Arts & Entertainment

Reel China: U.S. film producers are engaging the Chinese

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China bought $91.9-billion worth of U.S. goods last year, including boatloads of medical devices, precious metals and electrical equipment. But when it comes to America's most celebrated cultural export — Hollywood movies — crossing China's borders has proved more difficult than climbing the Great Wall.

After years of frustration with the Chinese government's severe limits on how many imported movies can play in its theaters, several prominent American film producers are cutting ambitious deals with Chinese firms that provide alternative routes into the country's exploding movie market.

"There's no reason we should have Chinese films and American films anymore. There should be global films," Ryan Kavanaugh, the chief executive of Relativity Media, said when unveiling his independent studio's joint venture in Beijing this month.

Film finance and production firm Legendary Pictures detailed plans for its own China joint venture called Legendary East on Sunday, and other independent U.S. studios like Nu Image are actively seeking coproduction deals in the country.

Such moves give the firms, which don't have the clout of major studios like Warner Bros. and Paramount Pictures, better access to the lucrative Chinese market. The deals also offer filmmakers access to a potentially huge source of capital: Chinese investors, who face significant restrictions on sending their money overseas. However, partnerships in China also mean U.S. producers must work closely with the country's Communist government and its censors.

"There is a big difference between announcing a quick deal and forming a company in China with a solid business strategy and strong Chinese partners," said Skip Paul, of Centerview Partners who advised on the formation of Legendary East. "The key to success is tapping into deep relationships to help navigate the politics and culture."

The U.S. push into China comes at a critical time for Hollywood: With income from some longtime cash cows, including DVD sales, collapsing, China is one of the globe's biggest untapped revenue sources.

China's box-office receipts surged 64% last year to a record $1.5 billion, and they will likely bring in about $2 billion in ticket sales this year. By the end of the decade, industry experts predict China will grow from the world's No. 5 movie market to No. 1.

"I am more bullish on China than any other country in the world," said Rich Gelfond, chief executive of Imax, whose digital screens are in 48 theaters in mainland China, Hong Kong and Taiwan, with plans to add 129 more in the coming months.

The latest "Transformers" sequel has sold more than $159 million worth of tickets in China this summer, with "Kung Fu Panda 2's" Chinese gross at $92 million — more than the animated family film generated in France, Germany, Spain and Britain combined.

Even with those outsized performances, American movie companies are hardly sharing in the bounty thanks to China's rules on how box office receipts are shared — or not.

Foreign studios say they face an opaque approval process for getting their films into China. Last year, the Chinese government allowed only 54 foreign films into the country, and U.S. studios were able to share a percentage of box office revenue on just 21, according to research firm Artisan Gateway. Those coveted revenue-sharing slots are typically secured by the six major Hollywood studios for their big-budget releases; this year, the spots have gone to films such as "Thor" and "Fast Five."

The revenue-sharing calculus is complex, but it leaves an American film's backers with no more than 17.5% of all Chinese ticket sales, compared with the typical 50% in U.S. theaters. The huge Chinese gross for "Transformers 3" brought Paramount Pictures less than $30 million.

Thirty-two foreign films that played in China last year were imported under a different exhibition model in which their financiers received a one-time fee of just a few hundred thousand dollars and no cut of ticket sales — even though two such movies brought in more than $20 million at the box office. Some producers believe that as many as 50 foreign films may be allowed into China this year under the flat-fee program.

U.S. studio lobbyists and officials at the World Trade Organization have been pushing the Chinese government to relax its import restrictions but have so far been unsuccessful.

By partnering with Chinese-based companies in co-production and exhibition deals, American filmmakers like Legendary and Relativity are not subject to the import restrictions. Such agreements not only guarantee movies a release in Chinese, but they also can dramatically improve the percentage of box-office receipts the U.S. producers can collect — to about 40%.

Relativity, which made the thriller "Limitless" and the upcoming "Immortals," is working with two Chinese investment firms and state-owned Huaxia Film Distribution Co., the country's second largest distributor. Their new venture, called SkyLand, will produce Chinese movies and also invest in some of Relativity's upcoming English-language pictures.

"Our ideal is to make as many of our movies co-productions as possible … and for them all to get a release in China," said Kavanaugh.

SkyLand's backers include SAIF Partners, an Asian private equity firm with $3.5 billion under management, and IDG China Media, the Chinese arm of Boston-based technology and publishing giant International Data Group.

Legendary East, which will produce English-language movies in China and export them globally, is partnered with Asian entertainment conglomerate Huayi Brothers Media Corp. It also on Sunday announced plans to list shares on the Hong Kong Stock Exchange with an initial enterprise value of $441 million. Even companies that don't have expansive Chinese business partnerships are finding new ways to reach the market. When Nu Image Films' "The Expendables" went to China last year, the company collected a flat fee in the six figures, even though the Sylvester Stallone action flick grossed more than $32 million there.

For the "Expendables" sequel, which starts shooting next month, Nu Image hopes to partner with a Chinese distribution company and shoot some scenes in the country. Executives at the independent studio believe a co-production deal could net them some $8 million, or more than 15 times what they collected for the first "Expendables" under the flat-fee system.

"The demand for product in China is going to grow exponentially," said Trevor Short, Nu Image's chief financial officer. "And the net income can be enormous because the [distribution and marketing] costs are so low."

But in order to qualify for a co-production, American scripts must be approved in advance by the government, which can be unpredictable in what it censors and what it doesn't. "No one really knows where the boundaries are," Short said.

Sony Pictures made a similar co-production deal on last year's remake of "The Karate Kid," which it made with China Film Group. The movie was a hit in most of the world but it flopped in China.

Still, no major Hollywood studio has formed a long-term partnership to co-produce films with Chinese companies. However, they have found some ways to release a few movies in the country outside of the 20-import quota.

To boost the rollout of high-tech projectors in the country's theaters, China in 2007 began allowing several pictures per year into the country on a revenue-share basis if they played only in digital theaters. Since 2008's "Journey to the Center of the Earth" kicked off the program, digital projection has become so common that movies like "Toy Story 3" and "Shrek Forever After" received nationwide releases in China by utilizing the exception.

"Show me another country where you can release a movie 100% in 3-D digital," said Jeff Blake, the vice chairman of Sony Pictures. The studio's animated film "The Smurfs," which in China is playing solely in high-tech digital theaters, has grossed $26.1 million since opening Aug. 10.

One other way for U.S. filmmakers to earn money in China is by making Mandarin-language productions in the country, which yielded Fox International's hit "Hot Summer Days" and Disney's flop "High School Musical: China."

Ultimately, American film companies don't want to have to find ways around the quota — they want to eliminate it. And though such a development isn't likely in the near-term, some believe it's inevitable.

"I'm optimistic," Imax's Gelfond said. "So much is being invested in the infrastructure in Chinese exhibition. And I think the government is going to want to support the infrastructure."

Times staff writer David Pierson in Beijing and Amy Kaufman in Los Angeles contributed to this report.

john.horn@latimes.com

ben.fritz@latimes.com

Copyright © 2014, Los Angeles Times
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