New focus: The industry is looking forward to rising revenues for years to come

Home to vast swathes of untouched land and numerous unique natural environments, Mongolia has immense mountain ranges in the north and the west, thousands of square kilometres of rolling steppe in the central and eastern part of the country, and the austere Gobi desert in the south. The nation also has a distinctive cultural heritage, which draws on traditional Central Asian nomadic culture, shamanism, Buddhism and the Soviet era, for example. With these assets in mind, Mongolia’s tourism sector has grown considerably over the past decade and a half. Visitor arrivals have jumped substantially in recent years in particular, topping 475,000 in 2012, up 3.4% from the previous year and up from less than 150,000 in 2000, for example. Considering the country’s numerous natural and cultural offerings, the sector is well positioned to continue to expand.

Hurdles

While the long-term outlook is broadly positive, the industry faces a handful of key challenges in the short and medium term. As a result of its high elevation and harsh climate, Mongolia is one of the world’s coldest countries. Temperatures can fall as low as -40°C in the coldest winter months, and generally hover below freezing for eight to nine months of the year. More than 80% of tourist arrivals take place during the brief warm season, from June to August. The short tourism season is a major challenge for local operators, many of which are dormant during the long winter. “However successful you are in summer, winter is a dead season,” D. Gereltuv, director of operations at local operator Nomadic Expeditions, told local media in early 2013. Another major hurdle to expansion is Mongolia’s widespread lack of transport infrastructure. The country’s road network is small and largely unpaved outside urban areas, and though it is mostly usable in the summer, many remote areas become largely impassable during the winter months. Finally, while tourist arrivals have risen in recent years, many local operators argue that the government has not done enough to market Mongolia in key international markets. “So far it has been unclear who is in charge of setting Mongolia’s overarching tourism policy, particularly in foreign markets,” U. Batbayar, the managing director of the Battour Travel Agency and the governing board member of the Mongolian National Tourism Organisation, an industry association, told OBG. “There is also a lack of understanding of the value of long-term investment here.”

Solutions

Both the private sector and the government are working to overcome these issues. In recent years a variety of winter festivals and other activities have been established, with the goal of bringing in tourists during the off season. The government, meanwhile, is in the midst of a series of major transport infrastructure projects, primarily aimed at upgrading and expanding the nation’s road and rail networks. Finally, as of mid-2013 the government was working with the private sector to overhaul both the country’s tourism regulatory framework and development strategy, which is a positive signal of the state’s commitment to the industry.

Sector History

Prior to the fall of the Soviet Union, Mongolia was a popular destination for tourists from other Soviet bloc countries. State-owned tour operator Juulchin had a monopoly in the sector until 1990, when the newly democratic government facilitated the privatisation of the company into eight independent private operators, in line with the country’s new economic liberalisation policies. In 1995 the government passed the nation’s first official tourism regulations, which, though relatively broad, had the intended effect of encouraging the establishment of new private operators and, subsequently, attracting tourists.

Similarly, in 1995 the government introduced the new state’s first 10-year development plan for the sector, “Basic Guidelines for the Development of Tourism in Mongolia for the period of 1995-2005”. This strategy, which was introduced in conjunction with a short-term implementation plan, led to an easing of visa restrictions in 1998 and enactment of the Tourism Law of Mongolia in May 2000. The 2000 law remains in place, though it is currently under review.

Steadily Rising Demand

By the mid-2000s Mongolia was attracting a steadily expanding number of foreign visitors. In 2005, for example, it saw 338,725 arrivals, according to the government-run Mongolian National Tourism Centre (MNTC), up from 137,374 in 2000 and 201,153 in 2003. Attracted by rising demand, a number of new operators set up shop in the country during this period.

By 2008 Mongolia was home to more than 500 tour operators, though only a small percentage of these were active at any given time, and almost all of them shut down during the long winter months. By 2007 Mongolia’s tourism industry was expanding rapidly, attracting more than 450,000 visitors over the course of the year. In 2008 and 2009 the sector saw a slight decline in tourist arrivals as a result of domestic economic issues and the international economic downturn, the latter of which had a major impact on travel spending in many countries around the world. The sector began to recover again in 2010, when 456,303 visitors arrived in Mongolia, according to data from the MNTC.

Sector Organisation

A wide variety of public and private organisations are involved in Mongolia’s tourism industry. A lack of governmental continuity – in terms of planning, implementation and institutions – has had a negative impact on the development of the sector over the past decade and a half.

In 2004 the newly established Ministry of Roads, Transport and Tourism was put in charge of the industry. Four years later a new government transferred it to the Ministry of Nature, Environment and Tourism. Finally, after elections in mid-2012, the current government formed the Ministry of Culture, Sports and Tourism (MCST), which has a mandate to regulate and develop the country’s tourism sector.

The ministry oversees the MNTC, which is responsible for implementing the government’s tourism policies at the national level, and for promoting Mongolia in international markets.

Provincial tourism boards are responsible for implementing policy in each of the country’s 21 provinces (aimags). The MNTC also provides training and other capacity-building services to private operators, while the MCST oversees the Mongolia Tourism Development Fund, which is used to promote Mongolia in foreign markets. “The fund is mostly spent on international road shows and at international travel and tourism conferences,” said G. Damba, the chairman of the Sustainable Tourism Development Centre (STDC), a local industry organisation.

In addition to these public bodies, Mongolia has various non-governmental and non-profit tourism-focused organisations. As well as the STDC, these include the Mongolia National Tourism Organisation (MNTO), an industry association that carries out destination marketing activities; the Mongolian Tourism Association, which lobbies the government on behalf of the private sector; the Mongolian Responsible Tourism Development Fund; the Mongolia Tour Guides Association; the Mongolian Hotels Association; the Mongolian Tourist Camps Association; the Community Based Tourism Association; and the Mongolian Ecotourism Society, among others.

Planning

As a result of the lack of institutional continuity across successive governments in recent years, many long-term development plans for the sector have fallen by the wayside over the past decade.

While regulations and development plans have officially been in place since the mid-1990s, according to most local participants the industry has been largely ignored by the government until recently. “Until 2004 or so the development of tourism in Mongolia was undertaken almost entirely by private sector players, non-profit institutions and a number of foreign non-governmental organisations,” said B. Indraa, the director of the governing board of the MNTO. Foreign organisations that have funded tourism-related projects include the Japan International Cooperation Agency, the US Agency for International Development and the German Technical Cooperation Agency, among others.

In 2012 the MCST announced a new four-year action plan for the sector. Broadly, the strategy aims to attract a mix of public and private investment to a handful of key niche development categories of tourism, including culture- and history-focused; religious; nature and wildlife; sports and adventure; and dinosaur-related (see analysis). At time of press the government was working to develop further details.

Marketing

Tourism was a major topic of discussion at the Mongolian Economic Forum that took place in March 2013. In a speech at the event, Ts. Oyungerel, the minister of culture, sports and tourism, announced that the government had allocated MNT1bn ($600,000) for tourism marketing in 2013, including MNT500m ($300,000) for promotional activities; MNT200m ($120,000) for international tours and expositions; and MNT300m ($180,000) for advertising. Additionally, the government recently signed a MNT360m ($216,000) contract with National Geographic Traveller, under which the magazine will highlight Mongolia in its coverage.

Year- Round Income

In 2013 the government published the country’s inaugural official tourism calendar in both Mongolian and English. The calendar lists more than 100 cultural and other events, including a number of festivals that take place in the off season. “If we want to try sustainable tourism, we need to have income coming in during all four seasons,” S. Khoshartsaga, head of the department of tourism policy implementation and coordination at the MCST, told local media in March 2013.

Additionally, in early 2014 the government announced a new national tourism slogan: “Mongolia, Nomadic by Nature”. This replaces a number of previous promotional lines, including “Go Nomadic, Experience Mongolia”, “Visit Mongolia” and “Discover Mongolia”, among others. Finally, in June 2013 the government announced that Mongolia had signed on as the Official Partner Country of the Internationale Tourismus-Börse Berlin 2015 conference, which is the world’s largest tourism and travel trade fair. Set to take place in Germany on March 4-8, 2015, Mongolia’s presence is expected to have a positive impact on the country’s tourism profile.

The government’s strategy has attracted some criticism. “The authorities have been more active in the sector in recent years, and have been seeking input from the private sector,” Batbayar told OBG. “Yet so far the state and the private sector have not managed to work together well.”

The number of parties involved in the sector can also make cooperation challenging. “There is duplication of effort among the various governmental and non-governmental organisations,” said Indraa. “The Mongolian tourism industry needs a comprehensive, sustainable development policy that can be implemented across administrations, with input from both public and private sector players.”

By The Numbers

While most local players agree that visitor numbers have jumped substantially over the past decade, Mongolia’s tourist arrivals data is potentially misleading. According to many local players, almost all visitors from China and Russia – who made up 66% of incoming tourists in 2012 – are not tourists at all, and instead entered Mongolia to trade goods. These small businessmen are generally on a tight budget, and spend little money in the country. Similarly, many travellers from other countries that enter Mongolia on business check the “tourism” box on the entry form issued at the airport, despite the fact that they generally spend most of their time in Ulaanbaatar, the capital, and do not take part in the multi-day package tours that sustain most of the local operators and their suppliers. With this in mind, the private sector has been lobbying the government to develop different statistical tools with which to gauge leisure tourism growth in the country.

As of the end of 2012, 475,892 tourists entered Mongolia, up from 460,360 in 2011 and 456,090 in 2010. In 2012 visitors from China accounted for just over 48% of the total, while 17.6% came from Russia, 9.3% came from South Korea, 3.6% came from Japan and 3.3% came from the US. Mongolia also attracts relatively large numbers of tourists from Kazakhstan, Germany, France, Australia and the UK.

According to the National Statistical Office of Mongolia (NSOM), estimates from the first three quarters of 2013 pointed to a slight decline in tourist arrivals for the year as a whole, mainly due to a drop in the number of visitors from China. Mongolia also saw fewer arrivals from the US and Australia in 2013, though the number of visitors from Germany, Japan, South Korea and Kazakhstan increased.

According to a survey carried out by the MNTC in May 2013, the number of visitors to the country is projected to rise by 9% over the coming decade, topping 1m tourists annually by 2020.

Between 700 and 800 tourist companies operate in Mongolia, according to a UN Conference on Trade and Development report published in November 2012. Around half of these are hotels and other accommodation services. There are fewer than 30 three-, four- and five-star hotels in the country. Additionally, according to the MNTC, Mongolia has more than 700 tourist camps, where visitors generally stay in traditional Mongolian felt tents known as gers. The average length of stay for leisure tourists is around two weeks, according to MNTC estimates, while business travellers generally stay for two to four days.

Package Tours

According to MNTC data, a tourist on a package tour in Mongolia typically spends around $190 per day, an independent visitor spends about $120 per day and a backpacker spends around $77 per day. However, in recent years the sector has seen a shift away from package tours, with many incoming tourists preferring to instead book various components of a visit independently.

“In the first three quarters of 2013 we saw an increase in direct bookings of around 30% from the previous year,” D. Altanbagana, the executive director of Active Adventure Tours Mongolia, a local operator, told OBG. “Five years ago it was much harder for foreign visitors to book activities in Mongolia on an independent basis. Now they can log on to the internet and set up their entire trip online.” This shift away from package tours has had a negative impact on revenues throughout the industry. “We have worked to reduce our expenses, but our margins have taken a hit,” said Altanbagana.

Economic Contribution

According to the World Travel and Tourism Council (WTTC), in 2012 the industry’s direct economic contribution in Mongolia was MNT323.5bn ($194m), or 2.3% of GDP. This figure was projected to rise by 7.2% in 2013 and by around 7% annually through 2023. It should be noted that WTTC forecasts are considered to be optimistic compared to projections from other international organisations. The organisation reported that in 2012 the tourism sector’s total economic contribution – which, unlike the direct contribution figure, includes related industries – was equal to around 5.7% of GDP.

Similarly, according to the WTTC tourism directly employed around 2% of Mongolia’s total workforce in 2012, while an additional 3.1% was indirectly supported by the industry. Finally, in 2012 the sector brought in MNT830.4bn ($498m) in foreign direct investment, which was equal to 12% of total incoming investment, according to the WTTC.

Leisure

While data by segment is unavailable, according to most local players 100,000-150,000 leisure tourists visit Mongolia annually. South Korea, Japan and the US are major sources of leisure visitors, though Mongolia has attracted steadily increasing numbers from other Western countries as well.

Most leisure tourists only spend a few days in Ulaanbaatar, the capital, while the remainder of their time is spent primarily in rural areas. With thousands of square kilometres of remote wilderness, Mongolia is a major destination for outdoors, nature and adventure enthusiasts. It attracts tourists interested in trekking, camping, fishing, hunting, cycling, horseback riding, camel treks and birdwatching, among other activities. Both the nature and wildlife segment and adventure sports are considered to be key development areas by the MCST. In mid-2013 the ministry launched a programme to develop walking trails in all 21 aimags, in response to rising demand for hiking and trekking from visitors.

Private operators provide most of the services in this area. “Mongolia has a unique selling point in terms of nature, wildlife and adventure,” said Damba. “It is a remote market, and to really see the country can be more expensive than casual visitors are used to.” Indeed, a majority of the leisure visitors tend to fall into a relatively high-income demographic. “Most of the incoming leisure visitors are 40-65 in age and well established financially,” said Indraa. “They are looking for a unique experience in Mongolia, and they are happy to pay for it.” With this in mind, the country is generally marketed as a high-end adventure destination, particularly in Western countries. This strategy is thought to be one of the most promising ways forward for the market. Developing a sector that caters to a small number of high-value visitors is considered to be the long-term goal of both the government and the private sector.

Mining

The rapid expansion of mining in recent years is seen by some as a threat to the development of nature and adventure tourism. Mining activity is ongoing in a handful of areas – largely in the eastern Gobi – that have long been popular destinations. “The mining sector has the potential to decrease the value of Mongolia’s wilderness as a tourist product,” said Damba.

In addition to altering the country’s natural environment, which is considered a primary tourism asset, mining activity could potentially result in the destruction of key historical and archaeological assets. The Gobi desert, for example, is one of the world’s richest deposits of as-yet undiscovered dinosaur fossils, many of which might be destroyed by mining-related blasting and other activities. “Land use regulations need to be carefully reviewed to ensure that the country’s natural assets are protected,” Damba told OBG.

Cultural & Historical

Mongolia’s rich cultural history is also widely considered to be a major asset. The annual National Naadam Festival, which is financed in large part by the government, serves as a showcase for a wide variety of traditional Mongolian activities, including wrestling, horsemanship, archery, music and visual arts of various sorts. The festival attracts a considerable number of visitors to the country, and is a highlight of the annual tourist calendar. Over the past decade and a half private tour operators have organised a handful of additional festivals, many of which take place during the winter months, and were specifically designed to attract tourists during the off season (see analysis).

Leveraging Mongolia’s cultural heritage in support of the tourism industry has been a key objective of both public and private sector development initiatives in recent years. In March 2013 the MCST announced that it planned to invest in several niche tourism segments, most of which fell within the cultural and religious heritage category.

A number of festivals highlight Mongolian culture, including the Golden Eagle Festival, which takes place annually in remote western Mongolia, and the Mongolian Camel Festival, which is held in the Gobi every year. Many of these festivals also feature demonstrations and performances of traditional Mongolian dancing and music.

Ulaanbaatar is home to a variety of museums, including the National Museum of Mongolian History, the Mongolian Natural History Museum and the Zanabazar Museum of Fine Arts, among others. The government is currently constructing a new museum, which will host displays of some of the state’s 500-odd dinosaur skeletons. Additionally, in 2013 Starsoft, a local firm, announced that it planned to construct a wax museum in the capital, featuring life-size wax likenesses of famous Mongols from the nation’s long and illustrious history.

Other Segments

Business travellers are an increasingly important demographic. According to WTTC data, business travel spending accounted for 20.9% of total travel spending in Mongolia in 2012, and this is expected to grow for the foreseeable future. In addition to researchers and management-level independent business visitors, who generally stay in the country for more than a week, Ulaanbaatar has hosted a number of conferences in recent years, largely as a result of the rapidly expanding mining sector and related investment activity.

Indeed, the meetings, incentives, conventions and exhibitions (MICE) segment has grown rapidly over the past decade. Major annual conferences held in the capital include the mining-related Discover Mongolia; the Mongolia Economic Forum; and conferences dedicated to the domestic coal and metals industries, among others. The capital has only a small amount of grade-A conference space, almost all of which is in a handful of major hotels, including the Blue Sky Hotel and the Kempinski. With a considerable amount of new hotel capacity expected to come on-line in the coming years, so long as the domestic economy continues to expand the MICE segment could become a major economic contributor.

Other sources of business for local operators include passengers travelling through Ulaanbaatar on the Trans-Siberian Railway and outbound Mongolian tourists. The former generally spend a few days in the capital and surrounding areas before climbing back on the train. Unlike the bulk of incoming leisure tourists, many Trans-Siberian passengers come through Mongolia during the off season.

Wealthy Mongolians represent a small but rapidly growing source of business. Local tour operators have reported an uptick in outbound travellers in recent years, particularly during the long, cold winter months, when many families book lengthy stays in warm-weather destinations, including South-east Asia and Southern Europe. Some local tour operators have established partnerships with foreign companies to facilitate outbound travel for locals.

Hotels

In conjunction with the steadily increasing tourist traffic in Ulaanbaatar over the past decade, the capital has seen a dramatic rise in both the number and quality of hotels in operation.

According to NSOM data, as of the end of 2012 there were more than 20 three-, four- and five-star hotels in Mongolia, almost all of them in Ulaanbaatar, which is the primary point of entry for most incoming leisure and business tourists. The country is also home to many one- and two-star properties, and a considerable number of guest houses and other types of informal, low-cost lodging.

Occupancy rates at the top end of the market are highly seasonal, with many of the best hotels operating at 90-100% capacity during the busy summer season and below 60% for the rest of the year. Leading top-end properties include the Kempinski Khan Palace, the Blue Sky Hotel and the Corporate Hotel, among others. The Kempinski opened for business in 2005, was the country’s first internationally branded hotel, and remains a popular choice for high-end leisure and corporate business visitors. The Blue Sky, meanwhile, is located in the tower of the same name, which is the tallest building in the capital.

New Arrivals

Spurred on primarily by the mining boom that kicked off in 2011, a number of major new hotels are now under construction. These include the Shangri-La Hotel, which is currently being built on a joint venture basis by the Hong Kong-based Shangri-La Hotels and Resorts group and the local firm the MCS Group; a new Mövenpick property, which was announced in mid-2013; and the Best Western Tuushin Hotel, which is being built by the US-based Wyndham Hotel Group.

A number of ongoing hotel projects have been put on hold since 2012, as a result of the economy levelling out somewhat and a series of minor setbacks in the development of the country’s mining sector.

Outlook

While major challenges remain, many local operators are broadly optimistic about the sector’s long-term potential. As of late 2013 the private sector was in discussions with the MCST and other government organisations about revising and updating the country’s tourism law. Provided this effort moves forward as expected, the sector could benefit from a raft of new legislation before the end of 2014. “The new law will likely include many new licensing rules and regulations, which should result in a major improvement in quality of service throughout the sector,” said Altanbagana. “So far the government seems to be listening to us and taking our recommendations seriously.” With these potential upcoming changes in mind, and considering the expected rise in incoming tourists over the course of the coming years, the future looks bright. “Mongolia is a huge, diverse country, with many major tourism assets and growing capacity in most areas of the sector,” said Batbayar. “There is a lot of money to be made in this industry right now, and I think that it will only get better over the coming decade.”