I only hope that we don't lose sight of one thing that it was all started by a mouse

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Shanghai Disneyland
I only hope that we don't lose sight of one thing - that it was all started by a mouse.

-Walt Disney
On a beautiful March day in Orlando, Andy Berst strolled down Main Street at the Magic Kingdom contemplating a new project proposal. Andy, the Director of Finance for Hong Kong Disneyland, had spent the last four years developing and preparing for the launch of Disney’s newest park on Lantau Island in 2005. It was now 2003, and as he prepared to move to his new office in Hong Kong, he received a call from CEO Michael Eisner’s office to discuss the possibility of a new venture in Shanghai.
Berst, like many higher managers with the company, knew that Disney was interested in breaking into mainland China for several years. On the other hand, he also knew that Disney had never built a park in a communist country, or what could be considered an emerging market. However, with the recent announcement from rival Universal-Vivendi confirming their intentions to build a Universal Shanghai to open approximately the same time as Hong Kong Disneyland, Disney executives were anxious for their own counter-strike in the mainland. As he walked towards Cinderella’s Castle, Andy’s mind began to work out the details of a Shanghai Disneyland.
The Walt Disney Company’s Theme Park and Resorts Division
Disneyland will never be completed. It will continue to grow as long as there is imagination left in the world.

-Walt Disney
In 1955, Walt Disney opened the company’s first theme park in Anaheim, California, after just one year of construction. At a cost of $17.5 Million, the partially completed park welcomed over 28,000 people on its first day. More recently, Disneyland has recorded approximately 12 million visitors annually, and opened another park, California Adventure in 2001.
Frustrated with space constraints after the first phase of Disneyland was completed, Walt Disney secretly purchased land in Orlando, Florida after an extensive search around the country. Although Disney passed away before its launch, the Magic Kingdom became the first of four parks that opened Walt Disney World in 1971. EPCOT, The Disney-MGM Studios, and Disney’s Animal Kingdom would later join over 19 resorts, 3 water parks, 3 golf courses, and a nighttime entertainment complex that welcomed guests from all over the world.
Disney’s first foray into international waters came about in 1982 with the launch of Tokyo Disneyland. Reflective of the Walt Disney Company’s financial situation in the early 1980s, the Tokyo Disneyland project was fully funded and wholly owned by the Oriental Land Company. Oriental Land Company had approached Disney about the construction of a theme park in Tokyo at a time when Disney could not financially support the project. Unlike its previous theme parks, the company’s only revenue from this project came from royalties and management fees, and Disney retained a 0% equity stake. Despite a strong relationship with the Oriental Land Company, Disney’s executive committee vowed never to again enter a similar project without a substantial equity stake. They viewed Disney’s brand as its greatest asset and the delivery of services at Disney parks as a critical element in maintaining the integrity of that brand.
As the overall financial health of the company improved, the push to expand internationally again culminated in the opening of Euro Disneyland (now Disneyland Paris) in 1992. Unwilling to let go of an equity stake as it had with the Tokyo project, Disney established a 39% equity stake in the Euro Disneyland through a subsidiary, and worked extensively with the French government to gain special tax breaks. Aside from its equity stake in the project, Disney would also be paid regular royalties in the form of “management fees” from Euro Disneyland. Despite a well-published rocky start, Disneyland Paris is currently turning a profit for Disney, on top of revenues produced through management fees.
Revenues and Operational Expenses
Operating revenue for each of Disney’s theme parks traditionally came from four areas, admissions charges, merchandise sales, food and beverage, and other miscellaneous “main entrance” fees such as stroller and locker rentals. The following table gives the average revenue breakdown:
Table A: Average Revenue Breakdown for Disney Theme Parks

Average Revenue Breakdown





Food and Beverage


Main Entrance


Operating expenses were also fairly standard across all of Disney’s theme parks. The following table gives the average operating expense for the Magic Kingdom Park in Orlando, Florida.

Table B: Average Operating Expense for The Magic Kingdom Park

Operating Expenses

USD (in Millions)

Park Labor (Salaried & Hourly)


Costs Associated w/ Park Labor






Food and Beverage2




Support Labor




Total Expenses3


In addition to the above costs, to keep Guests returning to Disney’s theme parks, regular capital expenditures were built into the financial projections of all parks. As a rule, Disney attempted to bring on-line an “E-Ticket”4 attraction every 3 years.

Disney theme parks have been traditionally marketed as vacation destinations.In keeping with this approach, every Disney theme park was collocated with a Disney themed resort hotel. The Disney resort hotels offer “perks” to guests such as early morning entrances to the parks and hotel transportation services. They were not typically large profit producers for the company, with less than 25% gross margins, but were thought to contribute to the Disney vacation experience.

Hong Kong Disneyland

We believed in our idea - a family park where parents and children could have fun- together.

-Walt Disney

After months of deliberation, The Walt Disney Company was able to secure a deal with the Hong Kong Special Administrative Region Government in November 1999 on Penny’s Bay, Lantau Island to build a theme park, two hotels, and a retail, dining, and entertainment complex. Because land was so scarce in Hong Kong, 280 hectares of land was dredged to make space. Disney planned on occupying 126 hectares of land in its initial Phase I build-out, commencing in an opening day projected for 2005/2006. The proposed construction would include a 400-room Disney resort hotel. Hong Kong Disneyland’s anticipated projected attendance in its first year totaled 6 million visitors.
Based upon general Disneyland themes mixed with the cultural flavor of Hong Kong, Hong Kong Disneyland presented the city with an estimated 18,000 new jobs at opening (a projected 35,800 jobs over 20 years) and an approximate present economic value of $19 billion USD. The $1.8 billion USD Disney venture would be supported heavily by the government from a fiduciary prospective. The Hong Kong government’s total of $22.5 Billion not only included equity, but also a substantial portion of the project debt and $13.6 billion in land formation and infrastructure improvements.

The financial structure of the Hong Kong Disneyland deal was greatly in favor of Disney. The project was to be financed through a 60/40 debt to equity split, with 80% of the debt covered by the Hong Kong government, and 20% of the debt covered through commercial means. Disney would supply 43% of the equity, and the government would take an equity stake of 57% in the project.5

China: Background

We are not trying to entertain the critics. I'll take my chances with the public.

-Walt Disney

The Chinese government appeared to be embracing capitalism at an impressive pace. China concluded negotiations with the World Trade Organization in September 2001, committing to a large number of improvements to support business and trade development. There were still many limitations on foreign-owned enterprises, particularly in industries such as entertainment, but the government was beginning to make concessions, though some speculated at too fast a rate. In 2002, China attracted a record $52.7 billion in Foreign Direct Investment (FDI), up 14.8% from the previous year and expected to continue climbing. About 26,700 foreign companies signed investment contracts in China in 2002, boosting the number of jobs created for Chinese workers by foreign companies to more than 23 million. Still, with many state-owned enterprises, China’s total private sector only accounted for around half of the country’s economic output.
With a population of 1.26 billion people, China is the most heavily peopled country in the world, and accounts for 20% of the world’s total population. Population stabilization in this country is predicted to be 1.5 billion in 2050, as the current population growth rate of 1% declines over the years. There is, however, a wide range in the prediction of China’s future population due to the variance in fertility or mortality assumptions. A change in the birth limitation policies can also have a significant shift in the population growth. Although China’s 1979 One-Child policy limited families to one child per household in order to increase natural resources per capita and stabilize the economic foundation, a New Population Law (September 2002) softened the urban policy by eliminating approval of the first family birth. This new law also conducted an internal study by an influential reformist group with high level support to prove that it was no longer necessary to investigate local policy rules, model the effects of removing the 1-Child policy, and review the social and demographic costs of the policy. Many believe that the 1-Child policy will quietly fade away in the coming years. Various projections and revisions for population growth can be found in Exhibits 5, 6, and 7.
Shanghai, located in the middle of China’s east coast, is one of four centrally administered municipalities. The city has four distinctive seasons with sufficient sunshine and rainfall. Average temperatures in Shanghai range from 2-3.50C (36-380F) in January and 27-280C (81-820F) in July.
The city is recognized as the economic leader in China, contributing approximately 5% to China’s GDP, and continues to develop steadily. It has the highest GDP per capita in the country, amounting to US$4,512 in 2001 and US$3,327 as of September 2002. In addition, Shanghai is the largest recipient of FDI in the country, accounting for 9.4% of China’s total FDI. Shanghai also would be the site of the World Expo in 2010, and is making substantial infrastructure improvements
Recording a population of 14.15 million in 2002, Shanghai is also one of the largest cities in the world. According to the 2002 National Bureau of Statistics of China, Shanghai has an average household size of 2.89. The municipality is also recognized as the first city in China with a negative fertility growth rate in its registered population. However, despite this decrease, the total population and number of registrants are increasing, due to the migrant or “floating” population. In 2000, 1.35 million women of childbearing age (15-49) were included among the 3.87 million floating population. This migration of women could potentially have a significant impact on the fertility growth in Shanghai. Additionally, as the metropolitan area expands to the suburban areas, (where rural households are also relocating) the overall urban population is increasing, impacting the wealth distribution among intra-urban households. See Exhibit 8 for more information on Shanghai’s demographics.
The uneven distribution of wealth in China is considered worse than any other country in the world. In addition to the wealth disparity among rural and urban residents, there exists an uneven distribution of wealth within Shanghai’s urban zone. Among the urban households in China with an annual income greater than 100,000 yuan ($12,066 USD), 9.41% of these households live in Shanghai. Furthermore, 10% of the urban population lives in poverty, with an average annual income of only 2,676 yuan ($323 USD).
In an attempt to improve its wealth distribution, the Chinese government developed the Great Western Development plan. China is restructuring policies to develop and benefit a stable "middle- income" group. Ideally, this group will consist of a set of educated consumers who will earn between $3,000 USD and $12,000 USD a year. Such changes include expanding teachers' salaries and pension and healthcare plans for urban residents, as well as tax breaks, loans, and new advantages for entrepreneurs. However, many believe that it will take some time before this plan can achieve income disparity improvements comparable to a western scale. Exhibits 9 – 14 capture more demographic information of the urban and rural residents of China.
Shanghai has strong distribution power in China, especially in the eastern part of China. Many domestic tourists visit Nanjing Road, a shopping district in Shanghai, to capture the latest trends in the Chinese market. Shanghai consumers are considered the trendsetters in fashion and lifestyle products across China. As a result, many merchandisers, distributors, and domestic tourists travel to Shanghai to preview the latest fashions and product designs that are set to enter their territory and try to gain a first mover’s advantage. Furthermore, Shanghai has seen a surge in domestic tourists and businesspeople that have boosted the city’s floating population. Shanghai expects this to continue, especially with the launch of the 2010 World Expo. (See Exhibit 15 for location)

The Shanghai Disneyland Project

It's kind of fun to do the impossible.

-Walt Disney
Disney had long been interested in entering mainland China. With a foothold gained in the Chinese government through the addition of Hong Kong Disneyland, Berst and his finance team were now faced with evaluating the viability of a fourth International Disney theme park. While Berst knew there were significant advantages gained by having a relationship already established with the Chinese government, he also knew there was a great deal of uncertainty in entering a Communist environment.
Shanghai, however, seemed to be optimal entry into China for many reasons. Additionally, Berst knew that labor costs in the mainland would be about 2/3 lower than in Disney’s other theme parks. Brand recognition of Disney’s core characters such as Mickey Mouse was strong, and a Shanghai initial exploratory team suggested that there would be sufficient demand to sustain the park’s existence over a number of years.

Berst knew that an accurate evaluation of a Shanghai project would be highly dependent upon his ability to correctly project demand. The Shanghai exploratory team had put together a packet of information they had received from the American Embassy in China (Exhibits 5-14) to support these efforts.

Off the cuff, Berst knew that such a project would cost about $1.2 billion to complete, and he would need to take into consideration the implications of taxes on revenue. From his knowledge of Chinese tax laws, Berst knew he could count on a 30% tax, but he could carry forward losses up to five years, and carry back losses 2 years, and would utilize a depreciation of 20 years. In addition, Disney typically used a 20 to 25 year time from for evaluating returns on investments at the theme parks.
Regardless of the numbers, Berst knew that the company needed to have a bigger presence in China in attempt to directly compete with Universal-Vivendi, as well as take advantage of the largely untapped Chinese market.

1 Built into Entertainment costs are labor hours associated with Entertainment. Of this $25 million, 28% is assumed to go towards labor.

2 Food and Beverage and Merchandise expenses are based on “per caps.” In the case of The Magic Kingdom Park, it is assumed that for every admission, the park will receive $12.00 per person for Food and Beverage also $12.00 per person for Merchandise.

3 Does not include start-up costs for any new park venture. Start-up costs for a new theme park can be estimated as $20 million (including opening costs for marketing, etc.)

4 E-Ticket Attractions were considered attractions with a high-level of financial investment (e.g., Space Mountain, Splash Mountain). An average E-Ticket Attraction costs approximately $100 million.

5 Disney speculated that the Chinese government would eventually sell down its stake in the project.

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