Hong Kong Disneyland's Future Is in Danger

Pixie dust is in mighty short supply at Hong Kong Disneyland. The park, a joint venture between Walt Disney (DIS) and the Hong Kong government, was supposed to be Disney's foothold in the potentially lucrative China market but has steadily lost money since opening in September 2005. The Hong Kong version of the Magic Kingdom is the smallest of Disney's theme parks, and some visitors gripe that it's too small to entice them back for a second visit.

Now the project has hit a new snag: Disney has indicated that it is putting on hold long-awaited plans to expand on the park. In a statement from Disney's Burbank (Calif.) office released on Mar. 16, the company said it was laying off employees in Hong Kong after failing to reach an agreement with the Hong Kong government to fund a much-needed expansion. According to Disney, "the uncertainty of the outcome requires us to immediately suspend all creative and design work on the project." Thirty Hong Kong-based Disney "Imagineers" will be losing their jobs, leaving a skeleton team of 10 behind.

The government has received plenty of heat over the financing of the project since the first balloons were released on the site. Although Hong Kong covered more than 80% of the initial $2.9 billion cost of the project, the government has just a 57% share in the joint venture, with Disney holding the other 43%. "Ever since Day One, Hong Kong Disneyland has been controversial," says Paul Tse, the representative of the tourism industry on Hong Kong's Legislative Council. "The government paid a lot of money for very little control, and the park hasn't been doing well in the past two years. That's not a big selling point to the Hong Kong public."

Small World After All

Scrapping expansion plans could threaten the park's viability. The park occupies just 126 hectares and has only four "lands"—Fantasyland, Tomorrowland, Adventureland, and Main Street USA—and two hotels. Hong Kong Disneyland Managing Director Andrew Kam has said expansion is vital to the park's success. Speaking to reporters in September, shortly after he joined Disney from Coca-Cola (KO), Kam said the park had plenty of room to grow, since it was only using half of the land available. "Expansion is part of the strategy to make this park work for Hong Kong," he said. Both Disney and the government were "very much interested in growing the business," said Kam, adding that new rides and features "will drive our future growth."

Local reports have put a $500 million price tag on the proposed expansion, which would increase the size of the park by about one-third. A Disney spokesman declined to confirm the figures. Although they are currently at an impasse about how to fund expansion, the two sides have agreed in the past to make some additions, albeit within the park's original boundaries. For instance, the addition of the attraction "It's a Small World" helped boost visitors for all of 2008 by 8% over 2007, and Kam said to reporters last September: "We have plans to open new attractions within the existing site."

One reason Disney might be willing to walk away from negotiations with the government: The company has another China option, since it is talking with Shanghai officials to open a theme park there that would be much larger and easier for many Chinese families to visit. "Now that the government has decided not to support Disneyland in Hong Kong, Walt Disney is going to shift its focus towards its new and arguably more exciting China project—Disneyland Shanghai," Parita Chitakasem, a research manager with research firm Euromonitor, said in an e-mail. The Shanghai park, which has not yet received final government approval, could open in 2014 and be as large as 800 hectares. "Hong Kong Disneyland would have a lot of trouble competing," she says.

Even without competition from a larger Disney park in Shanghai, Hong Kong Disneyland's numbers have been disappointing. The 4.27 million tickets sold in 2007 were well below the 5 million who visited in 2006, the first full year of operation and well below government projections before Hong Kong Disneyland opened. In 2007 Disney agreed to waive management and royalties for two years after the joint venture failed to meet performance targets. Although Disney does not release financial figures, Euromonitor estimates the park made an operating loss of $46 million in the year ended June 2006, and lost $162 million the following year. Estimates for 2008 were not available.

Meeting the Shanghai Challenge

One area of opportunity has been China. A company spokesman said the park draws one-third of its visitors from Hong Kong, one-third from mainland China, and one-third from international tourists. "We are merely scratching the surface of business in China," Kam said in September. However, the possible shift of mainland Chinese away from Hong Kong to Shanghai could mean a drop of as much as 60% in visitor numbers to the Hong Kong park, estimates Euromonitor's Chitakasem.

That's why the threat of Disney walking away and focusing on the Shanghai project may force the hand of Hong Kong government officials. "The bottom line is that the government needs Hong Kong Disneyland to keep expanding in order to stay as competitive as possible as a tourism destination," says Chitakasem. "With this in mind, it would definitely be in the Hong Kong government's interest to come up with the cash, despite its disappointment in Disneyland Hong Kong so far."

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