The global economic slump has hit the casino industry hard. Macau, once the dream of Las Vegas operators, is reeling from the downturn.
It was a sure bet. With 1.3 billion people at the doorstep, a newly affluent middle class flush with cash, and a bullish government anxious to spread the wealth, Macau was a casino operator’s dream. With Las Vegas companies putting their all into the city’s development, its future as the gaming mecca of Asia was all but guaranteed.
But gambling money doesn’t come easy these days…
As the pangs of a global economic slump reach every corner of the globe, Macau’s casino industry is feeling the crunch of evaporating credit lines and disappearing customers. Construction of mega-hotels has been put on hold all while hundreds of baccarat tables wait for installation. Gaming revenue alone is down 30 percent since January 2008. The Las Vegas firms that saw such potential in the south China province are now frozen in place, unable to continue their projects thanks to a double whammy of financial fallout and governmental restriction. Macau’s Cotai Strip, the famed Las Vegas Strip’s eastern brother, lies in flux – half built, half dream.
“Some people thought that they would just replicate exactly what worked in Vegas,” said David G. Schwartz, Director of the Center for Gaming Research at the University of Nevada Las Vegas. “While some operators have been content to grow their presence [in Macau] organically…other operators have tried to recreate the Strip overnight.”
Spurred on by a vision of near limitless opportunity, American casino operators like Las Vegas Sands (LVS) and MGM Mirage financed billion-dollar projects in Macau, anxious to grab a piece of the China boom. In 2002, the Chinese government opened up the peninsula’s gaming operations, once wholly controlled by Chinese entrepreneur Stanley Ho, to foreign firms. The Sands Macau, LVS’s first casino in its new market, opened in 2004 at a cost of US$240 million. The 740-table behemoth claims to be the world’s largest casino, yet provides only 51 hotel suites, a reflection of mainland China’s daytripping gamblers.
The brainchild of gaming tycoon Sheldon Adelson, the Sands’ risk-taking chairman, the Cotai Strip has seen incredible growth in recent years. Wynn Resorts opened its first resort in the fall of 2006, offering 205,000 square feet of gaming amenities and fine dining. In December 2007, MGM Mirage and Pansy Ho, Stanley Ho’s magnate daughter and director of his company, Sociedade de Turismo e Diversões de Macau, opened the 35-story, 600-room MGM Grand Macau. All three companies have publicly announced their plans for large-scale expansions.
In 2003, Adelson laid out his vision of the Strip, a decade-long plan to add 20,000 hotel rooms and hundreds of retail and convention spaces. The first phase, a simple eight resorts stretched across the peninsula, would cost US$10 billion. And while the plan had its critics, Adelson’s past successes in Las Vegas and the allure of the Chinese markets brought early investors. The opening of the company’s Venetian Macau, a massive centerpiece of the Strip’s development, in 2007 and its Four Seasons hotel in August 2008 only enhanced the vision of Macau’s winning future.
“Obviously Cotai is a really ambitious project, and when it’s built out it’s going to be a tremendous attraction,” said Schwartz. “The problem is what do you do if you are the first person in Cotai? Way out in the middle of nowhere. The answer has been well we will do this accelerated building schedule, and…what took 50 years in Las Vegas, we’ll try to do in 5.”
Adelson’s vision, however, has hit a major roadblock. The Las Vegas Sun reported in January that plans to finance the sprawling project were shaky even prior to the credit crunch. In earlier days, most casino operators funded their projects one at a time, raising the necessary capital to finance the project from start to finish. Adelson, on the other hand, revolutionized the Las Vegas market by financing his developments incrementally, relying on access to easy credit to provide the necessary funds as construction progressed. When markets collapsed just a few short months later, the approach’s risks were evident.
Las Vegas Sands’ stock price currently stands at $2.19 a share, down from its 52-week high of $86.55. In 2006, Forbes ranked Adelson third on its list of richest individuals in the world. In 2008, he stood at #12 with a net worth of US$26 billion. The 97 percent slide in share price, however, has personally cost Adelson an estimated $13 billion. The CEO has already poured US$475 million of his own money into Las Vegas Sands to stave off further collapse.
William Eadington, Director of the Institute for the Study of Gambling and Commercial Gaming at the University of Nevada-Reno, explains, however, that it is difficult to blame Adelson or other casino operators in Macau for being reckless in their development plans.
“It is easy to say [they overextended themselves] now, because obviously everyone is overextended in the gaming business, but it didn’t look that way a year ago,” Eadington explained. “It was going to be growing very, very rapidly…it is just very hard to manage growth when you are growing by 20, 30, 40 percent a year on visitation and revenues.”
Eadington noted that it was easy to get caught up in China’s success. Macau’s gaming revenue has increased year after year, tipping $14 billion for 2008, an increase of 31 percent for the year despite the late downturn.
“One can say, in retrospect a lot of mistakes were made, but it certainly seemed like the right thing to do at the time.”
Global financial woes, however, are not what make the Macau situation different. The city is facing a series of long-term challenges threatening to derail its continued progress. While the successes of international corporations come and go, Macau is caught between the prospects of open economic development and the strict oversight of a highly controlling Beijing government.
“There are two big challenges that I can see,” Schwartz said. “One of them is the political challenge.” While Las Vegas operators are used to a Nevada regulatory system that is built around helping further the industry, Beijing’s view of Macau and its businesses has a far more political tinge to it.
“In China, with the visa restrictions, …their number one goal is not to [necessarily] help the industry,” Schwartz said. On government lobbying and the strict control of business operations, “nothing in the U.S. could have prepared these companies for what they face in China.”
Visa restrictions have become one point of high contention. With Macau the only legal destination for gamblers inside the People’s Republic of China, mainland visitors are a critical lifeline for casino revenue. Before June 2008, visitors from neighboring Guangdong province and other locales were allowed to enter Macau once every two weeks. By October 2008, however, Beijing had implemented new restrictions allowing visa only once every three months, severely curtailing the number of mainland entries into the city.
By January 2009, Macau’s gaming revenue had fallen 30 percent from the previous year.
Desmond Lam, Visiting Senior Research Fellow at the University of South Australia, explained that the central government has several motives for the new restrictions.
“Around 55 percent of visitors to Macau came from mainland China in 2007 and around 30 percent from Hong Kong,” said Lam, who formerly taught as an assistant professor of Marketing at the University of Macau. “Most importantly, the restrictions send a message that China is watching the explosive but unregulated, probably unsustainable, development of Macau’s gaming industry.”
Some observers are optimistic, though, that visa regulations may be eased in the coming months. The Hong Kong Economic Times recently reported on future plans for one-year, multi-entry visas for the 95 million residents of China’s southern Guangdong province.
Yet as global markets suffer and China’s public feels the aftermath, the government is attempting to inhibit wasteful gambling among the country’s less wealthy. Lam noted that the government keeps a close watch on the potential of certain social problems creeping out of Macau.
“There are increasingly issues with problem gambling. Some Chinese officials and high-level executives in state-owned enterprises are secretly squandering away their money, some public funds, in Macau’s casinos. Macau is seen to be exporting these problems to [neighboring] regions, especially to China and Hong Kong.”
Schwartz sees several other issues complicating business in Macau beyond back-and-forth political wrangling.
“On the one hand, you have an artificially restricted market because you only have the three licenses and three more subconcessions,” referring to the government’s issuance of gaming licenses to only a select few companies. “Steve Wynn doesn’t have to worry about Harrah’s opening up next to him.”
In 2007, Harrah’s Entertainment purchased the Macau Orient golf course inside the Cotai area. Though Harrah’s is the largest casino operator in the world, the company is prohibited from establishing a casino in Macau without a concessionaire license. Harrah’s is banking on the possibility of the government opening up further licenses.
“On the other hand, though, since 2002, the SAR has been so bullish on gaming they’ve approved a lot of projects,” Schwartz said. “You have a huge amount of supply and potential supply that is going to really dilute the market, especially if the central government is really clamping down on visa restrictions.”
With thousands of rooms opening every few months, it is easy to see how supply may outweigh demand. Even today, construction on luxury hotels and resorts across the country has experienced no visible slowdown in the midst of a global economic downturn. The pre-Olympics fervor and its subsequent building boom have led to a glut of empty hotel rooms across China.
Yet early estimates may have not been so clear. Macau overtook Las Vegas as the world’s top gambling destination in 2006, when gross revenues for the peninsula topped US$6.8 billion, just above Vegas’ $6.6 billion. In 2007, Macau’s revenue reached $10.4 billion.
But has Macau truly supplanted Las Vegas as gaming top dog? While politics and project finances may already bring such a claim in to doubt, Macau’s tax rate will keep it below Vegas in the eyes of the world’s high rollers.
“The thing that works in Las Vegas’ favor is the tax rate,” said Schwartz. Nevada charges its gaming companies a 9 percent tax rate. Macau, on the other hand, tops the globe with a 39 percent rate, giving Vegas a comparative advantage on the biggest spenders. “If you have a really high roller that is going to drop a couple million over a year, getting them on a jet out to Vegas, [casinos] are going to see a lot more money out of that…[if not,] you are giving money away to the Macau government.”
For the daytripper from Guangdong, Macau will remain the top gambling destination. The average gamer’s spending is but a minor note in the casino operator’s tax considerations. Yet when it comes to “whales,” the gambling world’s biggest spenders, these companies will opt to fly their clientele to Las Vegas for the tax benefits. While it may seem obvious that Macau should lower its rates to take advantage of these high rollers and their frivolous spending, often dropping millions of dollars at a time, the local government sees enormous benefits from the higher-than-usual tax revenue.
“It works very well for Macau,” Schwartz said. “They can have a 40 percent tax rate and still get a lot of development. How much more product could they add if they lowered the tax rates?”
Eadington put the situation into a larger context of Macau’s overall development strategy, both in Beijing’s eyes and from the perspective of the local government.
“Keep in mind what’s happened in Macau over the past five years,” Eadington said. “They’ve had a lot of labor issues and social pressures because of the very rapid growth and importation of labor, and construction for example. This is going to slow down, have a much greater impact on [mainland] Chinese labor rather than Macau’s [local labor force]…Much of the construction labor is imported [and] works on a contractual basis.”
With the intense economic slowdown, the casinos have been forced to lay off thousands of employees and construction workers. The current phase of Adelson’s grand plan, a four-hotel development, sent 11,000 construction workers home in late 2008, most from the mainland.
“There may also be a political dimension to this as well,” said Eadington. “With that kind of a dramatic layoff, it may be a bit of posturing on behalf of the company to gain certain political concessions.”
In late 2008, the Singapore government announced that it would intervene, if necessary, to ensure the success of its casino resort projects. The city-state, which legalized gambling in 2006, is home to another US$4 billion project from Adelson’s Las Vegas Sands set to open in late 2009.
The Macau government quickly echoed Singapore’s guarantees and assured investors that it would take over any bankrupt projects, said Eadington.
Macau has hit a rough patch. It remains to be seen whether the risky bets there will weather the storm and emerge as the gambling paradise so many envisioned just a year ago.
Desmond Lam sees potential in Macau’s future.
“Chinese do love to gamble, in good times or bad. The present emphasis on gaming rather than non-gaming will probably see Macau bound back from this global crisis much faster than other countries. This is a blessing in disguise for Macau.”
Yet Macau’s early hardcore gaming appearance is being transformed by the emergence of Las Vegas companies. The era of dimly lit and cramped casinos is being rapidly replaced by the shiny lights and nonstop entertainment of Las Vegas-style glitz and glamour. And while similar scenes are popping up throughout China in places like Shenzhen and Hainan, Macau will remain the key destination for the country’s millions of gamblers.
“I think in the long run, it’s hard not to be bullish on the Chinese gambling market,” Schwartz said. “Just look at the demographics, you have more wealth, and a culture with a propensity towards gambling. If you look at the big per capita gambling markets, China is right up there with Australia and the U.S.”
Peter Winter is deputy editor of US-China Today. He is a graduate student in Public Diplomacy at the University of Southern California.