Trump Impact

These are fascinating times as the incoming U.S. President has made his wealth not just as a mixed use real estate developer but as a key player in branding international hotels and as a reality television personality.

Marriott’s Asian born CEO Arne Sorensen recently wrote a pointed letter to President-elect Trump underscoring how his policies may impact the hospitality industry, addressing issues of labor and immigration, infrastructure spending and tax relief.

As the CEO of an Asia-Pacific hospitality company, I am just beginning to get my head around the potential impact of a Trump Presidency for hotel brands. The fact is so much of our economic future will be based on the relationship between the two biggest economies China and the United States, which together generate $29 trillion or 39% of global GDP and 32% of global travel expenditures worldwide. The U.S. is also the number one destination for direct investment by Chinese based entities, representing $18.4 billion in the first half of 2016 alone. While President-elect Trump is concerned about the $350 billion dollar plus U.S. current account trade deficit with China, economists estimate that Chinese exports have saved U.S. consumers over $700 billion dollars over the past decade alone.

Cachet is a company led by American, Canadian and Australian executives that was launched in Shanghai with its global brands and platform being made in China, Thailand and India. Our experience in “reverse innovation” provides us with some unique perspectives on Asia-Pacific hospitality. As entrepreneurs, we are inherently optimists but here are my perspectives on the optimistic and pessimistic scenarios for the domestic and Asian hospitality under President Trump.

Optimistic Scenario

Our industry is an amazing training ground for international politics. Think about all the dimensions a senior executive must navigate to succeed in our business, including real estate finance, brand marketing, technology innovation, labor and government relations, social responsibility and, of course public relations and media. Therefore, while he has not held elected office, we should have high expectations for what President-elect Trump can do to turbo charge the U.S. economy, create new wealth and provide economic opportunities not just for American communities, but local communities around the world.

Trump’s investment into U.S. infrastructure including airports, rail and roads, coupled with a more efficient border control system will result in a boom in U.S. travel. Despite a strong dollar, Chinese travel to the U.S. will increase fivefold to 15MM arrivals a year and these investments will also stimulate more friendly and long-term oriented Asian real estate investment into our hotels, restaurants and entertainment venues, in excess of $50 billion annually. During the Trump administration, the U.S. hospitality industry will benefit from new permanent sources of capital from Asia, and these investors will seek long term capital appreciation and create tens of thousands of jobs that cannot be outsourced.

European travel to the U.S. will also rebound and airline and online travel companies will greatly benefit from the growth in domestic and international trips to markets such as Mexico and Cuba.

Perhaps his biggest breakthrough will be convincing Mr. Xi to “tear down that (no so great) firewall.” As one of the leading media innovators of the past decade and an individual with no political ideology per se, Trump will successfully negotiate with Beijing to secure the entry of U.S. based technology companies including search engines and social media as well as entertainment, media and content companies, including internet television. And he will negotiate fewer restrictions on disseminating a wide range of content online, including text, maps, games, animation, audio and video. In the process, Trump will establish new standards for intellectual property protection and enforcement in bilateral agreements between the U.S. and China.

The new rules of the game will facilitate the re-entry of Google and mobile technology platforms such as Facebook. This will help hotel brands compete more effectively against WeChat, Tencent and Ctrip. As Chinese citizens travel the world and become more fluent in English, hotel brands will generate more direct bookings and a more active database.

This wave of technology innovation will facilitate a new wave of franchising growth in China for full service international hotel brands. Thousands of Chinese entrepreneurs will raise capital and form their own management companies that franchise our brands. Some of these ventures will acquire assets from state-owned enterprises and create REITs and other tax efficient investment vehicles that have yet to exist in China.

In the long run, by evening the playing field for U.S. technology and entertainment companies in China, Trump will help drive U.S. GDP growth and increase cross border business travel.

In this optimistic scenario, the economic pie would grow and so would the share of the pie for hotel brands.

Downside Scenario

On the other hand, things could turn out to be a disaster. Trump’s enforcement of his 45% tariff on Chinese exports and his focus on renegotiating “old-economy” centric trade agreements will result in economic disputes with China. The U.S. economy will be marked by rising inflation, a future where iPhones cost $2000 in the face of rising interest rates and a strong dollar, which will negatively impact U.S. exports.

Asian real estate investors will be caught in the cross-fire and suffer from discrimination in the form of national security driven protectionism. Their investment into the U.S. will decline to $2-3 billion annually. They will instead seek returns in Europe, Australia and other Asian markets. The unintended consequence of the U.S. “turning inwards” will be increased Chinese investment with the rest of Asia – precisely what the TPP aimed to achieve – and the great firewall will be expanded across the region.

The Chinese will retaliate by more sharply reducing the scope of U.S. technology and theme park and content companies with significant business in their market, including Apple and Disney. These conflicts and disputes will thrust most of the G20 into a recession and business travel between China and the U.S. will slow considerably. Owners of international hotel brands, who are increasingly private, will shrink their portfolios and pare down their development plans on both sides of the Pacific.

Without properly examining the facts, namely that the U.S. has lost 6 million manufacturing jobs primarily due to changes in technology such as automation and robotics, along with increases in labor productivity, rather than outsourcing, Trump will tear up NAFTA. The termination of NAFTA for short term political gain will result in destabilizing value chains in a number of industries that generate demand for the hotel industry. The economic dispute with Mexico, a country whose U.S. dependent tourism market is taking off with almost 20,000 rooms in its hotel development pipeline, will result in many delayed or stalled projects, pushing back nearly a decade of industry progress.

Even in this downside scenario, there will be some winners. The biggest winners will be East Asian markets such as Thailand, Indonesia as well as Japan, Australia and Canada, who will greatly benefit from new trade and investment agreements with China that will also result in double digit growth in their travel and hotel real estate sectors. In terms of brands, the biggest winners may be domestic Asian brands that develop a franchising model in cooperation with the technology platforms inside the Chinese firewall.

However, in this pessimistic scenario, the economic pie would shrink and so would the share of the pie for hotel brands.

So, which scenario is more likely to occur? Many of us, especially young voters, remain concerned about his comments about immigrants, women and minority groups during the campaign. But the campaign is over. I learned many years ago from working with celebrity developers like Trump, to avoid overreacting to what they say and instead focus on what they do. Celebrity developers can at times be mercurial, controversial and unpredictable. But when they make decisions and execute, the results are usually impressive and they provide economic opportunity for everyone.

Above all, President-elect Trump knows better than any of his predecessors that the U.S. is a branding, entertainment and media machine. The future of Asia-Pacific hospitality is inextricably intertwined with the online travel, entertainment and media’s industries. Therefore, we should encourage President-elect Trump to advance a “new economy” agenda with China that encompasses intellectual property rights, entertainment and media and technology brands. If he goes on the offense, rather than turn inwards, it will be great for our business and make America and China both even greater.

 

- Alex Mirza, Co-Founder & CEO, Cachet Hospitality Group