Macau - the new Las Vegas
Klaus Koehler, Managing Director, Klako Group

Macao has officially overtaken Las Vegas as the world's number one gambling destination. Gambling revenues of the former Portuguese colony jumped 22 percent to USD 6.95 billion last year, beating Las Vegas with only USD 6.08 billion.

Gambling Industry in relation to Macao's Economy

The economy of the so-called "Monte Carlo of the Orient" is based largely on tourism and gambling. Most of the tourists come to Macao to gamble and therefore the industries are closely combined. Two thirds of the revenues from the tourist industry derive from gambling.

Before the handover of the former Portuguese colony to China in 1999, the Sociedade de Turismo e Diversoes de Macao (STDM) had a monopoly over the gambling licenses. The new Special Administrative Region (SAR) released in 2001 licenses to other companies in order to eliminate the monopoly and to attract both foreign investment and more tourists to come to Macao. This opened the market for competition and as a result the government's tax revenue increased significantly.
Gambling taxes form now 70% of Macao's governmental income and the gambling industry itself is the largest source of direct tax in Macao. In 2006, it generated USD 1.22 billion in direct tax. This has resulted in excesses of public finances for Macao and the SAR, which have been able to accumulate considerable fiscal resources. In 2005 Macao's monetary reserves rose up to USD 5.4 billion.
The gambling industry also has a big influence on the GDP. In the first half of 2006, Macao's GDP was recorded at USD 3.6 billion, out of which 40% is generated by the gambling industry.

Apart from the tax contribution, the industry has also brought direct benefits to Macao, such as providing jobs to over 10,000 people and financing of public projects, social charity and cultural undertakings. It has also benefited many other industries, for example the hotel industry, the catering business, transportation, banking and the construction industry.

History of Macao and the Development of the Gambling Industry

Chinese records of Macao date back to the establishment in 1152 of Xiangshan County under which Macao was administered. For a long time it remained an unpopulated area until the Hoklo Boat people showed commercial interest in Macao as a trading center for the southern province.

But it was the Portuguese who made Macao important for trading by establishing a staging port in 1516 between Lisbon and Nagasaki. In 1557 China agreed with the Portuguese settlement, but did not recognize Portuguese sovereignty even though a Portuguese municipal government was established. In 1680 the first Portuguese governor was appointed to Macao but the Chinese continued to assert their authority, collecting land and customs taxes. The Portuguese continued to pay rent until they abolished the Chinese customs house in 1849 and declared Macao's independence.

Gambling started to develop in the 16th century under the influence of Macao being an important harbor in the Far East. Gambling rooms started to spread over the streets and there where no rules or regulations on gambling activities.
When Hong Kong opened its port to the outside world, Macao suffered a drastic decline in its gambling business. The Macao-Portuguese authorities had to take action and announced in 1847 the legalization of gambling and therewith began to rely on it as its main economic pillar. The local government issued numerous gambling licenses and 2,000 gambling houses were opened.

It was not until 1979 that China and Portugal underlined their interest to find a suitable solution to Macao's status. In 1987 China and Portugal signed an agreement to return Macao to China as a Special Administrative Region (SAR) of China on the 20th of December 1999.

Jaime Silverio Marques, governor of Macao in 1959 had an important influence on the development of the gambling industries. In his opinion Macao had big potential as a tourist region and that the gambling industry could become a major growth factor of Macao's economy. Lisbon agreed with Marques and announced in 1961 that Macao was a tourist region and that gambling was approved as a "special entertainment game". After the ban was lifted, Macao's gambling industry was legalized.

Gambling Monopoly

Mr. Stanley Ho and his firm Sociedade de Tuorismo e Diversoes de Macao (STDM) held for over 4 decades the monopoly on gambling business. His 11 casinos made the gambling industry one of the most profitable in the world and provided almost USD 5 billion in tax in 2001. The tax rate for gambling was 31.8% and with the ending of the monopoly the gambling tax was also abolished.

Mr. Stanley Ho is one of the most famous persons in Macao and has had a big influence on both the gambling industry and Macao's development.
Together with his partners, Hong Kong tycoon Henry Fok, renowned Macao gambler Yip Hon and his brother-in-law Teddy Yip bid for a Macao franchise. By promising to promote tourism and to develop infrastructure they won the public tender for Macao's gambling monopoly. The Sociedade de Turismo e Diversoes de Macao (STDM) was founded.

It was the money from Ho and the STDM, which helped to build the Ka-Ho port in order to launch container operations and the airport in 1996. Ho was the main investor. It was also the management of Ho and the Yip brothers, which made the Lisboa a famous international casino. In order to promote more tourism, STDM invested large sums of money into the city; opening the Macao Tower Convention and Entertainment Center.

As gambling through casinos, soccer tournaments, horse and dog racing were illegal in Hong Kong and the rest of China, Macao was welcomed by tourists, initially from Hong Kong. Due to the individual traveling policy between Hong Kong and Macao, Stanley Ho realized the potential in this market and established the high-speed ferry between both cities and the business of gambling increased rapidly.

Macao's Success

There is more then one factor, which contributed to the development of Macao's gambling industry.

After returning Macao to China in 1999, Macao was still considered as a tourist region and gambling was therefore approved as a special entertainment industry. However due to the fact organized crime was high, the perception of Macao was not good. The new Macao Special Administrative Region government recognized that in order to make Macao more attractive to tourists they had to take action. Measures were put in place and Macao's crime rate has dropped rapidly since.

Chinese people always loved to gamble and it was never limited to a special group of people. It was popular to the rich as well as to the poor and throughout all levels of the Chinese society. Therefore after the handover to China, they have formed the largest target group coming to Macao.

In order to assure that Mainland Chinese can travel to Macao, more easily than it is to Hong Kong, the government of Macao decided that a special visa was not applicable and that Chinese nationals only need a valid entry and departure document. As gambling is illegal in China, Macao has become a popular destination for mainland Chinese. In the first half of 2006, 48.30% of all tourists came from Mainland China.

As Macao is one of two free ports in China, the Macao government has focused on protecting and streamlining the free market economic system. Today Macao remains next to Hong Kong one of the freest and most open regions in the world in terms of trade and investment policy.

Certainly the major factor for foreign investors was the ending of the gambling monopoly and the ability to issue new licenses to the incoming investors. Recognizing the potential of the gambling industry in Macao, Las Vegas tycoons, such as Sheldon Adelson, Steve Wynn and Kirk Kerkorian purchased a license and invested together approximately USD 20 billion to outfit Macao with new luxury hotels, giant casinos and V.I.P. suits and has given Macao a much needed western influence. With these new concepts, Macao has not only attracted people from mainland China, but also from around the world eager to gamble. Now on average the city's gambling tables pull in about seven times more money than tables in Las Vegas, which lures even more investors into Macao.

Foreign investors are planning not only to support the gambling industry but also to develop the entertainment industry as in Las Vegas. Mr. Adelson, owner of the Las Vegas Sands Corporation, is planning to spend USD 4 billion to build a whole Las Vegas-style strip including entertainment complex and shopping mall. The entertainment strip will be built on a piece of reclaimed land between the two islands of Coloane and Taipa, called Taico. The Venetian hotel is the first of these entertainment complexes, with 4,000 rooms and exhibition halls. It is planned to be completed by mid 2007. In fact exhibitions and fairs, such as the International Home Textile Fair 2007 will be held at the complex in October.

Macao's Future

Even though the largest contributor to the Macao economy is gambling, it is still an instable industry. The nature of the gambling business is not susceptible to technological advancement or productivity growth.
The gambling business is dependent on the prosperity of other Asian economies, now especially on China, where the majority of the visitors come from. Currently China's market is booming and more and more Chinese people are able to spend their money on gambling, as China's population is growing richer.

Macao is aware of the fact it is relying on gambling as a main source of income for the city, and therefore has put emphasis into other areas. Export related industries are currently being promoted. Export of textile and garments has provided an estimated three-fourth's of the export earnings, but while the manufacturing industry is striving to meet the challenge of a new era, the export of services has become more important to Macao's economy.

Due to Macao's success other cities in the region are rethinking their tourism strategies. Singapore, for example, is now planning to build its own casino resort and Hong Kong officials have talked about allowing gambling casinos.
But few rivals will be able to match Macao's success, which already has 24 casinos and over 2,700 tables in operation. Macao is going to expand its airport and reclaim broad tracts of land from sea in order to accommodate even more tourists.

Analysts predict that the top of Macao's gambling boom has not yet been reached. Revenues are expected to be higher next year and more foreign companies will be investing into this market.

If you require assistance with the above subject, please contact us at info@klako.com with your detailed questions.

All information in this report is verified to the best of our ability and is assumed to be correct at time of release; however, Klako Group does not accept responsibility for any losses arising from reliance on the information provided within.