DreamWorks Animation, Chinese partners bet big on 'Kung Fu Panda 3'

DreamWorks Animation CEO on its 45% stake in Chinese joint venture: 'Not a huge downside, gigantic upside'

On the 16th floor of a Shanghai office building, dozens of fresh-faced young animators are studying painting, sculpting and acting.

They're participating in film-appreciation workshops — Woody Allen's "Match Point" was a recent pick — and learning the latest software tools. Teaching them via video connections were some of the most experienced artists in Los Angeles, veterans who brought to life hits such as "Shrek" and "Madagascar."

But it won't take years for these newbies, many of them recent art-school grads, to get their big break working on a Hollywood blockbuster. As employees of Oriental DreamWorks, they're already staff artists on "Kung Fu Panda 3," set for release in January.

The runaway success of the "Kung Fu Panda" franchise inspired both awe and envy for Chinese who wondered how Americans came up with a billion-dollar global phenomenon that combines two quintessential elements of Chinese culture — a bumbling black-and-white bear and martial arts.

That sense of admiration and frustration helped smooth the way for DreamWorks Animation Chief Executive Jeffrey Katzenberg to create Oriental DreamWorks in 2012, a $330-million joint venture without precedent in the entertainment industry.

Modeled on agreements that have given American companies like General Motors expanded access to the restrictive Chinese market — in exchange for sharing their technology and know-how — the Shanghai-based entity is 45% owned by DreamWorks Animation.

Other partners include a government investment fund; private equity firm China Media Capital, which has invested in Imax's China business; and Shanghai Media Group, a multimedia television and radio broadcasting company.

"Being able to be a bit of a pioneer in that market, I think could be incredibly and uniquely valuable for us," Katzenberg said in an interview. "If we succeed, it could be a game changer for us."

Hollywood studios have been scrambling to expand their business in China to capitalize on a booming box office, which is expected to overtake U.S. box-office receipts by 2018. DreamWorks is in an enviable position: The $96.3-million haul for the second installment of "Kung Fu Panda" in 2011 still stands as the highest gross ever for an animated film in China.

It also reinforced Katzenberg's belief that the Middle Kingdom could be a mega-market for his Glendale studio.

"I would say saddle up, this is where it's headed," Katzenberg said.

DreamWorks sorely needs an unbridled hit to bolster its bottom line. The company this year shed about 20% of its workforce, closed its studio in Northern California, and sold (and leased back) its Tuscan-style corporate headquarters lined with olive trees and koi-filled pond. The layoffs and restructuring charges forced DreamWorks to take a loss of $54.8 million in the first quarter ended March 31.

Following a string of box-office misfires, Katzenberg has installed a new management team, scaled back the number of movies the studio produces, and vowed to focus on reviving the studio's core feature animation business that once produced hits including the "Shrek" and "Madagascar" films.

The creation of Oriental DreamWorks has already resulted in preferential treatment for "Kung Fu Panda 3" in China. The movie's recent designation as co-production will allow the company to receive a larger share of revenue than foreign studios typically receive when their films are allowed into China under its quota system.

And the movie has secured a choice release date over the Chinese New Year holiday, a period typically reserved for domestic productions.

Third installments in even the most successful franchises are far from sure bets, but the studio is making every effort to boost the film's odds of being a hit with Chinese audiences.

The movie is breaking new ground by having two versions, in which characters are animated so that their speech is in sync with both English and Mandarin. To create the Mandarin-language version will take about 25% more time and effort, adding to the budget of the film that's estimated near $140 million.

"The first few projects that we do are going to take longer and they're going to be potentially more expensive than what we would normally be planning to do," said Prashant Buyyala, head of Oriental DreamWorks' animation studio. "But that's all part of the process of building a world-class animation studio."

Though the Glendale-based team led by director Jennifer Yuh Nelson remains the driving creative force behind "Kung Fu Panda 3," more than 200 Oriental DreamWorks employees have been assigned to the film in Shanghai. They have been providing feedback on the authenticity of certain Chinese elements, working on details like the animation of snow, and helping craft the second version of the film that will be precisely coordinated to a Mandarin-language script (and be seen only in mainland China).

Nelson says the involvement of Chinese artists has improved the authenticity of the film. For instance, a brainstorming session with both Chinese and American staff led to some cultural discoveries.

"We were trying to come up with fun things the characters do — what they eat, how they play," she said. "As Western story artists, one of the things we put in was cookies. And the Chinese story artists basically said, 'Ummmm. You can't put in cookies, you have to put in traditional food.'"

That led to changing the script to include food and games more traditional for the Chinese characters.

Teng Huatao, the director for the Mandarin-language version of the film who had no prior experience directing an animated film, spent two months in Glendale last year discussing story and visual elements. He also had a chance to meet with some of the English-language cast, including Jack Black, who voices Po, the panda.

Teng also chimed in on some culturally significant scenes.

"Some stuff they wanted to put in looked Korean or even Japanese — clothing, hairstyles, even fans were wrong," he said. Alluding to historical animosities between China and Japan, he noted: "That can be very dangerous in China."

Chief Executive James Fong said Oriental DreamWorks is already in preproduction on its next film project, an animated movie code-named "ODW1." Executives are also deliberating over what to select for a second project, another animated film, but Fong said both should be in production simultaneously by next year.

The two movies, he said, would follow the "Kung Fu Panda 3" model — with versions in English and Mandarin — and are envisioned as co-productions with the Glendale campus. The content would be fully owned by Oriental DreamWorks.

There have been some growing pains.

Fong, a former executive at Amazon, joined the studio six months ago to become the company's second CEO in three years. He replaced former Disney executive Guenther Hake — a veteran of Disney's consumer products division in China, who left after just a year on the job. The Shanghai studio also lost its head of creative development after only about a year.

"Joint ventures are tough.… It's like getting married," Fong said. "Instead of two people, you have two corporations getting married; we're the love child."

The company has quietly dropped a film called "Tibet Code," which Katzenberg unveiled at a Beijing news conference in April 2013 alongside Han Sanping, then-chairman of the powerful state-run distributor China Film Group.

The adventure story, based on a series of Chinese novels set in 9th century Tibet, has "all the makings of a world-class, quality, blockbuster franchise," Katzenberg told reporters then. He said the company could not come to terms with the producer who owned the rights to the book.

The $330 million that DreamWorks and its Chinese investment partners invested in Oriental DreamWorks includes money to build and staff the Shanghai studio.

Katzenberg declined to say how much money DreamWorks contributed to the deal, or how DreamWorks and its Chinese partners will divvy up revenue and profit.

But he said DreamWorks' 45% ownership stake in the joint venture limits its financial exposure.

"If it fails it will be a loss of our time and effort as opposed to damaging the underpinnings of the company," he said. "Not a huge downside, gigantic upside."

Also boding well for the partnership, Katzenberg said, is a strong partnership with media mogul Li Ruigang, chairman of China Media Capital.

"I feel like he has as much skin in this game and is determined that we win and succeed," Katzenberg said. "I just find him an excellent partner, even when we disagree."

How DreamWorks fares in China will be important to its future, analysts say.

"If China is going to surpass the U.S. box office in the next four or five years, having a strong foothold there is key," said Eric Wold, a media analyst with B. Riley & Co. "It could not only help turn [DreamWorks] around, it could be a major leg of the company."

Makinen reported from Shanghai and Verrier from Los Angeles.

Tommy Yang in The Times' Beijing bureau contributed to this report.

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