China's film industry takes top billing

Chinese conglomerates are spending billions on Hollywood know-how as China’s film market grows into a world leader.

When Cai Gongming was looking to change gears in 2013 after more than a decade as a senior executive in China’s auto industry, one burgeoning sector caught his eye: film.

“Development speed is everything for an industry. I enjoy working in one with a high growth rate. It’s full of opportunities and potential,” Cai, the former vice-president of Mercedes-Benz (China), told FinanceAsia. “China’s cultural industries, such as film, are growing rapidly.” 

The auto sector veteran co-founded Road Pictures in 2014 and has since been luring talent from Hollywood and beyond. The Los Angeles-based studio, which has offices in Beijing, Shanghai and Hong Kong, has hired people with rich experience in film production, distribution and marketing to beef up a diversified team.

In November 2015, the studio launched a $50 million film fund with which it will co-produce a slate of movies with Hollywood peers. 

But Cai and his team want to go beyond pure investment; they want to be involved in the full process of Hollywood filmmaking, from content development to production and distribution.

“A professional team is very important for you to win a bigger say while working with Hollywood. You have to know their rules, speak their language and have your expertise,” Cai said. “Otherwise, they would wonder what else you can contribute to the movies, apart from money. Your investment will become stupid money.” 

The partnership is just one example of a filmmaking tie-up between a Chinese company and Hollywood counterpart. Their aim: to produce Hollywood blockbusters that can find an audience in a movie market that is already the second biggest in the world by box office revenue and is tipped to take the top spot soon.

Fast & Furious 7

What’s more, teaming up with Chinese partners gives Hollywood studios a chance to evade strict quotas on foreign-made films: just 34 imported films are screened in China each year, but co-produced films with a set level of Chinese involvement, including capital, production and acting teams, can dodge the restriction.

Edward He, a Hong Kong-based Chinese film producer, says Beijing encourages co-productions as they raise Chinese production standards and help the country’s image overseas. “Such movies can get around the quota system. The Chinese government will even give the green light to their releases in China. As they will come out in at least two markets, more foreign audience will see Chinese scenery and become familiar with Chinese actors.” 

And for Hollywood, access to China is priceless.

“Hollywood blockbusters really need emerging markets, notably China, to make profits - because only in growing markets can high box-office receipts be generated frequently,” said Su Beiqi, general manager of Magic Crop, a Chinese film marketing company.

The fate of Fast and Furious 7, the latest in a long-running action franchise about street car racing, shows the economics. The film grossed $390 million in China, eclipsing its US box-office revenue of $348 million.

China’s film sector continues to grow. Official data showed ticket sales hit a record Rmb44 billion ($6.7 billion) last year, up 49% on 2014. North American box-office receipts rose 6.3% year-on-year to reach a record $11 billion last year.

Analysts at Nomura see the gap closing fast and expect China to overtake North America as the world’s largest film market in 2017, with the Chinese box office tipped to reach Rmb100 billion in 2020.

US giants have been the big beneficiaries. Aggregate Chinese box office takings for the top four American studios – Universal, Disney, Warner Bros and 20th Century Fox – grew from $253 million in 2011 to $1.2 billion in 2014, according to Nomura. 

Magic Crop’s Su notes China has become an essential stop on the publicity agenda for Hollywood celebrities with films to promote – something she knows all about, having run marketing in China for films such as Cloud Atlas and Iron Man 3.

“If an imported Hollywood blockbuster wants to perform well in China’s box-office, actors have to come to China to participate in marketing activities to connect with Chinese fans. It has become a standard practice,” she said.

Buying movie magic

Before Cai came on the scene, Chinese investors had long sought Hollywood know-how as they looked to develop quality content to unlock the potential of their domestic market. But in recent years, Chinese companies with deep pockets – including Fosun International, Alibaba and China Media Capital – have paid billions for their own piece of Tinseltown.

Fosun, one of China’s biggest privately owned conglomerates, invested a reported $200 million in 2014 in US production company Studio 8.

Kung Fu Panda 3

“China’s movie production still lags behind Hollywood’s and international standards,” Guo Guangchang, chairman of Fosun International, told FinanceAsia in an email. “With Chinese movie industry’s overseas exploration…the interaction between Chinese films and the world will accelerate. We might transit from an era [supplemented by] Chinese elements and actors to an era led by Chinese stories and production.”

Dalian Wanda Group went a step further in January. The conglomerate acquired US film studio Legendary Entertainment Group for $3.5 billion. 

The deal stands out as China’s biggest-ever film industry acquisition, according to Dealogic. It adds the producer of hits such as Jurassic World and Batman films to Wanda’s growing film stable. 

Taken together with its 2012 purchase of AMC Entertainment for $2.64 billion and its takeover of Australian cinema chain Hoyts Group for $366 million last year, Wanda - China’s biggest cinema owner - showed its determination to build a fully integrated global film empire.

“The acquisition of Legendary will allow them to have an overseas movie studio focusing on English-language movies,” said Richard Huang, an analyst covering gaming, lodging and leisure research in China for Nomura.

Wanda could, he added “apply the US production capability in uplifting the quality of domestic movies”. 

And, like most Hollywood blockbusters, Wanda’s deal will have plenty of sequels – if takeover targets are out there.

Despite China’s growing appetite for overseas cinema assets, Nomura analysts say a lack of likely targets may slow down dealmaking in the short term.  Some international cinema operators are either part of a family business or controlled by conglomerates – neither of which are likely to want to exit the industry. 

Huang of Nomura expects more domestic acquisitions this year, triggered by industry consolidation and led by Wanda, which has been “very ambitious” in targeting smaller and perhaps loss-making cinema operators. “After it acquired Shimao last year and consolidated its 20 cinemas into Wanda’s network, it’s going forward to expand more…The target for Wanda this year is acquiring 60 [cinemas],” he said. 

The Mermaid: a big hit

Wanda’s smaller rivals

Smaller domestic cinema operators are also busy expanding their footprint across the country. Dadi Cinema Group, which runs 270 leased cinemas, plans to open another 300 over the next three years, with a focus on cities from tiers two to four – taking in everything from country towns of half a million to emerging megacities.

“From the performance during the Chinese new year, you can tell [box-office in] tier-four and below cities has been growing very fast. It demonstrates consumer demand for films is getting even stronger in small towns,” Yu Xin, chief executive officer of Dadi Cinema, told FinanceAsia

Click for full view

According to domestic media, the box office receipts during the Chinese Lunar New Year holiday in February exceeded Rmb3 billion, up 67% year-on-year and led by Hong Kong director Stephen Chow’s China-made fantasy comedy The Mermaid

Yu of Dadi Cinema said her firm achieved a record 94% year-on-year growth rate, higher than the national average, thanks to  focusing on tier three and four cities. “It was a great success of our strategy, as 70% of our cinemas are located in these cities.”

China’s smaller, less prosperous cities and towns, mostly in inland areas, are believed to underpin the sector’s future growth, according to market insiders and analysts. 

Click for full view

Low market penetration is one major reason. In 2014, for example, the average Chinese citizen bought 0.6 movie tickets, according to Nomura. In North America, 3.6 tickets were sold per capita; in Korea it was 4.2 tickets. In China’s inland provinces, such as Henan, the figure was 0.3, government data shows.

More affordable tickets – thanks to heavy subsidies offered by online-to-offline platforms and cinema chains – could also contribute to strong growth. Tickets were affordable despite China’s economic slowdown, noted Nomura’s Huang. “It might be even cheaper than going to Starbucks in China.”

¬ Haymarket Media Limited. All rights reserved.
Share our publication on social media
Share our publication on social media