KILL THE ILLS - A RECOLLECTION OF EVENTS IN MACAU (2008)

by Desmond Lam

On January 26, 2009, Chinese around the world will be welcoming the Year of the Ox. For the people, government and casino concessionaires of Macau, the year 2008 is a year of ups and downs. There were moments for celebrations, especially at the beginning of the year. However, celebrations quickly turned to competition and casino profits dwindled. By December this time, most people were concerned with the impact of mainland China’s visa policies and the global economic crisis on Macau’s casino gaming industry.

The year 2008 started with SJM announcing the rebuilding of Macau's landmark casino resort Hotel Lisboa, the oldest casino in Asia. A decision that reflected the intense competition that SJM was facing since the gaming industry liberalized in 2002 - the slow reinvention that it badly needed in order to fend off the threat of the other casino concessionaires. Beginning of 2008 saw a stream of good news spilled over from 2007 - the spectacular rise in gross casino gaming revenue and visitor numbers from mainland China and all over the world. In February, Ponte 16 opened in Macau Peninsula. It was Macau’s 29th casino. At this time, a member of the Legislative Assembly predicted that Macau’s gaming revenue would exceed US$10 billion by the end of 2008; quite a safe bet considering the economic conditions in early 2008. There were also talks that Macau would surpass Hong Kong as the region’s top tourist spot by the end of the year. In January 2008, the total number of guest rooms available in the Macau was around 16,000. By March, government figures showed that a total 23 hotel projects (approximately 24,000 guest rooms) were under construction. Hotel occupancy rate averaged around 70-80% during this period according to local media. Gambling taxes accounted for around 70 percent of Macau’s tax revenues and casinos employed around 44,000 people in 2007.

Casino security was once again under public scrutiny despite claims by government agency that Macau’s casinos were among the most secured in the world. Media cited an estimated US$2.5 billion per year lost in casino gaming revenue due to side-betting as a reason why Macau needed more than just the most advanced security and surveillance equipment in the world. This scam involves gamblers and junket representatives illegally agreeing to multiply the value of their table chips bet without the knowledge of the casinos (and hence, government). There was a sense that the anti-money laundering law was inadequately enforced n Macau’s casinos. Casinos were required to report any transactions that were above MOP 500,000 to the Gaming Inspection and Co-ordination Bureau. However, these transactions were normally filed under the names of the junket representatives and VIP promoters. The real identities of the actual gamblers were to remain unknown (or protected) due to the special VIP structure that Macau has adopted for decades. The result was that VIP customers, many were mainland Chinese and would include corrupted officials or criminals, enjoyed the privacy that they wanted. In the eyes of the Chinese central government, this current VIP structure/system may be a major obstacle for the sustainable growth of Macau’s casino gaming industry.

In February, Xinhua News Agency reported the result of a string of gambling crackdowns conducted in 2007 throughout mainland China. Police said they uncovered hundreds of thousands of gambling cases, busted tens of thousands gambling rings, and arrested more than a million Chinese gamblers. To fight gambling, a special committee head by the Ministry of Public Security was established. This was a warning sign for Macau and the unknown number of mainland Chinese officials who squandered away public money gambling in Macau’s casinos. There were speculations that the Chinese central government would turn their attention to Macau once the Olympic Games is over. There was a real concerned that it would start to crack down on gambling-related organized crime and corruption (i.e. the embezzlement or mismanagement of public fund). It was believed that corruption had reached new high and gambling was partly to be blamed. The Individual Visitor Scheme (IVS) that was implemented in 2003 has brought benefits to Macau but also encouraged more crime, corruption and other social ills within mainland China.

Media reports on crimes relating to excessive gambling in Macau by mainland Chinese climbed significantly since the liberalization of casino gaming. Some observers suggested that the number of cases might have more than doubled. More seriously, the amount of money involved was staggering and its impact on ordinary people widespread. For example, Shanghai Morning Post reported a former postal bureau director in Foushan (Guangdong) was caught defrauding some RMB 1.79 billion (~US$ 238 million) from 352 accounts in the postal savings bank to pay back hundreds of millions that she lost in Macau’s casinos. In another case, the former board chairman of the Gas Administration Corporation of Haikou (Hainan) embezzled more than RMB 10 million (~ US$ 1.5 million) of public money for gambling. Between 2001 and 2007, he made approximately 120 gambling trips to Macau and Hong Kong. From a statement released by a former Chinese official who was trialed for the embezzlement of public funds for the purpose of gambling overseas: "Gambling is the source of all evils. It ruins my family”. These high profile gambling-related corruption cases by Chinese officials were a cause for concern for ordinary Chinese and must have caught the eye of the Chinese central government. Enough is enough!

The over-emphasis on VIP game play and promotion had a big role in the subsequent development of Macau’s casino gaming industry in 2008. Crown Macau, which engaged the Hong Kong-listed VIP junket operator (also called consolidator or aggregator) Amax in late 2007, was branded as the “the King of VIP” and the “busiest casino in the world” in terms of betting volume by March. In February, Amax junkets generated about $US 5.3 billion in rolling chip turnover for Crown Macau. As a result, Melco PBL’s total market share jumped from just 5.7% in November 2007 to over 18% in February 2008. Among the losers in this VIP commission war were SJM and Sands Macau. As part of this business deal, Crown Macau offered 1.35% commission on chip sales to Amax. This was supposedly among the highest in the market but it was suggested to be unsustainable, leading to little profits for any concessionaire. Still, the first quarter of 2008 saw a 62% increase in gross casino gaming revenue from the same period a year ago. In the first four months of 2008, visitor to Macau neared 10 million, up by more than 16% year-on-year. Mainland Chinese continued to arrive in Macau in waves, accounting for around 59% of this number. The ills of an expanded VIP game play were clear to the Chinese central government. Macau’s casinos were supposedly (and secretly) frequented by an increasing number of suspected Chinese officials and managers of state-owned enterprises.

By April, some gaming executives and officials in the Macau government had expressed concern for the ‘unhealthy’ growth of the VIP market segment. Commission had skyrocketed compared to a few years ago due to competition. Some junket operators were demanding the same kind of deal as Amax, or they would walk away to another casino operator. To compete and boost volume, some concessionaires like Sands began to offer higher commission rate to meet competition and better access to credit to junket operators and representatives. New junket operators, hence, started to give away easy credits to their players in order to entice them to play through them. These fresh battles between concessionaires for junket businesses resulted in lower profits for all. Only the junkets get to gain.

As competition continued to intensify in the VIP market segment, Macau government made an important ann

Date Posted: 16-Dec-2008

Desmond Lam is a visiting senior research fellow at the School of Marketing/Ehrenberg-Bass Institute for Marketing Science, University of South Australia. He can be contacted at DesmondL@hotmail.com.