workers swinging job-to-job for career advancement, the hotel
industry in Shanghai is losing its hold on employees who prefer to work in one of the city’s many
glamorous burgeoning business sectors. As a result, JC Mandarin is faced with hiring employees
who are under-qualified, training them, and then losing them as soon as the training makes the
employees marketable to other firms. At the front desk, where employees receive extensive
English training, turnover is as high as 35% (the standard is 18-20%). The sales staff is under
constant pressure to find and replace workers as they are siphoned away. Aside from the human
resource challenges of finding and training new employees, departments at JC Mandarin must
make extra efforts to maintain a consistent level of service for guests, especially in light of the
hotels reliance upon repeat customers.

Employment Contracts & Flux in Labor Requirements

Across China, employment contracts are a residual effect of the Iron Rice Bowl policy. At JC
Mandarin, all employees sign one year employment contract when they begin working for the
hotel. Each year, the hotel and the employee must renew the contract for another year. If the hotel
needs to layoff employees, it must wait until their contracts expire. Although it is very rare,
employees can be terminated if three documented incidents show justifiable cause.

A ramification of these contracts is that JC Mandarin is somewhat inflexible to respond to

changes in the marketplace by adjusting employment levels. Even if the contracts did not exist,
cultural relics of the Iron Rice Bowl create the expectation that companies will not use work
force cuts as a strategic tool to dealing with employees. This understanding of commitment is so
strong that JC Mandarin did not lay off a single worker during the SARS epidemic of 2003.
Instead, it found alternative ways to keep everyone busy and employed.

In response to limited flexibility, JC Mandarin keeps on staff a base number of employees that
are able to fill employment needs most of the time. During especially busy periods, the hotel

J. Gamble, N. Rogers, M. Southgate

Page 11 of 29
employs temporary labor through an external agency. Although these workers can be contracted
for short periods to meet demand changes, they are inherently not as well trained as employees
working on full contract.

Training Employees & Maintaining Service Levels

Due to the high level of turnover, departments at JC Mandarin are constantly working to train
employees. In addition to providing technical training to employees about the mechanics of their
jobs, JC Mandarin provides internal training for all employees in spoken English. Since having
employees with the ability to speak English translates into a competitive advantage for the hotel,
this training is ongoing for all employees.

The time and money that the hotel invests in training each employee are effectively sunk costs.
In this sense, when an employee leaves, the knowledge and skills they have developed leave with
them. Furthermore, due to high turnover, managers or senior workers spend a relatively large
portion of their time training employees instead of attending to operational and service issues. As
a result, the incentive to provide extensive training for employees is reduced. However, in order
to remain competitive, JC Mandarin must provide a consistent, high level of service. Thus, the
competitive need for sufficient training will not allow JC Mandarin to escape the cycle of
bettering employees, then losing them to outside job offers.

Hauri recounted a particular repeat customer that hammered home the importance of consistent,
high quality service as a qualifier for earning business.
“One evening in the business center, I approached one of our international business
customers to ask how his stay was. Disgruntled with service he had received, the
gentleman told me, ‘This is my only sanctuary in a place where I don’t understand the
language, where I spend my day arguing with the taxi driver, in the hot or the cold,
working hard. I expect service when I come here.’”

Impressions of Employment in the Hotel Industry

Hauri expressed active concern in March 2005 that the workforce in Shanghai did not view the
hotel industry as prestigious or attractive. As Chair of the International Branded Hotel
Association in Shanghai, Hauri has been spearheading a cooperative effort in the industry to
change workers’ impressions. The hope is that making the industry prestigious to work in will
help resolve at least some of the hotels’ retention problems. Current plans include investigating
education and certifications that would legitimize trades in the hotel industry. It is not clear how
effective this plan will be or exactly how to quantify its effectiveness. However, there seems to
be industry consensus that negative perceptions are affecting turnover rates.

Hauri noted that most low to mid-skill workers tended to view working in the hotel industry as a
good way to earn money and gain experience but not as a good career path. As a result, it is
difficult for JC Mandarin to cultivate managers from within. By the time employees are ready for
management promotion, they frequently leave in order to change industries. For the same reason,
it is difficult for the hotel to attract quality managers from outside.

Squeezing harder: Profitability in a changing city

J. Gamble, N. Rogers, M. Southgate

Page 12 of 29
In a market that has exceptional room occupancy rates (typically near 80%), JC Mandarin has
two major areas where it can find revenue growth—increasing the earnings and profits from food
and beverage operations and increasing room occupancy rates. In 2005, the breakdown of profits
for the hotel is represented as follows:

Rooms: 70%
Food & Beverage: 25
Other: 5
100%

Food and beverage

Food and beverage operations target hotel guests and earn profits of 35% (before overhead). The
time to recoup investment ranged from 5-7 years for a restaurant to 10-16 years for a bar.
Because of recent success in the renovated open kitchen restaurant, Hauri expected that there
was an opportunity to increase the amount of business in the hotel restaurants. This spurred
recent additions of a wine bar, which features live jazz, and the cigar bar. While both renovations
improved the hotel’s offerings, the potential earnings are unclear.

The five-star major ranking: Worth pursuing?

In order to increase room rates in the highly competitive marketplace, JC Mandarin would need
to improve its score within the five-star category. The average room rate for a minor five-star
hotel, like JC Mandarin, is $150 US, whereas the average room rate for a major five-star hotel is
$200 US. The current gross margin percentage on rooms is 82%. Improvements in amenities,
square footage of public spaces, and facilities could increase the hotel’s ranking on the star scale
(which requires 525 points out of 600 for a five-star rating). Room size, another key driver, could
be altered through construction, which would demand significant investment. Hauri directed an
effort to investigate this possibility; it was determined that the fixed windows within the building
were a large challenge to room re-configuration. Perhaps more pressing than window limitations
was the fact that there was simply nowhere else to expand the building. Any modifications to the
hotel were confined to within the walls of the existing structure, barring major reconstruction.

Most of the hotels that have earned the major five-star ranking are backed by international
brands such as Hilton, Four Seasons, Renaissance, and Grand Plaza. As a result of worldwide
brand power, these hotels attract customers from many western nations in addition to “local”
Asian customers. In contrast, JC Mandarin’s brand strength is somewhat regional and, as a result,
its clientele is 50% Asian. It is unclear if efforts by the hotel to enter the five-star major category
would be attractive to its current audience or if the move would necessitate a shift in marketing.
If so, JC Mandarin might benefit from some of the increased market penetration the hotel hopes
to garner in the west through its membership in the Asian Hotel Alliance, the Global Distribution
System, and its listing with international travel brokerages. As of yet, it is uncertain how
successful such efforts will be against the considerable power of international brands.

As a result, JC Mandarin faces the challenge of identifying its ideal market position for the
future. Its current strategy is to be a top-level player in the five-star minor realm, with excellent
service and a largely Asian clientele. This strategy has been successful to date, but could it be
successful in the future?

J. Gamble, N. Rogers, M. Southgate

Page 13 of 29
Threats to the margins
This strategy is threatened by the development of the Pudong region on the eastern side of
Shanghai. The dramatic development of this region into Shanghai’s premier financial district,
eight times larger than London’s new financial district, has opened great opportunities for
hoteliers in Asia.xii To this point Meritus has expressed no interest in developing a hotel in that
region.

The possibility exists that business travel in Shanghai will become more heavily concentrated in
the Pudong area; Shanghai JC Mandarin will suffer business loss because of this. Until massive
development starting in the early 1990s, the area was primarily farmland. In recent years,
Pudong has become a bustling center of business. If business continues to shift to Pudong and it
becomes a fashionable place to shop, JC Mandarin’s reliable business could suffer.

Threatening as this may sound, this risk is mitigated by the proximity of the convention center
(just across the street from the hotel) and the continued growth and development of the
downtown region. The hotel also presently resides along the longest strip of big name designers
in Shanghai, but this too is changing. Further development of the city reveals new areas that are
emerging as shopping magnets: major and minor brands alike find storefront property in these
new areas.

Finally, the threat exists that, as the Chinese economy continues to develop, the wage demanded
by employees will outpace the growth in room pricing, creating a loss in profits.

JC Mandarin looking forward

Looking into the future, it is clear to Hauri that there are numerous challenges facing the hotel.
Although room occupancy rates were high throughout Shanghai, JC Mandarin needs to fine-tune
its operations to maintain or improve current profit levels. Tantamount among Hauri’s concerns
are challenges relating to staffing. All of Hauri’s efforts to create a well-oiled operation depend
heavily upon people. Without a reliable and consistent staff, service levels that the hotel strives
for cannot be maintained. Should the JC Mandarin continue to employ the incentive-pay system
it pioneered? Should Hauri continue his efforts to create “trades” out of hotel positions in order
to secure long-term labor commitments? If not, how can he address increasingly high turnover
rates?

As the marketplace in Shanghai continues to change at an exceptional pace, Hauri is forced to

evaluate how well JC Mandarin is equipped to address the future. To date, increases in hotel
supply have been quickly matched by increases in demand. If this changes, how will the hotel
manage a decline in occupancy rates? If Nanjing Road ceased to be a central business
destination as the locus of Shanghai moves closer to Pudong, can he continue to run the hotel
under its current strategy? If not, what can he do to prepare for such a change?

Additionally, Hauri wonders which course of action would help guarantee the hotel’s level of
profitability. Further, he faces the challenge of growing business within the physical confines of
the hotel’s home on Nanjing Road. Is the hotel headed in the right direction with its recently
added restaurants and bars? Are there any additional in-house services that can be offered to

J. Gamble, N. Rogers, M. Southgate

Page 14 of 29
bolster earnings? Can JC Mandarin go up against international brands in a higher revenue
category without offsetting added earnings by additional costs?

In one sense, the Shanghai hotel industry is a comfortable place to do business due to consistent
demand. In another sense, this consistency makes Hauri’s job of improvement even more
difficult. With success, it is easy for Hauri, his managers, and the staff to be content with the
status quo. As a result, an additional challenge Hauri faces is finding the motivation for him and
others to pursue constant improvement.

J. Gamble, N. Rogers, M. Southgate

Page 15 of 29
Exhibit 1

Shanghai Hotel Market 1998-2002

Source: China National Tourism Administration

J. Gamble, N. Rogers, M. Southgate

Page 16 of 29
Exhibit 2

Market Segmentation: 5 Star Hotels in Shanghai 2002

Source: HVS International Research

J. Gamble, N. Rogers, M. Southgate

Page 17 of 29
Exhibit 3

Shanghai Seasonality by International Arrivals at Accommodation 2002

Source: China National Tourism Administration

J. Gamble, N. Rogers, M. Southgate

Page 18 of 29
Exhibit 4

International Arrivals at Accommodation, Shanghai 1996-2002

Source: China National Tourism Administration

J. Gamble, N. Rogers, M. Southgate

Page 19 of 29
Exhibit 5

Ownership and Associations of JC Mandarin

Founding Member

[REAL ESTATE]

12 OTHER
Five-star HOTELS
Singapore
Malaysia
China
Thailand

Exhibit 6

J. Gamble, N. Rogers, M. Southgate

Page 20 of 29
Number of Rooms, 5 Star hotels in Shanghai

* Opened 1 March 2002. Total inventory is 440 rooms.

** Opened 1 April 2002. Total inventory is 549 rooms.
*** Opened 27 September 2002. Total inventory is 305 rooms.

J. Gamble, N. Rogers, M. Southgate

Page 21 of 29
Exhibit 7

JC Mandarin
Kitchen

Dim Sum
Kitchen

Roast
Preparation

Wok
Kitchen Cleaning
Rice Kitchen

J. Gamble, N. Rogers, M. Southgate

Page 22 of 29
Exhibit 8a

J. Gamble, N. Rogers, M. Southgate

Page 23 of 29
Exhibit 8b

J. Gamble, N. Rogers, M. Southgate

Page 24 of 29
Exhibit 8c

J. Gamble, N. Rogers, M. Southgate

Page 25 of 29
Exhibit 8d

J. Gamble, N. Rogers, M. Southgate

Page 26 of 29
Exhibit 8e

J. Gamble, N. Rogers, M. Southgate

Page 27 of 29
J. Gamble, N. Rogers, M. Southgate
Page 28 of 29
i
Phil Golding, Hubert Viriot, Lim Ai Yi, 2003 Hotel Market Overview: China, Beijing, Chengdu, Dalian, Guangzhou,
Guilin, Hainan Island, Hong Kong, Shanghai, Shenzhen, Wuhan, Singapore, HVS International Singapore, 2003.
ii
Ibid.
iii
Ibid.
iv
Blake. “Global Update: news”. www.hotelmag.com. December 2004.
v
Giovanetti, Toni. ”Trends Point to More Travel By Smarter Customers”. January, 2000.
vi
Issenberg, Michael.
vii
Giovanetti, Toni. ”Trends Point to More Travel By Smarter Customers”. January, 2000.
viii
Ruggia James. “Back on Track.” August 28, 2000. Business Source Premier.
ix
Jirasakunthai, Choosak. The Nation (Thailand). May 24, 2002.
x
From conversation with Hans Hauri.
xi
Ibid.
xii
Zakaria, Fareed. “Does the Future Belong to China?” Newsweek. pg 26. May 9, 2005.