Starwood Hotels will oversee the investment of $5 billion to build 35 new Sheraton hotels by 2013 -- half of them in China, the company told Reuters.

Most of the money will come from individual hotel developers and owners. Operators such as Starwood and Marriott International franchise their brands and manage hotels but own very few of them.

Of the $5 billion, about two-thirds will be spent outside the United States, said Hoyt Harper, who directs the Sheraton brand worldwide, in an interview.

The new spending is on top of the $6 billion the company has already spent overhauling Sheraton, and signals the importance of Starwood's oldest and largest brand even as it focuses on operations outside the United States.

Like its rivals, Starwood is vigorously pursuing growth in China. But Starwood has made international expansion its main selling point in recent years, even hosting its most recent earnings conference call from Beijing.

The company has 34 Sheratons planned for Greater China -- which includes Hong Kong, Taiwan, Macau and Mongolia -- over the next several years, slightly more than half its current portfolio of 65 hotels there.

Marriott has 41 hotels in China but has a market capitalization of $15.21 billion compared with Starwood's $11.58 billion.

China is a growth story for hoteliers, said Deutsche Bank analyst Chris Woronka. It's still fairly early in the game. It's about distribution, it's about getting their brands in the right places over there.

The $5 billion will build only new hotels and does not include the millions that will be spent to renovate Beijing's Sheraton Great Wall, the first non-Chinese hotel built on the mainland, Harper said. The hotel's upgrade will begin in the middle of 2011 and end the following year.


As China's economy and infrastructure expand away from its coast, foreign hotel operators are following it both to the west and to smaller Chinese cities which still may contain millions of people.

We're moving inland, and from the gateways to the second and third-tier cities, Starwood Chief Executive Officer Frits van Paasschen said in a separate interview.

China's economic growth is creating a newly mobile middle class, prompting hotel companies to think beyond luxury towers to accommodations for the traveler heading to smaller cities on a smaller budget.

Starwood's middle-market offering is Four Points by Sheraton, whose selling point is its lower rates, while the original Sheraton offers restaurants and gift shops.

There are 11 Four Points hotels on the ground in China and 14 planned for the next four years.

Four Points by Sheraton is giving us a place to grow in places where there isn't enough opportunity to build a higher-end hotel, van Paasschen said.

Four Points is also the brand Starwood would use to implement the franchise model instead of the management model used in all its Chinese properties, van Paasschen said.

As manager, Starwood collects fees in addition to a percentage of revenue and retains greater control of the hotel bearing one of its brand names. Marriott manages all of its China hotels.

Franchising is riskier, but facilitates faster growth, so it makes sense that Starwood might consider it for Four Points, Deutsche Bank's Woronka said.

Four Points could be a lot bigger than it is today, he said. They're willing to franchise that because it's not their flagship brand.

Wyndham Worldwide , the biggest U.S.-based hotelier in China, franchises most of its hotels in China and all five of its brands that operate there: Days Inn, Howard Johnson, Ramada, Super 8 and Wyndham.

Wyndham has 288 properties in China, including 179 Super 8s and 32 Days Inns, both of which are economy brands.

United Kingdom-based Intercontinental Hotels Group PLC , the world's top hotelier by room count, told Reuters in October that it recently signed its first two franchise deals in China, both involving Holiday Inn Express outlets, one of its more basic brands.

The company said it would like to see a quarter of its business in that segment run by franchisees in the next three to five years. [nTOE69D05E]

InterContinental Hotels has 132 hotels in Greater China, including Hong Kong and Taiwan.

(Reporting by Helen Chernikoff; Editing by Dave Zimmerman and Richard Chang)