With
a 40 percent rise in the first quarter of 2015, China’s box office is, for the
first time, larger than North America’s, making it the largest market for
cinema in the world. Although China is home to more than 1.3 billion citizens,
almost four times the population of the US and Canada combined, it remained the
world’s second largest cinema market due to a lack of infrastructure in the
form of cinemas. Since early 2014, construction of cinemas in China has been as
high as 13 per day, which has massively increased the opportunity for Chinese
audiences to see films.
Innovative
Chinese companies, such as the Dailan Wanda Group, noticed the gap in the
market and invested massive sums of money building cinemas to serve what was
previously a highly under-screened country relative to population. The purpose
of this essay however, is to examine the innovative actions these Chinese
companies are performing on the other end of the film value chain, in the
development and production areas, and how they’ve invested in foreign, mostly
US-based, companies to fill their new cinemas with content. Several case
studies following Chinese investment in individual films, specialty services
firms, other forms of media, and foreign companies are examined below, but
first a short analysis of the history regarding Chinese/western business.
Doing
business with China was mostly impossible in the mid-twentieth century until
the foreign policy of the Nixon White House successfully opened relations.
Since then a large amount of trade has taken place between China and the west,
reaching never-before-seen levels in the late 1990’s when it seemed as though
everything had a “made in China” label on it. This was due to cheap Chinese
labor and China’s access to many natural resources necessary for materials
production.
By
the early 2000’s China was completing its journey from a developing nation to a
fully industrialized one, eventually outpacing Japan as the world’s second
largest economy. With new economic power and the rise of e-commerce, many
western businesses, including Hollywood, looked to move into China to find new
customers. There was one small problem however; the Chinese government wouldn’t
allow it.
Despite
being a highly successful, modern economy, China was and still is a communist
country and not a free market. Therefore many of the proposals for western
company’s expansion into China were met with refusal. This was unfathomable to
many westerners who never considered that a communist government could be so
economically successful. Instead they chose to remember the communists of the
Eastern Bloc who, in the late 1980’s, failed so spectacularly that all of those
countries no longer exist.
Western
businesses failed to see the challenge of the Chinese market both politically
and culturally and assumed they could operate there just the same as they had
been operating everywhere else. The west was operating in a “push economy,”
where a company itself can push into a new market. China however, was operating
in a “pull economy,” only pulling in the business it wanted.
One
of these businesses pulled into the Chinese market was Hollywood, the global
leader in terms of cinema content quality and marketability. China had a weak
film industry compared to neighboring Hong Kong, and required screen content to
show in its slowly expanding network of cinemas. As a result, the Chinese
government instituted a quota system for films, in which only a certain amount
of films would be allowed in each year, as well as strict content guidelines
making films subject to censorship. Because the Chinese quota was far below the
number of films being produced by Hollywood and other western film producing
countries, China could be very picky on which films were selected to play. Only
the films deemed suitable were “pulled” through to Chinese cinemas.
The
Chinese quota system is inherently limiting to foreign produced films but there
is another way into the Chinese market that circumvents it: co-production.
Instead of making a film with foreign funds and selling it to a Chinese
distributor, as is often done in other territories, foreign films funded with a
substantial upfront investment from Chinese distributors can be released in
China under the same rules as local Chinese films. Therefore, rather than a
foreign producer “pushing” his or her film to a Chinese distributor, the
distributor has the power to “pull” the films it wants to make into the Chinese
market.
This
mostly occurs with large-scale action pictures such as Iron Man 3, Transformers: Age
of Extinction, and Furious 7, because
that’s what selling best to local Chinese audiences. Following the success of
these films, several new Chinese/Hollywood co-productions have been announced
including a sequel to DreamWorks’ Need
for Speed, itself a major hit in China and an import under the quota
system. The sequel will feature China as it’s primary location as well as
several Chinese actors in prominent roles.
The
first Need for Speed film was typical
of a Hollywood mini-major, financed by DreamWorks, produced entirely in the US
and featured American stars Aaron Paul and Michael Keaton with British actress
Imogen Poots. The film played moderately well in the US but found its largest
audience in China, grossing the equivalent of $66 million. That number has
enticed three prominent Chinese companies: Jiaflix, China Movie Program Channel
and 1905 Pictures to enter into a co-production with DreamWorks for the sequel.
These are the same three companies that co-produced Transformers: Age of Extinction with Paramount in 2014, which
grossed $330 million worldwide, $220 million from China alone. The promise of a
more Sino-Centric sequel to the first Need
for Speed film demonstrates the faith these companies have in the franchise
and clearly demonstrates the evolution of Hollywood films as they become
increasingly less American and more international to meet the demands of a
global audience and sources of global finance.
China’s
co-production activities are not limited to Hollywood alone. 2015’s European
Film Market saw the debut of Jean-Jacques Annaud’s Wolf Totem, a Chinese/French co-production based on the 2004
Chinese novel of the same name. Such a production shows how the nature of
Chinese co-productions are moving further away from the styles of their
co-producing partners and closer to that of native Chinese cinema. Whereas Transformers: Age of Extinction was a
Chinese co-production of a Hollywood film, Wolf
Totem is a French co-production of a Chinese film. This is likely to be the
case with the Need for Speed sequel
as well, where the final product is closer to that of a native Chinese film
rather than a Hollywood film. Therefore, China is moving toward a business
model that pulls in outside finance for the funding of native content rather
than one that pulls in outside content for local distribution.
With
the Chinese film industry transitioning from an import economy to an export
economy, it requires access to resources that work on a global scale and the
best place to find those resources is Hollywood, the most established and
mature industry in the world. Therefore, Chinese companies such as the
aforementioned Jiaflix, China Movie Program Channel, and 1905 Pictures, as well
as large entertainment conglomerates like Alibaba, Hunan TV, Huayi Bros. Media
Group, Wanda Cinema and Tencent Media are finding Hollywood firms to partner
with. These partnerships started with co-financing individual films but are now
evolving to include direct investment by Chinese companies in Hollywood firms.
Q3
and Q4 of 2014, and Q1 of 2015 saw a huge amount of press announcing various
deals between Chinese companies and Hollywood producers but very few of them
actually happened. In his article in The
Hollywood Reporter Michael Wolff writes about how the large amount of
Chinese interest in Hollywood does not translate to a similar amount of money
being invested in the industry. He attributes this to a cultural disconnect
between Chinese and American business practice. He writes:
“The Chinese approach often is to show up and say: "We'd like
to buy your company. Show us your books." The native response is,
"Make me an offer, and no, you can't see my books." The result often
is a nondeal deal, a willingness to begin a relationship but a resistance to
make the first move — producing a term sheet that hardly commits anyone to
anything.” (Wolff, 1)
Wolff sites an anonymous executive
who has had many business dealings with Chinese investors and describes how in
China it is common practice to meet, discuss deal terms, take press photos,
issue a press release and then decide whether or not to move forward with the
deal. “They call it caution, we call it reneging.” (Anonymous, Quoted in:
Wolff, 1) This has resulted in many supposed Chinese/Hollywood partnerships,
few of which ever came to fruition.
Former Warner Bros. President Jeff
Robinov announced a partnership with China’s Huayi Bros. Media Group and his
newly formed production company Studio 8. Huayi and Studio 8 released a term
sheet along with major press coverage, which seemed to cement the partnership.
Later however, Huayi announced that instead of providing Studio 8 with the $120
million in capital it had outlined in the term sheet, they would instead open a
Los Angeles office of their own to evaluate films for investment on a per-film
basis.
This would have been a much
different type of investment in the Hollywood infrastructure than the one
previously outlined. It could have proven more advantageous for Huayi Bros, as
having a Los Angeles office without any direct ties to US companies theoretically
gives them the freedom of choice in which American films to invest. However,
not making a direct investment in Studio 8 would have limited Huayi Bros.
access to projects as well, as they have no established network in Hollywood.
Although Studio 8 is a new venture,
seasoned Hollywood professionals whose job it is to know exactly which films
are being bought and sold worldwide run the company. The largest advantage of
direct investment in a Hollywood company is the access to that company’s
network. Huayi’s announcement suggested they were taking the risk of finding
their own way in Hollywood.
This is actually the second time
Huayi has announced plans to partner with a Hollywood company and failed to
deliver. In 2011 the Hollywood Reporter announced that Legendary Entertainment,
the financing and production entity behind The
Dark Knight and Inception, was
opening an office in Hong Kong and would develop “global films” with Huayi.
Warner Bros. would distribute the films worldwide except for China, where Huayi
would serve as distributor. It was in effect a co-production agreement between
Huayi and Legendary, albeit with a condition for Huayi to become a major
shareholder in Legendary’s Hong Kong subsidiary: Legendary East.
Huayi’s deal with Legendary was
never finalized and Huayi then turned to Studio 8 for a second attempt at a
Hollywood partnership. Now, after a whirlwind of press coverage, speculation
and doubt, Huayi has finally succeeded in investing in a Hollywood company: STX
Entertainment, owned by Bob Simonds.
Huayi is actually STX’s second major
investor from China. In 2014, a Chinese private equity firm called Hony Capital
invested $65 million in the startup company. Michael Wolff highlights this
event as one of the key moments in the history of Chinese/Hollywood collaboration
in his article for The Hollywood Reporter,
but disclaims that it’s lacking in significance because Hony Capital is not a
media company. Therefore the transaction was purely financial and it’s very unlikely
that Hony will have any creative influence over the team at STX.
Because STX was already sufficiently
bankrolled by an outside investor, Huayi Bros. was not responsible for
committing upfront capital to the company itself and instead invested in STX’s
slate of 18 films. This changes the arrangement that Huayi had negotiated with
both Legendary and Studio 8, where the deal was for Huayi to invest directly in
the respective companies. This would have meant a significantly higher risk to
Huayi as it would have been a large shareholder in Legendary, and later Studio
8. Therefore, when Hony took on the risk of owning shares of STX, a relatively
low risk for that type of company as it has holdings in many industries, Huayi
was free to enter into a lower risk agreement that accomplished the same goals
as the previous two deals, minus the risk.
Investing in a slate of films rather
than a single company helps manage the risk associated with film production and
distribution. Just like real-estate investments or those in the stock market,
investment in films works best when the investor holds a diverse portfolio.
Therefore, spreading out a large investment across 18 films rather than
investing it all in a single company helps maximize the investor’s chance of a
good return.
This change in risk holding could
explain why the previous deals with Huayi, and others that failed to
materialize with other companies, were never completed. It seems that the film
industry is a risky business on both sides of the Pacific and although
companies on both sides need what the other side has to offer, it’s not worth
adding a significant amount of risk for. Better to let the bankers handle those
commitments.
That was the exact sentiment of
Studio 8’s owner Jeff Robinov after his deal with Huayi fell apart. After
ceasing discussion with Huayi, Robinov turned to Chinese conglomerate Fosun
International, a firm similar to Hony Capital that has diversified investments
in many areas. Fosun had invested in a film company before: China’s Bona Film
Group, but had not made any overseas investments in that business. The result
was a $200 million investment from Fosun into Studio 8, a number that allows
them to control nearly two thirds of the company’s shares.
Both Fosun and Hony were able to
invest where the Chinese media companies were not because of their diversified
investments in other businesses. Therefore, it seems as though Chinese
investment in Hollywood is poised to come from financial companies rather than
the media companies. This makes sense given the way the different types of
companies are able to handle risk. The more risk a company takes on, the more
diverse their investments need to be.
It is because of this arrangement
that Chinese broadcaster Hunan TV was able to come to a co-financing and
distribution deal with Hollywood Mini-Major Lionsgate. A deal so large, it nearly
doubles the $200M figure invested by Fosun in Studio 8. Lionsgate is already
successfully bankrolled by a combination of equity investment and debt finance
and has been in the film business far longer than start-ups like Studio 8 and
STX. Therefore there was no need for a private equity firm to bankroll the
company as it has consistently proven itself to be a going concern.
With no need for outside investment
in the company, Lionsgate was a prime candidate for a co-financing and
distribution deal with a Chinese media company, an opportunity seized by Hunan
TV. Hunan is generally considered to be China’s most progressive broadcaster
despite being state owned and they are the second most watched channel in
China. Hunan is also a parent to several other media companies, including
feature film producers and distributors Leomus and TIK Films, as well as Hunan’s
pay TV network, Hunan CATV.
Under the terms of the agreement,
TIK Films will front 25% of Lionsgate’s feature film production budgets, a
number that could be as high as $375 million. TIK and Leomus have the option to
distribute four of the co-financed films in China. Lionsgate will also
co-develop and co-produce Chinese language films with TIK and Leomus with
Lionsgate handling distribution of those films outside the US and China. There
are also rumors that the Hunan/Lionsgate deal could evolve to include theme
park entertainment as well.
This sounds like a triumph of
international capitalism but ultimately Hunan is a state-owned enterprise and
some very specific deal points had to be made in order to come to an agreement.
China’s strict censorship and regulatory requirements dictate strict guidelines
for films. Hunan’s power may go as far as preventing certain Hollywood stars,
whose political views differ from the Chinese government, from appearing in
Lionsgate films for release in China. Furthermore the Renminbi is a currency
with strict exchange regulations. Partnering with Lionsgate required Hunan to
open a separate Delaware corporation specifically for currency exchange.
Despite these restrictions however,
both parties seem to have agreed that the partnership between the two entities
is worth the trouble. To date this is the largest investment from a Chinese
company into a Hollywood firm, which Lionsgate is happy to receive due to the
market exploitation opportunities it opens for them. Why though, are Chinese
companies so eager to invest in Hollywood? There are two possible answers.
In recent years China has seen the
emergence of a healthy middle class. No longer is China a nation of poor famers
and factory workers, with its new position as the world’s second largest
economy the Chinese are developing a more sophisticated consumer culture. A
prime example of this trend is in the automotive industry. As few as ten years
ago, cars in China were reserved for the wealthy while ordinary people made
their way on motor scooters or bicycle. As the Chinese economy expanded
however, the industrial complex matured enough to begin to manufacture domestic
cars rather than relying exclusively on imports. The first Chinese cars were
unreliable, unsafe and impractical. Now though, the manufacturers have learned
from experience and the quality of Chinese cars has nearly caught up to other
car-producing countries. This increase in quality has increased the demand for
quality by consumers. No longer will a middle class family settle for a poorly
built car when there are much better options in the market. The same is true
for film.
Film technology and technique was
largely developed outside of China, meaning that the Chinese had to rely on
imported technology to create screen content. With the expansion of the economy
has come a surge of technology and practices developed in China. The native
film industry of China was able to mature just as the automotive industry was,
which has now increased consumer demand for product that is both native and of
high quality. The Hollywood studio system has reigned supreme in the market for
decades due to its development of the best talent and technology. Now that
Chinese audience are demanding more from their films and television, it seems
as though Hollywood is the obvious choice help Chinese companies bring it to
them.
China wants to be able to offer
native films to its audience the same way Hollywood is able to offer them to
theirs, they only want to be limited by what’s possible, not by what’s possible
in their country. Despite the rise of the internet and the current information
society, Hollywood’s best practices for development, production and
exploitation remain a mystery to anyone working outside the system. The only
way for one to learn Hollywood’s secrets is to climb the career ladder or to
buy in at a higher level. Huayi Bros. and Hunan TV have chosen to buy in.
The next reason that China wants to
become a part of the Hollywood infrastructure is because of Hollywood’s success
with the international market. Generally speaking, Hollywood films travel,
Chinese films do not. China is looking to change that with its two new
partnerships with Hollywood. As mentioned earlier, one part of the Hunan TV
agreement was for Lionsgate to distribute Chinese films internationally,
something that the Chinese companies haven’t been able to do on the same scale
as Hollywood.
China is looking to become a global
leader in film production and distribution, they are not content with having a
profitable native industry, which is why investment in Hollywood will continue
until that goal is realized. An anonymous source quoted in an article by Variety Asia Bureau Chief Patrick Frater
states:
“From now on [the Hollywood China connection] is going to get real,
ultimately leading to the acquisition of a studio.” (Annonymous, Quoted in Frater, 1)
In all likelihood this is a real
possibility as the studios both want access to the Chinese audience and have
the best collection of film talent and technology in the world. A Chinese-owned
Universal or Paramount could increase the value of Chinese films worldwide
while simultaneously providing a reliable source of funding to their slate of
films. It could be the first step toward a truly global entertainment company.
It is very possible that the world is headed for an era where instead of the
two film industries being the Studio and Independent industries, they are
instead the Worldwide and Regional industries. Two distinct industries for
screen content, one global, one local.
Works
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Coonan, Clifford. 'Lionsgate Unveils Film Financing
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Apr. 2015.
Coonan, Clifford. ''Need For Speed' Sequel In
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Coonan, Clifford. 'Universal Film Chief Jeff Shell:
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