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Labor Pains

Macau's problems are compounded by a lack of skilled workers, high turnover, and even higher labor costs.

Labor Pains

On May 1, Macau’s casino workers kicked off another dismal month for gaming revenues by taking to the city’s ancient streets to demand pay raises and limits on the employment of migrants, and an end to workplace disciplinary policies they fear have been introduced as cover for a troubled industry looking to cut its losses by cutting jobs.

May Day, the holiday the world marks to commemorate the rights of working people, is called Labor Day in Macau, and over the last decade, as China’s liberalized and only legal casino market roared into hyper-drive, it has provided the stage for a yearly ritual of public protest. It’s an opportunity for citizens of a political system that is largely closed off to them to air all manner of gripes and petition for reforms. Importantly, it also serves to remind the local hierarchy, an elite handful bound by property, business interests and family ties, that they must reckon, at least now and then, with a third force.

This is especially so as it pertains to decisions touching on its US$40 billion casino market, the largest in the world, and never more so than now, with the market having fallen afoul of Beijing and mired in an epic downturn.

On Labor Day, an estimated 1,800 marchers led by some 13 labor and civic groups braved scattered rain, oppressive humidity and afternoon temperatures approaching 90 degrees to demonstrate for job security and housing and welfare reforms. Most were gaming, transportation and lower-level public-sector workers, but there were political activists in the crowd, and old people and students protesting the force-feeding of a pro-Communist Party school curriculum devised by the Chinese government and known as “national education.”

They converged on the north and center of town in nine separate processions that ended with rallies in front of government headquarters and the Office of the China Liaison.

It was nothing on the scale of the angry turnout last year that saw thousands demonstrate outside the Legislative Assembly on the last Sunday in May against a bill showering lavish retirement benefits on top officials—a measure Chief Executive Chui Sai On, the son of a construction magnate who was due to be re-elected in August, promptly rescinded.

But as lawmaker Ng Kuok Cheong, who participated in the marches, said, “I think the appeals are even more diversified this year.” As he put it, “This is only the beginning of a new term of government, thus the contradictions in society haven’t widened as has been the trend in previous (protests). People will wait and see. The protests are just to give them a warning.”

It won’t go unheeded, for never has the industry and the local power structure been more vulnerable. At its height in the early part of last year, the market was booking US$1 billion in revenue a week, most of it from high-end baccarat, with no end in sight. Then, the nationwide crackdown on corruption and graft launched by President and Communist Party General Secretary Xi Jinping hit its stride.

By mid-summer it was clear the VIP market, which was driving 70 percent of the take and had catapulted the market to the size of seven Las Vegas Strips, was in crisis as high-rollers from the mainland, fearful of Beijing’s wrath, abandoned the city en masse. The huge and hugely secretive junket industry that recruits them and bankrolls their play with credit went into financial shock.

By autumn, revenue from high-limit cash play, for the casinos an even more lucrative business in terms of margins, was following VIP downward. The year ended with the market off by 2.6 percent from 2013’s record $45 billion. This had never happened before, at least not since the government began keeping track in 2002, which was the year the curtain came down on tycoon Stanley Ho’s decades-old casino monopoly and the juggernaut got rolling.

The worst was to come. Investors hoping for a rebound in the first quarter of 2015 instead were slammed with year-on-year declines of 17.4 percent (January), 48.6 percent (February), 39.4 percent (March) and 38.8 percent (April). May, down 37 percent, was the 10th consecutive month of double-digit shortfalls—the 12th for VIP. The share prices of the six operators are down a combined 59 percent from their January 2014 peak. Less than halfway into 2015 they’ve shed $20 billion of value.

‘My Children’

The Labor Day participation by croupiers and other front-line casino staff was smaller than expected. Which is to say only a few hundred turned out. That’s not to say they weren’t noticed. They’ve been rattling government and the industry since last year, organizing no less than eight public demonstrations to complain about pay and working conditions, and marked toward the end of last summer by two highly publicized work slowdowns at the Grand Lisboa, the flagship of Stanley Ho’s Sociedade de Jogos de Macau.
    
In neighboring Hong Kong, the “Umbrella Revolution” was about to shake the financial capital of Asia to its core. Some weeks earlier, a lecturer at a small Macau university had been fired for expressing views considered anti-government. In August, an associate professor at Macau University was suspended after his election to an executive position with a pro-democracy group.
     
At the end of August, activists attempted to hold a street poll on the performance of Chief Executive Chui, a bold piece of performance art that raised the ire of the China Liaison Office and landed five people in jail. Chui’s re-election by a select committee of business and civic leaders with representation from the gaming industry took place unhindered and on schedule a few days later.
     
The clampdown on worker discontent was also delivered swiftly. In September, groups representing croupiers and casino floor staff issued public pronouncements threatening a strike at Grand Lisboa during October’s Golden Week, one of the busiest holidays on the calendar after Chinese New Year and historically a major draw for the casinos. Police went in pursuit of their leaders, planning to charge them with civil disobedience, allegedly for crossing a security barrier during a large protest march the month before. Five were summoned for questioning.
     
The effect, however, was to galvanize the dealers. In December, they banded together to form the Power of Macao Gaming Association, a partnership of seven advocacy groups under José Pereira Coutinho, a prominent community activist and member of the Legislative Assembly, as president. The association is focusing its efforts on securing legislation that will codify collective bargaining as a basic right and recognize trade unions as legal entities with the power to represent workers and call strikes. The drive figured prominently in the Labor Day marches and has been taken up by a group called the Confederation of Trade Unions, among others.
    
The CTU is headed by Macau native Cloee Chao, who became active, as have many on the front lines of the gambling halls, over the government’s failure to effectively regulate smoking at the games. A VIP room floor supervisor and single mother, she was among those interrogated by police in September. “My children will probably follow my path to be casino workers if they want to live in Macau,” as she would tell Bloomberg. “I won’t restrain them, but I won’t let what my generation is going through become their future.”

‘No Visibility’

Understandably, the likes of Chui Sai On would rather not have to deal with the likes of Cloee Chao. She is the last thing the administration needs, squirming as it is in the glare of a central government that has made known its displeasure over Macau’s failure to diversify its economy away from gambling and grow into the showpiece of Asian tourism it thought it was getting.
    
The locals have taken more than one scolding for a one-sided path of development which Beijing says has placed the territory at odds with the national interest, providing a magnet for the ostentatious consumption the anti-corruption drive is bent on stamping out and a conduit for crooked government and party officials to launder their ill-gotten gains out of the country.
    
Last year, the central government cracked down on abuses in the visa system for travel to Macau from the mainland, both to curtail gambling visits and choke off illicit capital flows by hindering the cross-border activities of agents and operatives with ties to the junkets. In December, Beijing began directly monitoring banking and financial transactions in the city.
    
The combined effects of such measures, harnessed to the anti-graft campaign and a weakening mainland economy, are dampening hopes that China’s mass market, which the casinos have barely tapped, will flood in any time soon to fill the void left by VIP.
    
“We believe the Chinese government’s policy will remain interventionist,” says New York-based analyst Cameron McKnight, who tracks gaming equities as a managing director with Wells Fargo Securities. “We expect forward growth to be managed and don’t expect it to exceed Chinese GDP growth. If we’re right and market revenue growth maxes out at 7-10 percent, with 10-15 percent supply growth over the next few years, same-store growth could be flat or negative, and the only operators who will see revenue growth are those who are opening new properties.”
    
In line with this, Deutsche Bank analyst Karen Tang notes that mass-market table limits are down 30 percent from their Q3 2014 peak, and she expects mass table yield will fall a comparable 30 percent over the next couple of years as a ton of fresh supply comes on line—seven new resorts whose plans were laid back in the salad days, a total of some $20 billion in capital investment that the industry was certain would flourish with 3,500-4,000 baccarat games. Now it’s anybody’s guess.
    
“We do not ascribe to the consensus view of ‘supply drives demand,’” as Tang has said.
    
“The bottom line is that given the political nature of the problem there is absolutely no visibility on when a recovery could occur,” says Macau-based analyst Grant Govertsen, a principal with investment brokers Union Gaming Research. “Based on current (gaming revenue) trends, and under the assumption that there is improvement the rest of the year, (revenue) is tracking minus-30 percent year over year.”
    
What’s more worrisome is the fall-off in visitation, down 3.6 percent year on year through April, the last official count available as of this writing. That hasn’t been seen since the global financial crisis of 2008-09. It’s expected to turn around as the new resorts come on line, the first of which, the $2.8 billion Galaxy Macau Phase 2, debuted at the end of May with three hotels, two casinos and an expansive array of dining, shopping and entertainment attractions. In fact, the Macao Government Tourist Office is looking for a 5 percent increase in visitation in 2015, a climb-down from 2014’s 7.5 percent growth, but hardly disappointing given the circumstances.
    
As it stands, the average length of stay is still under one day, same as ever. The number of hotel guests in the first quarter was off 11.5 percent compared to the same period in 2014. Occupancy was down from 85 percent in October-December to 77.3 percent, according to figures published by brokerage Macquarie Securities, and well off the 84 percent average for the 10 previous quarters.
    
In all, tourism receipts were down more than 16 percent in the first three months. Sales of luxury goods—jewelry, watches, designer bags, etc.—items much prized by big-spending mainlanders and linchpins of the retail economy, have taken comparable hits.
    
Layoffs are a big concern. To fail to uphold social harmony, for the Chinese a paramount virtue, would be a misfortune the current government might not survive, and it is studying the problem in all its aspects as it looks to weigh its options and identify remedies. The gaming slump has the economy in a tailspin. Gross domestic product has fallen for three consecutive quarters. The 24.5 percent decline in January-March was the worst on record. By any conventional measure, Macau is deep in recession.

Keeping Government ‘Happy’

“Labor seems to have an outsized influence on government policy. That’s just the way it is in Macau,” says Union Gaming’s Govertsen.
    
This was reflected in May when the government’s 180-degree flip on smoking became official with a statement from Secretary for Social Affairs and Culture Alexis Tam that a complete ban was now government policy. It’s been a sore point among dealers and floor staff for years, and was a big part of what drove them to the streets in 2014 as the government dithered over a variety of ineffective half-measures, among these a VIP room exemption and a mass-floor ban that labor complains is laxly enforced, and various configurations for airport-style smoking lounges.
    
Tam said in May that a full ban, VIP rooms included and no indoor smoking lounges, would be submitted to the legislature by summer. The casinos and the junkets are hoping for some kind of carve-out, but observers now believe it’s only a matter of time, probably early in 2016.
    
Govertsen says, “There does not appear to be a unified strategy on the part of the operators, other than a few sound bites here and there saying they want to keep smoking lounges. Behind the scenes there is presumably some lobbying going on, but they do not appear to be winning in the court of public opinion.”
    
The likely effects of a property-side ban are difficult to assess, because when the mass-floor ban was imposed in October the market was already in free-fall. As McKnight observes, “Its introduction coincided with a number of other pressures, so it’s hard to comment on the impact of the smoking ban alone. We saw a notable drop in revenues in October, after the ban was implemented. Mass-table revenues have dropped from about HK$10.5 billion per month ($1.35 billion) before the ban to $7.7 billion per month year to date.”
    
Govertsen says, “Best guess is a further decline of at least 5 percent across all gaming segments (VIP, mass, slots), but perhaps as high as 10 percent.”
    
The knottier problem of balancing growth and the available labor supply will not be resolved with anything as blunt as an official about-face. Macau’s unemployment rate stands at 1.7 percent, one of the lowest rates in the world, and what that means for all practical purposes is that everyone who qualifies as a member of the workforce has a job.
    
That’s a vast improvement over colonial times. It stands as arguably the local economy’s greatest success. And it’s attributable in no small part to a policy of the government designed to mollify the local population by rendering croupier and floor supervisor jobs off limits to all but Macau permanent residents.
    
The obvious problem now is that it leaves almost no one to staff the pits of the six new resorts slated to follow Galaxy Phase 2 between now and 2017-18 (and Galaxy is already mapping out a third phase of expansion). Dealers harbor the not-unreasonable fear that it’s only a matter of time before non-resident workers are brought in behind the tables.
    
As with most growth economies, the Macau boom has been a tale of migrant labor, most of it mainland Chinese. In the 10 years since the market took off with the opening of Sands Macao in 2004, the number of non-resident workers has ballooned more than fivefold. That year, they accounted for all of 6 percent of the population. Through the first quarter of 2015, they numbered more than 174,000, 65 percent of them mainlanders, representing more than 27 percent of population, a whopping 43 percent of the workforce.
  
Just in the last five years, a period when only two major resorts opened (Galaxy Macau and the Sands Cotai Central complex), their numbers have grown by 86 percent. With 19,000 new hotel rooms on tap between now and 2018, this is not likely to change.
    
Among locals in the casinos, their presence is deeply resented. An April report by the government’s Human Resources Office says they number about 26.5 percent of the total industry workforce, far less than their ratio to the citywide workforce would imply. Yet, anything over 20 percent is considered “alarming” by labor groups like Forefront of Macau Gaming. “We urge that the government must suppress the overflow of migrant workers and establish an exit mechanism for them in order to protect the locals’ employment,” a spokesman recently told the English-language Macau Daily Times.
    
Their worries are understandable. As unskilled jobs go, a croupier’s is the best-paying job in the city at an average last year of 19,000 patacas ($2,380) a month. The median industry-wide is about the same, compared with 15,000 for the city as a whole, 13,000 in construction, 12,000 in wholesale and retail trade, 10,000 in restaurants.
    
But as the dealers see it, while gaming revenue has soared over the last decade, growing at an annual rate of 21 percent, their salaries have barely kept pace with inflation and have fallen way behind big-ticket expenses such as housing and education. And this takes no account of the disruptions of shift work, the hazards of secondhand smoke and the often volatile behavior of the rabid gamblers they serve on a daily basis.
    
“The workers feel they’re bearing the brunt,” is how one local academic has put it.
    
They see the proliferation of non-resident workers as undercutting their competitiveness and thwarting them in their quest for better pay and benefits and promotion into management. Their demands include a moratorium on new table games, to which the government has acceded, in part, by awarding Galaxy Phase 2 only 150 of the 400 tables the company sought.
    
In this respect, the corrective effects of the downturn have not been a bad thing for them, as long as they can keep their jobs, and the expectation is that government will exert all the leverage in its power, and this includes the concession renewals that start coming due in 2020.
    
As Steven Gallaway, a principal with industry consultant Global Market Advisors, states it, “It’s difficult to project when a market depends on political action rather than demand. As revenue decreases, as it has for Macau’s operators, you don’t need as many people as you did. But in Macau you can’t just let people go. You have to keep the government happy.”
    
What is certain for now is that the protectionist policies of that government guarantee that labor supply will remain, as Well Fargo’s McKnight puts it, “extremely tight.” He estimates the shortage is driving wage inflation of 10 percent-15 percent a year. “In a declining revenue environment, this is clearly pressuring margins.”
    
Govertsen says, “It is a very unique situation in that revenue and cash flows are declining, yet labor costs are increasing. However, the casinos are not in a position to cut head count due to political sensitivities. As a result, and at least for the time being, the labor situation is having a decidedly negative impact on profitability.”
    
Chui Sai On, meanwhile, has begun waxing on his city’s tough times with a new column available in print and podcast on the official website of the chief executive’s office. These fireside chats of a sort began appearing the end of May. In the first he acknowledged the “deep perplexity, anxiety, restlessness” and “disappointment” some of his people must be feeling, but he assured them, “Our objectives are clear, our direction is right.”
    
“Stay calm and peaceful,” he said, “to observe trends with wisdom.”