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Central Asia is a region that has been going through a transformation process to improve the business environment and increase its attractiveness for foreign investment. Participation in different Belt and Road Initiative (BRI) projects worth billions of dollars, whether in terms of infrastructure development, trade or logistics, will lead to diversification of these economies away from oil and gas, and the region can reap the benefits of its geographic position between East and West.
With a focus on infrastructure developments as part of the overall BRI project in Central Asia, the tourism appeal is expected to improve in the region and in turn boost tourism flows and diversify away from traditional source markets.
China is expected to become the biggest market in terms of outbound departures by 2030 globally, with 256 million trips, according to Euromonitor International. The country is targeting more destinations along the Silk Road, under the Belt and Road Initiative. With deeper international trading partnerships established by the Chinese government, less established destinations, such as Uzbekistan, Azerbaijan and Kazakhstan, among others, can attract more Chinese travelers if the right tourism infrastructure and products are developed for the right consumer preferences. In particular, increased hotel room supply, working with Chinese online travel agencies, tour operators and agents, heavy online advertising, including social media outlets such as WeChat to appeal to millennials and digital-savvy consumers, providing destination information in Mandarin, introducing Chinese payments options, boost accessibility and connectivity, among others.
Most of the economies in Central Asia are reliant on their natural resources, which have been the driving factor in their growth since independence. Because of their geographic location, many of the countries are aiming to benefit from China-Europe trade traffic.
Local governments in the region are looking to develop modern tourism infrastructure, which can help attract more visitors from Asia Pacific and Europe, for example. The natural resources and cultural heritage provide the opportunity for continued growth in the leisure segment. Opportunities exist, however, to attract more business visitors and thus capitalize on some of the major business events in the region (e.g. Expo 2017 in Kazakhstan), in addition to the luxury and upscale hotels segment, which is enjoying strong exposure in this part of the world through brands such as Ritz-Carlton, St Regis, Fairmont, Four Seasons, Hilton, and Hyatt.
Destinations such as Azerbaijan and Kazakhstan stand out in terms of economic performance thanks to stronger political and commercial ties with China.
The economic performance of Azerbaijan has been improving, with real GDP expected to increase by 2.9 percent in 2018. Annual growth in real GDP is expected to reach 3.1 percent by 2025. Azerbaijan is highly dependent on its natural resources, which account for more than one-third of GDP and close to 90 percent of exports.
The economy in Kazakhstan is expected to slow down slightly in 2018. Growth in real GDP will be 3.7 percent in 2018, compared to 4.1 percent in 2017. The country is highly dependent on petroleum, which accounts for almost 40 percent of the government’s revenues.
Uzbekistan is the most populous market in the region, although it is also the poorest, with consumer expenditure per capita at just $773 in 2017. In 2030, the population of Uzbekistan is expected to reach 34 million. Growth in real GDP will increase to nearly 6 percent in 2025.
Finding the right market niche for differentiation
Azerbaijan’s focus on hosting major sporting and cultural events such as the European Games, Formula 1 Grand Prix, Islamic Solidarity Games, among others, positively influences the development of tourism infrastructure in the country and, at the same time, serves as a driver to attract investment. Such events can help the country not only to promote its destination but also prepare the market to cater to a higher number of tourists. Targeting new source markets and introducing attractive promotions can further boost the appeal of the country for such events, in addition to the government’s efforts to promote medical, MICE and sun and sea tourism. Inbound arrivals in the country are projected to reach 4.5 million trips by 2030, according to Euromonitor International.
Doubling down on rail
In Uzbekistan, tourism is seen as an important segment by the local government, which has been actively promoting the destination internationally. Airlines face competition from other transportation modes, as railways have witnessed active development in the last couple of years by the local government. This type of transportation is much more affordable, especially for domestic travelers and provides a good service quality. Uzbekistan began upgrading its railway system in 2015, when a high-speed railway — Afrosiyob — was introduced, which today connects three of the major cities in the country, Samarkand, Bukhara, and Tashkent.
Impact of travel bans
Kazakhstan’s air transportation segment has been impacted by the decisions of the International Civil Aviation Organization (ICAO), which in 2009 blacklisted most carriers in the country, except Air Astana, and prohibited the operation of any flights to Europe. The ban was lifted in 2016, contributing to growth, although the air transportation segment still struggles from a lack of competition in the absence of wider open skies agreements, which leads to higher fares. The absence of a well-developed airport network in the country further reduces competitiveness, though Kazakhstan plans to invest $20 billion in the development of all types of transport infrastructure by 2020.
Players such as Air Astana—one of the leading airlines in Central Asia—have been adopting strong tactical moves to upstage the competition. In 2019, the carrier plans to launch its own low cost arm under the name FlyArystan using Airbus A320 aircraft to serve initially the domestic market before gradually moving into a regional operation. The ambitions of the company are to grow FlyArystan’s fleet to 15 aircrafts by 2022. The move will capitalize on the gap in the sector not only in Kazakhstan but the wider Central Asia region.
Overcoming obstacles for future growth
More needs to be done in Central Asia in terms of the regulatory and business environments to support the increased capacity and demand that can be derived from projects such as the Belt and Road Initiative.
Infrastructure developments will be vital to stimulate growth and bridge the gap that exists with developed markets, especially in tourism and transportation. The lack of open skies agreements, however, deters mobility of people. Liberalization of air transportation will eliminate entry barriers and lead to a more competitive environment, allowing the entry of more low cost players and in turn increasing investment in the economy, as well as revenues from tourism and business activities.
Improved connectivity between the East and West can facilitate the transfer of knowledge and technology, which can help boost underdeveloped parts of the region. At the same time, regional cooperation can reduce cross-border trade costs and bring more integration to this part of the world.
It is, however, important to recognize that over-reliance on one market—in this case China—could expose these countries to economic influence. BRI uncertainties are very much related to the fact that the project is a work in progress, with many unknowns and political risks, along with some concerns about its impact on the environment.
Euromonitor International is a leading provider of global strategic intelligence on consumer markets, with offices in London, Chicago, Singapore, Shanghai, Vilnius, Santiago, Dubai, Cape Town, Sao Paulo, Tokyo, Sydney and Bangalore and a network of 800 in-country analysts worldwide. Euromonitor International’s analysis of the global travel industry covers a wide range of categories, including tourist flows and expenditure, lodging, transportation, car rental, cruise, tourist activities, travel intermediaries, online and mobile travel.