China’s Movie Industry: Foreign Investment and Competition

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Expect more of this in the future

Two interesting things to read about China’s movie industry and foreign influences. The film industry here is doing very well, and as the revenues surge, foreign studios are looking (again) at cashing in. However, options remain limited due to local protectionism and a great deal of regulation. Moreover, there is still a lot of internal debate over if/how/when the industry should be opened up.

Let me first call your attention to Gady Epstein’s investment piece in Forbes. This is a nice survey of the current (financial) state of the industry and how some foreign companies are set to exploit growth:

You might be surprised by the rise of a cinema-going culture in a market rampant with piracy, but China suffered for years from a paucity of good content, quality movie theaters and, unsurprisingly, customers willing to pay more to see this bad content in bad theaters. That has all changed dramatically in the last five years[.]

Some very good stats and information on some of the key players that will support the cinema industry in the coming years. Gady’s article was not about film production, however, so for a discussion on how foreign studios are once again looking to expand here, we have to look elsewhere.

China Daily, for example, just ran two good articles, one on the debate over opening up the movie industry to foreign films, and the other on the growth in foreign co-productions. The two issues are related, of course.

The co-production trend tells us something about the attractiveness of the China market, the success of market access restrictions, and perhaps the limited growth potential of established markets like the US.

Why do foreign studios go with co-productions? Well, first of all, this is not a new phenomenon. The first co-production I worked on as a lawyer was in 1999. My firm’s client was Columbia Pictures/SPE, and they were partnered up with Huayi Brothers and (if memory serves me correctly) China Film Group.

There are several advantages to a co-production but also many drawbacks. All of the pros and cons of a joint venture apply, plus there are additional movie industry restrictions. On the other hand, the film is considered a domestic production and does not have to be imported (and subject to quotas).

But what’s the real reason why foreigners go for co-production? Because they have to. Sure, you can make a film offshore and then import it, but the import quota is small and revenue sharing arrangements suck. You can’t produce a film yourself (foreign investment restrictions), so the co-production is the only reasonable alternative if you want to retain a degree of operational control and copyright ownership. As long as China doesn’t open up foreign investment in this sector, co-productions will remain popular.

But what about those imported films? Is anything going to change soon with the quota scheme, and will we be seeing a flood of foreign movies over here anytime soon?

These are the issues discussed in that other China Daily article:

[I]mported films still take the bulk of the box office receipts, despite the fact that China allows a limited number of foreign films into the country a year. These include 20 through a special “revenue sharing” scheme with only two State-owned companies – China Film and Huaxia.

And the number of foreign films being screened in China is likely to be increased this year. Under a World Trade Organization ruling, foreign producers will, from March 19, be able to contract private film companies to distribute their films on the mainland. If the Chinese government allows this ruling to take effect, it is expected that more than just 20 foreign films will be brought to Chinese cinemas.

Hold on a second. Yes, the WTO ruling necessitates a change in China’s law regarding film distribution and imports, but it does not mandate any changes to the import quota. I don’t see what the connection here is between the WTO case and the numbers of films being allowed into China, unless the government is considering raising the quota a bit so that importers like China Film Group don’t lose out of too much revenue. It’s possible, but I haven’t heard about it.

As I’ve written about several times before, the WTO case said that China must open up A/V imports and distribution to foreign enterprises as it promised in the WTO Accession Protocol over a decade ago. That’s it. Nothing about censorship, nothing about quotas.

However, while the quota may/may not change, the revenue sharing scheme certainly will, as foreign copyright owners go with other options, something that will definitely not benefit the State-owned folks. Here’s how the current system works:

Under the revenue sharing scheme, foreign producers and the State-run China Film Group Corporation take 43 percent of the box office takings, with most print and promotional costs borne by the overseas producers, Zhang Jingyu, project manager of Beijing Jiaxin Shidai Entertainment Company, said. This results in the foreign producers getting about 13 percent of the revenue.

Once things open up to foreign players, that revenue share is going to finally go up. So what are the domestic objections?

[The] WTO ruling is causing concern to some Chinese cultural industry experts. Xiao Huaide, director of the Institute of Cultural Studies at Peking University, said the revenue-sharing system protected the development of the Chinese film industry.

This is a typical infant industry argument, but the logic is flawed. If the domestic industry needs sufficient resources to develop, the government can subsidize it (and it does). If revenue sharing is simply a way to get money into the hands of domestic film producers, then find another source of revenue, one that isn’t WTO-inconsistent.

Xiao said the best situation would be for Chinese and foreign films have similar market shares, which would not only protect domestic movie development and industry reform, but also be an opportunity to learn from the developed international market.

This comment is about the quota scheme, and not the revenue collection aspects of it. The worry here is that if the quota were lifted (and again, I’m not sure who is suggesting that), China would be deluged with Hollywood movies, which would crowd out domestic fare. Sounds like a traditional French complaint about US cultural encroachment.

I’m not a big fan of cultural protectionism. If everyone wants to watch crappy Hollywood flicks, let ’em. But I don’t think that would be the death knell of Chinese film production anyway. This is still a huge country, with its own language and culture, and with an economy strong enough to support a domestic film sector.

The good news here is that with the amount of money being poured into this sector, we’ll be seeing a lot more movies in the near future produced by both domestic and foreign studios, and that’s never a bad thing. We’ll, there are some limited exceptions.