Some Economics of the Hong Kong Tourism Industry

In SCMP, Kelvin Wong reported:

The Independent Commission Against Corruption has arrested bankrupted jewellery tycoon Tse Sui-luen over allegations related to illegal commissions and tax evasion.

The anti-graft body said in a statement yesterday that the management of a listed company was suspected of offering kickbacks to employees at several travel agencies if they arranged for tour groups to visit the company's shops.  Although the company was not named in the statement, sources revealed that the ICAC arrested Mr Tse, former chairman of Hong Kong-listed Tse Sui Luen Jewellery (TSL), his son and incumbent chairman Tommy Tse Tat-fung, a former deputy chairman and three other company managers in an operation code named "Pearl" on Tuesday.  Also taken into custody were three existing and former employees of a travel agency, believed to be S.K.Y. Travel, and two other unnamed individuals.

The ICAC said the company chairman might also face charges relating to the misappropriation of company funds totalling more than $2 million, while other employees were suspected of helping to cover up the alleged theft.

To understand the background about how this came about involves knowing how the various economic sectors work together.

First, there is the tourist industry, whose surging rise has benefited related retail and service industries.

(Wenweipo, in translation)  In 2003, China began to permit solo travelers to visit Hong Kong.  Last year, the total amount of tourist spending (for travel agencies, hotels, restaurants, retail stores, jewelry stores) was HK$69 billion.  There were 12 million mainland Chinese tourists from a population base of 150 million in 32 cities (including Beijing, Shanghai, Nanjing, Suzhou, Wushi, Hangzhou, Ningo, Taizhou, Fuzhou, Xiamen and 21 cities in Guangdong province.  For 2005, the projected number of of mainland Chinese tourists is more than 15 million.

Many of the mainland Chinese tourist came in groups, and some solo travelers come by themselves and join local tour groups.  Therefore, the tourist agencies have benefitted from the boom.

(Wenweipo, in translation)  Many tour leaders and guides receive low base pay, sometimes as little as HK$1,000 per month.  The reality is that the principal sources of their income is through sales commission.  When the tourist guide brings his group to a designated shop, he/she will persuade them to spend as much as possible.  Tourist guides can make more more HK$10,000 per month through these commissions.

When a sales is made, the store will send the "comission" to the tourist agency, which will divide the amount among the tour leader, the tour guide and the agency according to a pre-determined ratio.

From the viewpoint of the tourist, this is not necessarily a bad deal, at least for some of them.  The existence of sales commission means that the tour costs are lower since labor costs for the tour leaders and guides are non-existent.  The mainland Chinese tourists tend to be cost-sensitive, so this is an important consideration.  In fact, from a purely accounting point of view, some of these tour packages are money-losers on their own terms, but they are viable after sales commissions are included.  So mainland Chinese tourists who are not big spenders are actually getting a good deal.  The situation is less favorable for the big spenders who are led to the designated shops.

But what about the mainland Chinese tourist who spend a lot, especially on jewelry?

(Wenweipo, in translation)  The reality is that mainland Chinese tourists are much more interested in buying gold jewelry than local residents.  About 50% to 60% of the sales volume in gold jewelry comes from mainland tourist groups.  Last year, some of the tourist-oriented gold jewelry chain stores generated sales of hundreds of millions.

To capture that business, the gold jewelry stores offer a commission typically bewteen 20% to 30% (but sometimes as high as 50% if the store becomes the first visiting point of a tour) to the tour leaders and guides.  In turn, their products were marked up by 60% to recoup that cost.

So what then is the problem in the TSL case?

(Wenweipo, in translation)  According to article 9 of the "Anti-Bribery Regulations":  under any circumstances, if the employee receives kickbacks without the knowledge of the employer, then this constitutes the crime of bribery.

The TSL case is about the collusion between the gold jewelry store chain and individual tourist leaders and guides to defraud the travel agencies of their commissions and the government of taxes.