MAJESTICA HOTEL IN SHANGHAI

NAME: XIMIN HU
STUDENT NO. 205826717

Majestica Hotel Inc. is one of the world’s leading operators of luxury hotels. Its key factors for success are based on two points: high quality of personal service and maintenances of consistency in operating philosophy. Since 1990s, Majestica has adopted an expansion strategy in Asia. During this process, it signed a letter of intent in 2004 with Commercial Properties of Shanghai Limited (CPS), one of subsidiary of CPSIH of Shanghai municipal government to be the operator of CPS’s new luxury hotel under construction in Shanghai. This would help Majestica enter the attractive and potential Chinese market with the support offered by the government. However, during the negotiation of the management contact, there are several big issues remaining unsolved: length of contract term, name of hotel, general staffing, purchasing, arbitration and the control that Majestica has over the management of the hotel. These issues mainly reflect the conflicts between Majestica’s operating philosophy and CPS’s hands-on approach as the owner of the hotel. The executive vice-president of Majestica, Richard Roy, is worried whether they should make any concessions in order to enter the Chinese market or stick with its original philosophy.
Whether Majestica should stick with its original philosophy depends on these aspects: 1). Is CPS the most ideal partner in entering Chinese market? 2).What is the cost, risk and benefits of the corporation with CPS? 3).Is it the best time to enter the Chinese market? 4).If needed, in what aspects can Majestica make a concession?
CPS is a subsidiary of Commercial Properties Shanghai Investment (Holdings) Co., Ltd. (CPSIH), one of several overseas investment arms of the Shanghai municipal government; therefore, in corporation with CPS, Majestica could obtain the resources and support, both financial and political from experienced quality personnel and customer resources, so when foreign delegations come to Shanghai, this hotel would have higher possibility of being appointed hotel. In accordance with Chinese culture in which government usually represents high reputation and high quality service, being the operator of this hotel would help Majestica build its world-class hotel brand image in China. Besides, as CPS has a close relationship with government, it will provide Majestica some political convenience in doing business with suppliers, such as interpersonal relationships which is quite important in China. Some may concern about the corruption and opacity of the government, in this case, since CPS was publicly listed in Hong Kong, it will have more business transparency and independence from government influence. In addition, as one of the financial and commercial centers in the world, Shanghai is a potential cite for hotel industry. First, the tourism industry in Shanghai is booming which will attract more and more tourists around the world. Second, the hotel industry is of great potential, especially the five-star hotels as among the 423 hotels at the end of 2004, only a small amount is five-star hotels operated by the competitors. Therefore, entering in the Chinese market at this moment is of great potential for development and it is beneficial for Majestica to occupy more market share in the near future when the competition is not so intensive. As a result, it is the best time to enter in Chinese market at this moment and CPS is an ideal partner in terms of resources and support.
However, cooperating with the CPS also has some risks and potential costs. Potential costs include human resource costs spent in rounds of negotiation, transportation costs of sending representatives to Shanghai to have negotiation and the opportunity cost of finding another partner or chance to enter the Chinese market. Also, since Majestica acts as a foreign company in China, the local law may have more restrictions on the foreign