Entertainment

Hurrah for Hollywood

American film studios are set to earn a good deal more in China

Girl of tai chi? Karen Mok

In the first Matrix movie, there’s a scene in which the hero Neo is dodging bullets. “He’s starting to believe,” his mentor observes knowingly. Neo’s enemies then opt to throw punches instead. He parries their blows, deflecting their energy straight back at them, resulting in their defeat.

The moment is pure tai chi, a term that translates literally as ‘supreme ultimate’ and derives from a Taoist concept where an individual reaches a state of absolute and infinite potential.

The Chinese have believed in tai chi’s power for millennia but it took the 1999 release of The Matrix – as well as the advent of CGI technology – for Hollywood to cotton on to its true commercial potential.

The film took $463 million at the box office.

Playing Neo in The Matrix was Keanu Reeves, and he’s recently dusted down his martial arts manual for his directorial debut. Appropriately enough, it’s called Man of Tai Chi. The Hollywood star is currently in Beijing shooting the film alongside Hong Kong actress Karen Mok and kung-fu master Tiger Chen.

Man of Tai Chi is also something of a first. While director Zhang Yimou has made movies that switch between English and Mandarin (such as The Flowers of War, see WiC135), this is the first time that a Western director has sought to do so. Reeves claims a smattering of Chinese blood on his father’s side. But the Canadian actor is not a Mandarin speaker. Instead, the decision to use both languages is reflective of a new commercial reality: the growing pull of Chinese cinema audiences.

Man of Tai Chi is being co-financed by China Film Group and Wanda Media. On the Hollywood side, the backers are Universal and Village Roadshow Pictures (which co-produced The Matrix). And Hollywood Reporter quotes Universal’s boss David Kosse as saying that the film gave the studio “the opportunity to become further involved in the Chinese market, as well as bring Chinese films to audiences all over the world, which is a priority for Universal.”

Interest in Chinese ticket sales among Tinseltown bosses will also have picked up after a key announcement during the visit of China’s future leader Xi Jinping to the US this month. The news was that a long-overdue compromise had been reached on a US complaint to the WTO about limited access to Chinese audiences (specifically, on restrictions capping foreign films at just 20 releases per year).

US film executives say that the regulations resulted in a huge loss of potential income for American studios in China and also fuelled widespread pirating through illegal DVD distribution.

Last March the Chinese had accepted the WTO verdict and agreed to open the domestic market for “entertainment goods” (see WiC70). However, as we pointed out in WiC118, the concession proved a lot less significant in practice because state censors were still limiting the number of foreign releases that were being screened.

Last Friday’s announcement was therefore something of a breakthrough. Under the agreement 14 additional American films will be exempted from the annual quota. It was specified they had to be premium format films (i.e. 3D or IMAX), which was likely a clever compromise on the Chinese side – after all these movies tend to be of the blockbuster variety and therefore the type unlikely to ruffle China’s political sensibilities. They are also – conveniently for Hollywood – the most lucrative. Transformers: Dark of Moon last summer earned Rmb1.1 billion ($174 million) in China.

Hence US Trade Representative Ron Kirk welcomed the concession, saying that it would boost “one of America’s strongest export sectors in one of our largest export markets.”

Industry insiders now predict that US studios will see their share of the Chinese box office rise from 13.5% to 25%. As the Shanghai Daily noted: “Cheering as loudly as any movie audience, Hollywood and the Obama administration have hailed China’s agreement to reduce barriers that have kept US-made films out of the booming Chinese market.”

The deal’s other significant concession: US studios will be permitted to sell their blockbusters through privately-owned enterprises rather than have to rely on two state-owned agencies for distribution, as previously. The new pact should help the US firms negotiate a larger share of takings.

American studios rightly view China as their number one growth opportunity. After all, three new cinema screens are being added per day in the country, with 20,000 expected to be showing films by 2015 (America has about 40,000). That means the Chinese box office is growing exponentially fast. In 2008 it took just $680 million, versus $2.1 billion last year.

“It is tremendous news for the millions of American workers and businesses whose jobs depend on the entertainment industry,” Chris Dodd, president of the Motion Picture Association of America said.

In news also timed to coincide with Xi Jinping’s visit to Los Angeles last week, Dreamworks Animation has announced the formation of a joint venture with Shanghai Media Group and China Media Capital, as well as the investment arm of the Shanghai government.

Dreamworks – which owns the Kung Fu Panda franchise – says the deal breaks new ground because it’s about more than trying to get more foreign films onto Chinese screens. Instead, Dreamworks CEO Jeffrey Katzenberg told the Wall Street Journal that aim is to produce “stories that are made for China by the Chinese, at a quality that can be exported to the rest of the world.”

The new venture, called Oriental Dreamworks, hopes to release its first animated film by 2016 and then plans to produce two a year thereafter.

Of course, the new arrangements will mean that the joint venture’s output won’t be classified as foreign content. That will ensure that quota or no quota, its flicks will have guaranteed access to Chinese screens.

Keeping track: in issue 139 we wrote that during a trip to Hollywood, China’s new leader orchestrated a deal that would see his country up the number of foreign films screened annually from 20 to 34. The deal – which came into effect February – also promised to increase the portion of box office takings foreign studios receive (up from 13-17% to 25%).

But last week the Wall Street Journal reported that Hollywood studios were locked in a fresh dispute with Chinese authorities over their share of ticket sales. It started with the state-owned distributor China Film Group trying to deduct the cost of a newly value-added tax (VAT) entirely from foreign producers’ share of the box office take. In other countries, value-added taxes are taken out of gross box-office receipts, before the money is divided between studios and theatres. Hollywood studios say China Film’s move could reduce by 8% their theatrical revenue in coming years. Even more unfairly, domestic studios are exempt from the tax.

Twentieth Century Fox, which was being offered $23 million from China Film as its share of the box office for Life of Pi, is refusing to take any money until the issue is resolved, says the Journal. The studio says the new tax will reduce Fox’s take by about $2 million. China Film, meanwhile, says it always has good relationships with foreign studios and that “there is no controversy” says the company spokesperson. (May 3, 2013)

In issue 139 we wrote that during a trip to Hollywood, China’s new leader orchestrated a deal that would see his country up the number of foreign films screened annually from 20 to 34. The deal – which came into effect February – also promised to increase the portion of box office takings foreign studios receive (up from 13-17% to 25%).
But last week the Wall Street Journal reported that Hollywood studios were locked in a fresh dispute with Chinese authorities over their share of ticket sales. It started with the state-owned distributor China Film Group trying to deduct the cost of a newly value-added tax (VAT) entirely from foreign producers’ share of the box office take. In other countries, value-added taxes are taken out of gross box-office receipts, before the money is divided between studios and theatres. Hollywood studios say China Film’s move could reduce by 8% their theatrical revenue in coming years. Even more unfairly, domestic studios are exempt from the tax.
Twentieth Century Fox, which was being offered $23 million from China Film as its share of the box office for Life of Pi, is refusing to take any money until the issue is resolved, says the Journal. The studio says the new tax will reduce Fox’s take by about $2 million. China Film, meanwhile, says it always has good relationships with foreign studios and that “there is no controversy” says the company spokesperson.


© ChinTell Ltd. All rights reserved.

Exclusively sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.