Progress happens fast in China… Yes, yes…this is not breaking news; you can read about it in almost any publication. China’s economy has grown from the sixth largest economy to the fourth largest in just the last 4 years - behind only the US, Japan & Germany. Dot…dot…dot. But how does all that progress actually translate into changes one can actually witness?
How about these trivial examples for starters…(remember, try to imagine how long these things would take back home):
- When I arrived in early-Sept, there was an old building at Tsinghua (near the dorms) that had already been demolished down to its foundation. By the 3rd week of October, that site had been fully cleared, smoothed out, and grass was growing on it.
Several older men were flying kites 500 meters high when I snapped this pic. (BTW -this new field was probably ready even sooner than the date shown…a friend had to point out to me what this space USED to be - and on Google Earth that bldg is still there!) - Since moving to the center of the Beijing in early November - a gas station around the corner has been torn down, underground tanks replaced, new construction, new pumps, new EVERYTHING…it was opened a week ago (within 3 weeks).
- Today - A few weeks ago, we passed by a storefront where scaffolding and posters/signs (to cover-up during renovations) where being erected. One of the signs said, “We’ll be reopening our doors in 25 days.” - wanna bet that it is now completed?!
Recouping your investment?
We pass by one of the best hotels in China everyday on the way to the subway, and we sometimes cut through it because the weather has gotten so cold. 4 weeks ago, we were going our usual route when we got stopped inside by one of the attendants. He said, “Where are you going? I’m sorry but the hotel is closed for renovation and repairs.” Turns out it had closed earlier that morning…from now until May 2008!
The first few days of renovation, when you passed by there'd be a new stack of old fixtures/appliances lined-up outside. One day there were stacks of interior doors + rows of porcelain alter-tables (for you non-drinkers, that means a toilet bowl), the next day old carpeting was laid out as if the road outside was as clean as the marble floors it once covered, the following day old bathtubs were ready to be carted away. On top of the capital investment to renovate this 5-star hotel, what are the opportunity costs of closing hotel operations for 6 months in a prime location in Beijing?
Obviously (as my wife pointed out) the hotel is revamping itself in time for the Olympics next year…but since I recently wrapped up my classes (including International Finance) I’m in the mood for some simple number crunching à so follow along with your pencil, paper + calculator at home, kids…
Assumptions:
- Occupancy rate = 85%
- Current rate (avg): $275/night; future rate: 15% premium
- Renovations = $15 million
- Operating Margin = $15%
So that means... | # Rooms | 273 |
| Days of Renovation | 180 |
| Avg Occupancy | 85% |
| # nights forgone | 41,769 |
Cost of Renovations...
|
|
| Avg rate/night | $ 275 |
| Total Opportunity Cost | $ 11,486,475 |
| CapEx renovations | $ 35,000,000 |
| Total cost | $ 46,486,475 |
| Total cost/room | $ 170,280.13 |
Recouping Investment...
|
|
| New rate/night (25% premium) | $ 343.75 |
| Operating margin (@ 15%) | $ 51.56 |
| # days payback | 3,302 |
| days/year @ 85% occupancy | 310 |
| # years til payback | 10.64 |
(Yes, I know...didn't do a real DCF...but I'm also feeling lazy - plus I said they were going to be simple.) Honestly, I think my estimates on capital expenditures on the renovations are on the low side - considering that the Mandarin Oriental (HK) underwent an 8 month, $140 million makeover a few years ago. Hmmmm...guess if there are 30+ new hotels to be completed in Beijing in time for the Olympics, now is probably a good time for a 5-star hotel to undergo a facelift...to continue to entice guests for years to come.
That’s Boloni! Remember the trip to the Chinese factory tour I had planned to go to a few hours before my family was arriving at the airport? Well, after some changes in plans we were able to go back in mid-November.
The Boloni facility we visited was far from the city center...and fortunately we were able to catch a ride in the company van that left from headquarters (within the 4th North ring road). Ironically, the trip took longer in the van than if we took another means of transportation b/c we had to make stops at Boloni's flagship store in Beijing - and the driver had to stop for lunch! (The company also uses the van as a courier service, to avoid costs of FedEx/DHL/etc...)
Anyway, we got to tour a facility that produces interior doors. It was great to get an in-depth look at the (mass customization) production facility, working conditions, and a play-by-play on some of the new equipment that was brought in...and how additional cap ex on machinery is being deferred until a new factory is opened next year...that will be 1 sq. km!
What was
particularly interesting was the mix of manual labor and machinery. It seemed that more precise tasks were done manually...For example, most doors were planed by hand (see pic on left), and also this material called
"honeycombing" was inserted into the middle of doors by hand. Essentially, this material was thin cardboard inlaid in the paneling of doors, and before it is coated in lacquer (see pic on right). (Its strong enough that you could jump on it, and the shape wouldn't give out...)
Also, 25-30% of the employees were quality inspectors...dressed in red. And over 80% of all doors produced underwent inspection. (Obviously, the more manual labor involved, the greater the chance of variance...leading to the greater need for inspection.)
What else?...How about figuring out the payback on lower-tech machines versus the
top-of-the-line equivalent? The company recently purchased a new air-compressed machine for 40,000 euros, and required 4 persons to operate it but with a waste reduction from the replaced machine of 50% to 25%...this option was still far less than the 200,000 euro top model substitute that only required 1-2 people to operate it. On waste reduction
alone, the payback on the 40,000 euros was less than 6 months!! (To the left is pre-treated panels, to the right...the post-machinery task...)
Given the copycat nature of the interior design industry in China (and most industries for that matter!), if something new is on display in the the company's mega showrooms, than Boloni needs to have production turnarounds fast-enough to have them ready to ship within 6-8 days.
In terms of working conditions...It took a while for my nose to adjust to the fumes of cleaning solvents and other industrial materials, but on the whole they were tolerable. Actually, for the workers who did the layers of paint or finish - it took over a year to convince them to wear masks b/c workers didn't understand the long-term risks of heavy inhalation. There were a few areas that were not insulated - so in the winter these few folks had to
wear a ton of layers to keep warm (...and in the summer those same workers would be covered head-to-toe in sweat). On the cold afternoon we visited, one guy had the fortunate job of fueling the flames of the vacuum system (to extract dust)...although it's probably not the job people are fighting over come June-August...
The day were were visiting, the factory was working on an order for the 
Olympic games of 6,500 doors...among other products. Interestingly enough, a few weeks after my visit to Boloni I was actually touring one of the sites on the Olympic green for the Games next summer...although I will have to postpone that story for another post...
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