The US and China are trying to tie the knot with new film deals, but will politics and culture intervene?
Would Die Hard still be a classic hit if Jet Li had played the lead role? Would it have made a difference if Spiderman had been set against the backdrop of the Great Wall? And could Zhang Ziyi have played Keira Knightley’s role in Pirates of the Caribbean. If everything goes according to plan, we’ll find out soon.
In mid-April, Walt Disney Co. announced that the third installment of its wildly-successful Iron Man movie series will be a co-production with Beijing-based DMG Entertainment. The percentage breakdown of investment has not yet been released, but Iron Man 3 is sure to have enough Chinese money in it to get it past the government’s stringent imported film quota.
Less than a week after that, director James Cameron arrived in Beijing. He is said to have met the state-owned China Film Group to discuss the potential of making sequels of his blockbuster movie Avatar as Chinese co-productions. Cameron, whose films have scorched box office charts in China, is unlikely to ignore the power to circumvent China’s film quota policy.
That quota, originally set up to protect the local film industry, has become less stringent in recent months. In February, China’s Vice President Xi Jinping signed an agreement in Los Angeles to raise the number of foreign films allowed in to the country from 20 to 34 each year. It also raised the foreign filmmakers’ share of mainland China’s box office takings from 13% to 25%.
Last year, China’s box office set records at RMB 13 billion ($2.1 billion), up 28.9% from 2010. Of that, foreign releases took roughly RMB 6 billion, according to data from the State Administration of Radio, Film and Television. Across the Pacific, things didn’t look as rosy – a report released by the Motion Picture Association of America showed that ticket sales from US and Canadian theaters had slipped by 4% to $10.2 billion.
With declining audiences in the West, it’s no surprise that Hollywood directors are turning the spotlight on the East for new opportunities. “Every executive in America’s film studios is fascinated by the growth and potential of the Chinese market,” says Jason Squire, who teaches courses on the movie business at the School of Cinematic Arts at the University of Southern California. “I am convinced that in the next five years, the amount of money made on movies in this market will make China the number one market in the world.”
China has a booming box office and Hollywood has the knowhow and the means to make great movies. It seems like a match made in heaven. What is not clear yet is whether the two will live happily ever after or end up heartbroken.
Cashing in on Culture
China’s film industry is getting tremendous support from the government’s 12th Five-Year Plan (2011-2015), which aims to increase the share of culture in the GDP by at least 5% by 2015. The goal is to increase the added value of cultural industries by 20% a year. Currently China’s cultural industries account for less than 2.5%. This is a stark contrast to countries like the US where they account for more than 20% of the total GDP.
From the get-go, Beijing’s plan to boost culture had striking effects on the capital market. Cultural enterprises, which are usually slow-moving, began to gain momentum in 2011, mergers and acquisitions took place among film companies and media outlets, and many listed on the stock exchange. Fourteen cultural industry-orientated equity funds were launched, with a collective plan to raise RMB 45 billion.
By October 2011, China’s commercial banks held a total balance of RMB 230 billion loans for the cultural industry, according to a report issued by the China Center for Information Industry Development, a Beijing-based consulting firm.
The Five-Year-Plan also offered tax breaks to cinema builders, and last year alone, 800 new cinemas popped up. Many started offering high-definition and 3D capabilities and according to Entgroup, a Beijing-based firm that researches the Chinese entertainment industry. China’s famously fast pace of construction meant that around 8.3 new screens were set up every day. For companies like IMAX, business started prospering; and overnight China became the second-largest market for the picture format after the US with roughly 25 IMAX theaters located throughout the country.
However, this thriving market is dominated by Hollywood blockbusters instead of local films. Last year two of the top-grossing films were imported. Transformers: Dark of the Moon took RMB 1.1 billion at the Chinese box office, while the second-highest grossing film--Kung Fu Panda 2—raked in RMB 610 million.
One of China’s most internationally recognized directors, Zhang Yimou, and his film the Flowers of War managed to take third place on the rankings with RMB 590 million, according to Entgroup. The lackluster performance of what was the most expensive Chinese film ever made came as a surprise to the film industry, which had seen Zhang make a bigger splash with blockbusters like Hero and House of Flying Daggers.
“The important thing for a powerful film-producing country is that local language films have the absolute advantage in the local market, and a competitive advantage in the overseas market,” says Yu Dong, the president of Bona Film Group Limited. He pointed to India’s Bollywood model as an example.
Domestic Barrier
[This article has been reproduced with permission from CKGSB Knowledge, the online research journal of the Cheung Kong Graduate School of Business (CKGSB), China's leading independent business school. For more articles on China business strategy, please visit CKGSB Knowledge.]