Expanding Japanese Hotel Concept Employs 60+% Less Labor

Thinking Points

  • A new hotel brand under major travel agency HIS (TSE: 9603) is eyeing rapid expansion over the next 5 years.
  • Dubbed the “strange” hotel, Henn na Hotel is operated by robots and employs less labor compared to peers.
  • Parent company HIS plans on taking a similar approach to its Dutch-inspired theme park.

A three year old hotel brand operated by major Japanese travel agency HIS (TSE: 9603) is looking to aggressively expand its footprint. Starting with 1 experimental hotel in 2015, the company expanded its hotel count to 4 today, and aims to reach 100 in the next 5 years. Dubbed the “strange” hotel, Henn na Hotels is operated by robots. The check-in counter, for one, is manned by one humanoid and a couple dinosaurs.

Source: Henn na Hotel (Japanese source)

I read about the strange hotel back when it was still new (around 2016). In fact, media interest on the robot operated hotel was high, both in and out of Japan. I figured it was a fad and never paid close attention. Then yesterday, I read a Nikkei interview on HIS’ CIO Naomi Tomita, which explained the strange hotel from an operational angle. This caught my interest.

The interview

In the interview, Naomi commented about the strange hotel and its focus on productivity. In talking about productivity, he discussed his views on Artificial Intelligence (AI). For me, the term AI is in the same camp as bitcoin, blockchain, and several other buzzwords that seem to be thrown around in every other sentence by anybody remotely involved in the stock market or business media. Put differently, when I see these words in the headline of an article, I avoid the article.

So back to Naomi’s views on AI. He more or less defines it as man-made intelligence or knowledge. So anything related to IT would fall under the broad AI category. He doesn’t explicitly comment on deep learning, or what I’d consider the more “buzzword-y” part of AI – the part where people are afraid of robots becoming too smart and taking over the world. Instead, he points out that the key difference between AI and human, in his view, is the human’s five senses. Naomi thinks AI will have a difficult time replicating that. Additionally, he comments that AI isn’t suited for responding to unexpected situations.

This was refreshing to me, mostly because I share a similarly mild view on AI. Though my background in computer programming is (very) shallow, I learned that computers are highly proficient at solving logical problems. The whole idea of computers developing consciousness seems like a stretch for a machine that can crunch numbers. Sure, you can teach robots to recognize certain facial expressions, which may be associated with certain human feelings. And sure, you can teach robots to pick up on these clues on its own. At the end of the day though, it’s different ways to collect, crunch, and respond to data. I doubt if any sort of data crunching would end-up with robots doing human things like acting on intuition.

So Naomi and I both don’t think AI is this super scary, next level intelligent thing. It certainly is useful though, and Hen na Hotel uses it. Naomi mentioned that, in operating Henn na Hotel, he realized that it is better to avoid using humanoids (robots that look just like humans) at the check-in counter. Interacting with a small dinosaur robot is like walking up to someone else’s pet, whereas interacting with a humanoid can be a little creepy for some customers. In any case, my main takeaway from the interview is the “strange” hotel isn’t a result of a hotel brand riding the AI/robotics wave, but a result of thoughtful use of robots and AI to improve productivity.

More about the operations

At the grand opening of its first location in 2015, the hotel had 30 staff members. By mid-2017, they were down to 7. The receptionist, porter, and lawn mower are all robots. You name it, it’s a robot. As a result, labor cost is about a third of similarly sized hotels.

In a Wedge Infinity interview, Huis Ten Bosch and HIS CEO Hideo Sawada didn’t disclose details about how much each robot costs. Instead, he explained that even if Hen na Hotel paid 5 million to 8 million yen (about $50~80k USD) to install robots, it’s about the equivalent to one person’s annual salary. After one year, the robots are paid for with minimal operating expenses going forward. Currently, many robot companies ask Hen na Hotel to use their robots at no charge.

It doesn’t stop there. The hotel also gives you the option to get rid of that room key card that everybody seems to lose. Facial recognition can be used to gain access to your room instead. The cloakroom is pretty neat, too. A robotic arm places  your personal belongings into a small locker:

Source: Henn na Hotel (Japanese source)

The rooms are about equivalent to a standard business hotel in Japan: compact and clean. The little animal-like object you see on the bedside table in the picture below is Churi. I’m not sure whether Churi knows English yet, but she handles simple tasks like setting the alarm clock, turning on lights, and adjusting room temperature by voice command.

Source: Henn na Hotel (Japanese source)

If you go to the original Hen na Hotel, located within the campus of Huis Ten Bosch theme park in Nagasaki, you get to experience the full extent of new robotics. Huis Ten Bosch invites companies to experiment and gain feedback on their robots. Among the robots you can see is a fleet of hybrid drones developed by none other than HIS’ own CIO Naomi Tomita.

Huis Ten Bosch and the Henn na Hotel

The concept behind Henn na Hotel is continuous change.  “Henn” is actually a playful twist on the Japanese Kanji for change, which can also mean strange, depending on how it is used.

The robot and productivity movement is in play with Huis Ten Bosch too. The company announced its plans to reduce its 1,700 operating staff down to 600 over the next 3 years through implementation of robots. The 1,100 personnel will be moved to new projects and other business areas.

The history of Huis Ten Bosch is an interesting one, which CEO Hideo Sawada explained in an event last year (Japanese source). In 2010, after 18 years of losses and bankruptcy, the mayor of Sasebo City (where Huis Ten Bosch is located) basically harassed and begged Hideo about turning the flailing theme park around. Why Hideo? Having turned around a variety of businesses, including a Mongolian bank and a yacht harbor in Japan, Hideo had built a reputation as a turnaround meister.

After declining to turnaround Huis Ten Bosch the first two times, Hideo told his secretary to decline further appointments with the Sasebo City mayor. Then, as it turns out, the mayor was waiting for Hideo at the office early in the morning with no appointment to ask again for Hideo to tackle the turnaround. Hideo caved in.

To give you an idea, Tokyo Disneyland is 15 minutes away from Tokyo train station. The Tokyo area population is something like 20~30 million. In contrast, Huis Ten Bosch covered a larger area than Tokyo Disneyland, yet Sasebo City and nearby Nagasaki City combine for less than a million people.

After a series of hardships, ranging from lowering entrance fees down to free in the evenings to copycat festivals and attractions, Hideo came to a realization that they needed to focus on being either number one or the only one in something. In other words, either have the biggest or best in something, or be weird. Today, the theme park is known for its enormous scale illumination festival (13 million lights) in the winter and rose festival (100 million roses) in early summer. In this context, the Henn na Hotel project seems like a natural fit.

Since Hideo decided to take on the Huis Ten Bosch turnaround, the theme park has become a significant profit generator for HIS. Today, the Huis Ten Bosch Group accounts for about 40% of HIS’ operating profit.

Takeaways

Frankly, I’m not familiar with the rest of HIS’ businesses and have not looked at any of the company filings at this time. I read Nikkei’s Naomi Tomita interview and went down the rabbit hole of reading an endless stream of articles related to Henn na Hotel. In doing so, it became apparent to me that Henn na Hotel is operated as a business, not as a ride on the robotics trend (though I’m sure they benefit from it). It seems to me like the management team has the right mindset. Assuming revenues remain at similar levels for Huis Ten Bosch and Henn na Hotel (on a per hotel basis), we can probably expect respectable earnings growth from both through tangible productivity improvements. Might be worth a look!

 

Clayton Young

Author: Clayton Young

Hi! I’m Clayton. My value investing journey began in 2012 during my college days. It was not until recently (2016!) that I decided to leverage my Japanese language skills to research Japanese equities. I hope to provide valuable insight on Japanese companies to the English-speaking world through this blog!

Clayton Young

Author: Clayton Young

Hi! I'm Clayton. My value investing journey began in 2012 during my college days. It was not until recently (2016!) that I decided to leverage my Japanese language skills to research Japanese equities. I hope to provide valuable insight on Japanese companies to the English-speaking world through this blog!

2 thoughts on “Expanding Japanese Hotel Concept Employs 60+% Less Labor”

  1. I’m nowhere near the first to say it, but perhaps Japan is realizing robots may be part of the solution to the population problem.

    I checked out the members section of the site and it is fantastic. Also nice to see there is a lot of comment activity.

    1. Hey Brian,

      I’m curious to see how far they can take the robots. Fanuc already has an all-robot production facility with no lights or air conditioning.

      Glad you like the member section! Content will be coming soon. Let me know if you have any suggestions on what to add 🙂

      Cheers,
      Clay

Leave a Reply

Your email address will not be published. Required fields are marked *