China: Golf Industry 1 Overview of Emerging Tier II Markets

CONTENTS

Introduction Executive Summary The Golf Market Regulatory Environment Market Opportunities For Foreign Companies

2 2 3 5 6

Events Resources & Key Contacts Methodology About the Author

8 9 10 10

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China: Golf Industry 2 Overview of Emerging Tier II Markets

INTRODUCTION

The objective of this report is to provide a snapshot of the Chinese golf industry, with focus on market dynamics, trends and potential opportunities for foreign companies

EXECUTIVE SUMMARY

Golf is a relatively new industry in China, but it has been growing at a very rapid pace. Though estimates vary, the general expectation is that the industry should grow significantly in the next few years. Strong interests affect the construction of new golf courses; the regulatory environment is ambiguous in that national laws and local application and interpretation of the national laws tend to be inconsistent. The US is the second largest importer of golf equipment and foreign products are considered of very good quality. The best prospects for foreign companies are golf equipment, golf course design, golf club management and golf training.

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China: Golf Industry 3 Overview of Emerging Tier II Markets

THE GOLF MARKET

Overview. Golf is a relatively new sport in China. The opening of the first course in 1984 in Shenzhen was the starting point of an industry that, in 2006, had an estimated equipment production value of $6 billion. With Chinas overall rapid economic growth as well as its entry into WTO, the golf industry has also been experiencing strong growth rates. In the last ten years, China became one of the worlds most active golfing locations with strong developments in promotion, training courses, golf match organizations, and merchandise manufacturing. There are currently 5 big tournaments which are part of the big golf circuits (European and Asian). Today, golf in China is still considered a sport accessible only by small elite and the prestige and class associated with golf is as alluring as the sport itself. It is expected that over the next 5 to 10 years golf will become a sport accessible to many. Golf Clubs. Although there are no official statistics, it is estimated that there are about 300 to 330 golf clubs in China, with an increase of 20 to 30% per year. Golf clubs usually get started before the golf course itself, in order to attract members ahead of time. Each golf course has at least one golf club. China now ranks second in Asia and fifth in the world in terms of number of clubs and has essentially become the world center for manufacturing of golf products and equipment. Golf is most popular in the South of China where golf courses are open all year round.
Golf is becoming a key driver for urban development especially in Tier II and Tier III cities. Many investors entered the market in search of inexpensive land to convert into upscale golf development, with a golf course being accompanied by expensive villas. It is often the case that, while the golf club and course are operating at a loss, the overall real estate development (i.e. sales of villas) is where most of the profit comes from.
Figure 1 - Golf Clubs per Region

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China: Golf Industry 4 Overview of Emerging Tier II Markets

Players. Estimates on number of golfers vary as there are no official statistics. There should be up to 1 million golfers in China (including players which only play on the driving range, e.g. beginners). Some estimates, perhaps optimistically, predict that there will be as many as 5 million players by 2012. Although golf is becoming more and more popular, the high fees charged still make it available only to the wealthiest mostly entrepreneurs, government officials, and foreigners. Membership fees in private clubs can range anywhere from US$ 20,000 to as high as US$ 200,000 per membership depending on the exclusivity of the course; green fees (which are charged for every round on the green) can go anywhere from $40 to $200 per round. The high pricing is considered a possible barrier to the industrys development as it is preventing less wealthy enthusiasts to join the game. Equipment Suppliers. Currently, there are over 2,000 golf-related businesses in China. Most of them are located in Guangdong, the province where the golf industry has developed the most in terms of number of players, courses and companies. As a low-cost sourcing market, China hosts all major golf-related brands such as Callaway, Titleist, Taylor Made, and Jack Nicklaus. Most of these brands approach China as a relatively untapped market. US, Japanese and Taiwanese brands dominate the market for golf equipment, with US equipment considered as having very good or best quality. However, there are still serious issues with IPR (intellectual propriety rights) or counterfeit products as highlighted in the next section. Counterfeits. Equipment counterfeiting is still a major issue in this industry, with a considerable amount of equipment in the market - such as clubs, shoes and balls being counterfeited. Different from other situations when it may play a more passive role, the Chinese government is paying attention and working closely with some foreign manufacturers to take measures against counterfeit products. Nevertheless, there has not yet been major progress on this matter as it is relatively easy to find fake sets of golf clubs in several Chinese cities as cheap as $150. Low Profitability. It is estimated that almost half of Chinas golf courses are running a deficit due to the oversupply driven by real estate interests. Most golf courses are full on weekends but empty during weekdays. It is estimated that 78 rounds a day are needed for a course to break even; only a few golf courses can reach this level. In addition, poor management practices also contribute to the current situation.

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China: Golf Industry 5 Overview of Emerging Tier II Markets

REGULATORY ENVIRONMENT

Chinas environmental situation has become a key item in the Central Governments agenda in the past few years. The key issues prompting the government to prohibit the construction of new golf courses are: the fast past of decline of arable land, excessive usage of water and chemicals, and because existing golf courses have been developed on large portions of fertile land. National Laws. Currently, there are two main national laws regarding the construction of new courses. The first, approved by the State Department Office in January 2004, has essentially stopped the construction of new golf courses and strengthened the supervision of course management. Late last year in December 2006, a second law issued by the Ministry of Land and Resources also prohibited the occupancy of land for the construction of new golf courses.

Local Implementation. However, while official laws from the Central Government are clear no new courses - the enforcement of national policies at the local level is still weak. Strong local interests play in favor of building new courses. For example, local authorities may believe that large-scale golf courses improve the citys image, creating a friendly atmosphere for businesses and therefore helping local politicians climb the political ladder. In addition, real estate interests are also quite strong and may sometimes overcome legal and political obstacles. Golf courses in China are often being built in tandem with other property developments (e.g., villas, luxury apartments, etc.) to help sell those properties. Overall Regulatory Environment. These forces combined make the legal framework regarding the golf industry still quite ambiguous, with variations from province to province. As a result, many golf courses have been (and are being) built, essentially without permission from the Central Government.

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MARKET OPPORTUNITIES FOR FOREIGN COMPANIES

While the golf industry in China has been growing at an impressive rate, the industry is still characterized by a general lack of know-how, management expertise, and low service level.

Overview. While the golf industry in China has been growing at an impressive rate, the industry is still characterized by a general lack of know-how, management expertise, and low service level. Market opportunities for foreign companies lie essentially on addressing these gaps; the best prospects include golf equipment, golf course design, golf club management and golf training (for both crews and players). Golf Equipment. Taiwan is the top importer of Golf equipment in China. The top 5 countries include Taiwan, US, Japan, and Vietnam. The table below shows the top 5 countries by import value.

Table 1: Imports of Golf Equipment to China Top 5 Countries, US$M

Countries Taiwan USA China Japan Vietnam
Source: World Trade Atlas, JLJ Analysis

2004 60 9 5 7 1
*Footnote1

2005 106 14 13 10 2

2006 126 18 22 12 6

The imports of golf products from the US totaled $18.3 million in 2006 and have grown 45% per year since 2004 (CAGR). Golf clubs have experienced a dramatic increase (+588%) from 2004 to 2006. The chart below shows the fast growing trend of imports from the US.

Imports of Golf products from the United States

20 18 16 14 12 10 8 6 4 2 0 2004 2005 2006 2007 (Jan to Mar)

Millions of US Dollars

Other Golf Equipment * Golf Balls Golf Clubs Total

Source: World Trade Atlas

1 Imports from China refer to all goods that have been produced in China, exported and further on re-imported from abroad * Other golf equipment refers to parts of golf clubs, other golf equipment, parts and accessories.

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golf is perceived as an elite sport, Chinese players demand high quality products and are brandsensitive

Because golf is perceived as an elite sport, Chinese players demand high quality products and are brand-sensitive when it comes to the purchase of clubs, shoes, and other products, such as balls or gloves. Overall, foreign brands are perceived as being of very good, quality. Ironically, some industry experts believe that foreign players in China are the ones supporting the counterfeit industry by buying counterfeit products, since Chinese players tend to be more brand sensitive rather than price sensitive.

In addition to golf equipment, course maintenance, equipment for lawn and turf development, preservation, and maintenance are also in high demand.

Golf Course Design. Though golf course construction has been recently limited by the State Department Office, there are still some courses being built and many more planned. The over supply of golf courses has created some concern in the industry. In addition, there are some existing clubs which are redesigning their courses in order to become more competitive. Most courses in China have been designed by foreigners. Foreign designers such as Jack Nicklaus (who is currently designing 8 courses in China) are highly recognized in the marketplace. The investment price for an 18-hole course in China averages $18.4 million. Golf Club Management. In addition to the unsustainable growth of golf courses, the lack of professional management skills has also lead to reduced profits or even losses in more than 50% of the golf clubs. At present, there are already a few schools that provide education in golf course management. Nevertheless, opportunities for service companies capable of providing training to golf club managers still exist. Golf Training. Along with poor management, the lack of know-how of golf crews has resulted in inefficiency and low service level. Most workers have never had on-site training; only a few vocational schools exist in China today. As the demand for higher service levels increase, the professionalism of both caddies and maintenance crews becomes critical. Therefore, there is good market potential for companies providing this type of services as well as coaching services for new players.

With the increasing popularity of golf, the opportunity for both equipment manufacturers and coaching companies will be significant.

Summary of opportunities. Despite the recent course development limitation imposed by the Central Government, investors are still willing to invest in golf courses with special attention on projects that also include real estate opportunities. With the increasing popularity of golf (5 million golfers in China by 2012, according to some optimistic estimates), the opportunity for both equipment manufacturers and coaching companies will be very significant. Course maintenance and overall service levels are critical to success and, as the industry develops, more clubs will be focusing on these aspects.

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China: Golf Industry 8 Overview of Emerging Tier II Markets

EVENTS
Key Scheduled Upcoming Fairs
Asian Golf Show Shanghai Date: September 13-15, 2007 Venue: Shanghai Exhibition Center Website: www.asiagolfshow.com China Golf Show Date: April 6-8, 2008 Venue: China International Exhibition Center (New Hall) Beijing Website: www.chinagolfshow.com

Key Tournaments
Beijing Open Circuit: Asian Tour Date & Location: April, Beijing BMW Asian Open Circuit: Asian and European Tour Date & Location: to be determined each year HSBC Champions Circuit: Asian and European Tour Date & Location: November, Shanghai TCL Classic Circuit: Asian and European Tour Date & Location: to be determined each year, Sanya (Hainan Province) Volvo China Open Circuit: Asian and European Tour Date & Location: to be determined each year

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RESOURCES & KEY CONTACTS

China Golf Association Tel: +86 106 711 7897 Website: www.golf.org.cn Asian Tour Tel: +603 7880 3714 Website: www.asiantour.com European Tour Tel: +44 1334 840500 Website: www.europeantour.com

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Methodology
This research is based on a combination of secondary and primary resources as well as a continuous analysis and elaboration of all key facts and data throughout the research. Secondary resources included The JLJ Group, US Commercial Office, World Trade Atlas, China Customs, China Statistics Bureau, and other sources. Primary resources include interviews and interactions with key industry players.

About the author

The JLJ Group Solutions for China Entry & Growth The JLJ Group is a one-stop service provider assisting international companies entering or growing in the China market. JLJ has already served more than 400 clients including Fortune 500, SMEs and government organizations - in more than 10 years of activity in China. JLJ provides services in five areas Market Research & Consulting, Corporate Formation, Human Resources, Tax & Accounting and Business Process Outsourcing to support the business needs of foreign companies at different stages of their China projects.
The JLJ Group in Shanghai (China) can be contacted via e-mail at consulting@jljgroup.com or phone: +86-21-5211-0068. For more information visit www.jljgroup.com

Disclaimer: The information provided in this report is intended to be of assistance to foreign exporters. While we make every effort to ensure its accuracy, neither the The JLJ Group nor any of its employees make any representation as to the accuracy or completeness of information in this or any other JLJ document. Readers are advised to independently verify any information prior to reliance thereon. The information provided in this report does not constitute legal advice. International copyright, The JLJ Group, 2007. All rights reserved
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