China's middle class is emerging as an economic force: a group of consumers larger than the entire U.S. population with an appetite for international brands and experiences. The cruise industry is competing hard to appeal to these consumers, and Royal Caribbean Cruises Ltd. (NYSE:RCL) just made an impressive gesture. The company announced in Beijing on March 25 that the company's next new Quantum-class ship, Ovation of the Seas, will go directly from the shipbuilder's yard to the northern port city of Tianjin in April 2016.
That decision makes Royal Caribbean the first international cruise line to homeport a top-of-the-line newbuild in China. And its homeport in Tianjin helps strengthen Royal Caribbean's presence in northern China.
The Motley Fool spoke with Royal Caribbean President and COO Adam Goldstein about the Ovation's planned debut. In this, the first of four articles based on that discussion, we'll look at the Ovation announcement as well as the staff training, supply chain, and ship repair plans the company is developing to serve what may soon emerge as the world's largest cruise market.
A grand gesture to a promising market
Historically, cruise lines such as Royal Caribbean and competitor Carnival Corp (NYSE:CCL) have sent existing, sometimes older stock to serve the Chinese market. Royal Caribbean broke that pattern this year by sending Quantum of the Seas to homeport in Shanghai after a debut season in New York. With Ovation, Royal Caribbean is bypassing North America altogether in order to cater to the Chinese market's evolving desire for the newest and best international brands.
If the decision seems surprising, cruise-market growth in China has been surprisingly rapid. "Five years ago we couldn't have conceived of sending one [Quantum class ship], let alone two," Goldstein said. According to Cruise Line Industry Association numbers, the market in China grew 79% from 2012-2014. Ovation will bring the number of Royal Caribbean ships based in China to five, more than any other international brand.
The Ovation move may also be based on bookings for Quantum, which starts sailing from Shanghai in May. Goldstein couldn't offer firm numbers ahead of the next quarterly report, but "in principle we're pleased with the reception Quantum has had. The Chinese find it quite meaningful. They want to be among the world leaders in every category, and they see Quantum as verification that they have emerged."
Training crew for the long haul
Tianjin, a city of 7 million half an hour by bullet train from Beijing, is important not only as a port but as a base for cruise operations support. To meet the growing need for crew members who speak Mandarin as well as English, Royal Caribbean last year implemented a curriculum with Tianjin Maritime College to prepare students in detail for work on the company's ships. The school appears to be investing in the program with an eye to the long term.
The college, Goldstein said, "built a 3-story hotel that mimics one of our ships. The hotel rooms are set up like our staterooms and the kitchen is set up like a ship's galley, so when when trainees come to the actual ship, it's similar."
So far, Royal Caribbean has hired more than 3,000 graduates of the school, with an eye to staffing ships already in China, Ovation, and other ships worldwide to serve Chinese guests.
Investments in supply chain development and ship repair facilities
Another sign that China may be a major cruise industry market for years to come is Royal Caribbean's search for an in-country dry dock facility to revamp the Legend of the Seas within the next three years. Competitor Carnival Cruise Lines already has a memorandum of understanding with shipbuilder Fincantieri of Italy and Chinese enterprises to look at eventually building cruise ships in China, but Royal Caribbean's focus for now is saving money on repairs and refurbishments to its Chinese fleet.
Without mentioning the competition specifically, Goldstein said it could be a while before any large cruise vessels are built entirely in China. "It will be a major undertaking for the Chinese to enter the industry in that way. It makes more sense in the short- to medium-term to focus on repair and refurbishment dry docks. We're looking to do those projects in Chinese repair yards, hopefully in 24-36 months."
Royal Caribbean is also working to develop logistics centers to coordinate and source ship supplies for its five Chinese boats. "We'd like to work the supply chain within China to cut down on transaction costs and shipment times, and the Chinese would like to be suppliers," Goldstein said. "There are logistics challenges in getting things from city to city in China. It's not like Europe, where you can get things from Rotterdam to Barcelona in a day or two. But there's no question there's progress, and as they build better road and rail lines, it will be easier to move things around."
Just the beginning for the Chinese cruise market?
Royal Caribbean's attention-getting decision to homeport Ovation in Tianjin, as well as its in-country training, repair, and logistics development, all indicate that China could lead cruise industry growth for years to come. Carnival, for its part, recently announced an order for nine new ships, some of which will likely homeport in China in the coming years.
In upcoming Fool.com articles based on The Motley Fool's interview with Goldstein, we'll look at the ripple effect Chinese cruise market growth may have on other cruise markets in Asia and Oceania, the growth potential in outbound Chinese cruising, and what Royal Caribbean is doing to bring North American and European vacationers to China.
Casey Kelly Barton has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.