Disney Seeks to Add China to Its World

On a tour of the old section of Beijing last year, Walt Disney Co. President Bob Iger found himself in unexpected quarters.

An elderly woman cleaning windows along a narrow street had invited him and his assistant into her two-bedroom apartment for a cup of tea.

As he sipped his tea, Iger noticed a stack of Disney books on top of the woman’s refrigerator.

“She said they were for her grandson,” Iger said. “It was a seminal moment for me.”

Iger recalled the tale recently, fresh from another trip to China, where he and Disney Chief Executive Michael Eisner met with top leaders on a mission to expand Disney’s business interests there.

The trip cast a spotlight on Disney’s plans for a possible second theme park in China. It also coincided with other ventures, including the launching of the company’s first Chinese-language Web site, signaling the company’s growing interest in the world’s biggest untapped market.

“Enough development has already occurred for us to view China as an incredibly important market for the Walt Disney Co. and a great opportunity,” Iger said in an interview. “It could evolve into one of our most important markets.”

Disney is hardly alone in seeing gold in China, which is on the verge of entering the World Trade Organization. News Corp. and AOL Time Warner Inc. announced this month that they were close to a deal that would allow them to broadcast programming to homes in parts of southern China. And Viacom Inc.’s MTV cable channel has had a presence in China for several years.

For American business, the allure is clear: China is a vast market of 1.3 billion people with a vibrant economy--one that grew 7.5% last year--and a rising middle class.

Mickey Mouse and China would seem to be a perfect pairing. China has a huge middle class that is hungry for the kind of wholesome, apolitical family entertainment that is Disney’s trademark.

And, after years of nurturing ties with China, Disney has something of a head start over its rivals. The piracy of Disney products in the 1980s and 1990s has helped to make Mickey Mouse and Donald Duck household names in much of China.

“Walt Disney’s future in China can be extremely promising. The market opportunity is there for the taking,” said Desmond Wong, a partner at Ernst & Young who advises Western clients on investing in China. “There’s no domestic competitor anywhere close in magnitude in brand recognition. Generations of Americans grew up on cartoons in the Walt Disney library that will be relatively new material to generations of Chinese kids.”

Such overseas expansion would be welcome for Disney, which has faced some gloomy news on the home front, including 4,000 job cuts and the closing of several dozen Disney Stores.

But China also poses risks for Disney and other entertainment companies. The studios have struggled to market and distribute movies and television programs in China. Among the obstacles: piracy, red tape and a government whose ideology often has been at odds with Hollywood.

Disney and Sony Pictures Entertainment were temporarily banned from China’s film market after releasing movies about the Dalai Lama. Disney also stumbled with its adaptation of the Chinese folk tale “Mulan.” The movie was hurt by criticism that its characters were too Western and by rules that restricted its release in China.

“China has changed tremendously in the last two decades, but it still has a different ideology and the government guards certain ideas very, very carefully,” said Yasheng Huang, a professor at Harvard Business School who studies Western investment in China. said. For a media company such as Disney, which owns the ABC television network, “this is the biggest risk,” he said.

Disney Courting Chinese Leaders

To succeed in China, Disney will have to carefully navigate political and cultural crosscurrents far greater than those that bedeviled Disneyland Paris when it opened in 1992.

“They must have somebody with Chinese tastes to direct the operations and not do what they did in France and say ‘This is the way we do it,’ ” said James Stancill, professor of finance at USC.

That means seeking local partners and having plenty of patience and tenacity. After the anti-Western backlash that followed the NATO bombings of the Chinese Embassy in Belgrade, MTV was taken off the air for five weeks. But MTV bounced back. Disney’s push into China didn’t happen overnight. The company has been carefully cultivating its relationship with China’s top leaders for several years.

Two years ago, Eisner was among a handful of executives who met privately with Chinese Premier Zhu Rongji when he visited Los Angeles.

The company’s foray into China began in 1986 with a roll-out of merchandise and the launching of “The Mickey and Donald Show,” a half-hour program on Chinese television. The Chinese-language program was pulled three years later in a dispute over piracy of Disney products.

Disney took another stab at Chinese television in 1994, co-producing “The Dragon Club,” a children’s television program that featured mostly Disney cartoons. It became a top-rated TV show and today is viewed by more than 60 million households in China.

Beyond television, Disney has published nearly 200 titles in China over the years and has a biweekly magazine, Mickey Mouse, with a circulation of 250,000.

China also is becoming an important movie market for the company. In the last five years, Disney has released to theaters “Lion King,” “Toy Story,” “Mulan,” “Tarzan,” “Dinosaur” and “Pearl Harbor,” plus more than 100 Chinese-language titles on DVD. And Disney has opened about 200 Mickey’s Corners and other retail areas within stores. “We’ve essentially been aggressively building the brand in China over the last five years,” Iger said.

The expansion follows the classic business development pattern that Walt Disney used to convert his fledgling film studio into an entertainment juggernaut: Establish a loyal following for characters through television programs and movies, roll out merchandise based on the characters, then create theme parks that are 3-D versions of the characters.

Disney plans to open more stores and has commitments to launch additional television programs, Iger said, declining to elaborate. In Hong Kong, Disney has been pushing to start a full-time Disney Channel.

Second Theme Park Could Stir Controversy

Disney’s biggest investment so far is Hong Kong Disneyland. Disney is contributing about $315 million and will own 43% of the park, set to open by 2006. Hong Kong, eager to make the city more of a tourist center, is contributing more than $2.8 billion in cash, low-interest loans and public-works spending for the project.

In a speech last month to the Hong Kong Chamber of Commerce, Eisner described Hong Kong Disneyland as a “very important start for us” and cited the “staggering economic potential of China and all of Asia Pacific.”

But the trip was not without controversy. Though Eisner denied a Chinese newspaper report about Disney opening a park in Beijing in time for the 2008 Olympics, his comments about the possibility of a second theme park in China created a stir among Hong Kong officials. It’s a sensitive issue, because Hong Kong is counting heavily on mainland visitors to recoup its large investment in the park.

Hong Kong Chief Secretary Donald Tsang told The Times recently that Eisner has assured him Disney won’t build a mainland theme park until Hong Kong Disneyland is established. Disney executives have made several trips to Shanghai, the more likely location for a second theme park.

Conditions are ripe for Disney’s expansion in China, analysts say. China’s fast-growing economy has produced a new middle class.

“The tourism industry is booming because the rising middle class has more disposable income,” Huang said. And unlike other companies that have stumbled in China, Disney doesn’t face any real domestic competition.

“China is so big they could take two or three theme parks and you wouldn’t even know they were there,” said Stancill of USC.

China’s low-cost labor is an attraction for Disney, though the company would not discuss its manufacturing operations for proprietary reasons. An investor group last month filed a shareholder resolution asking Disney to adopt a human and labor rights code for companies that do business in China.

Disney already has such a code of conduct for its manufacturers, spokeswoman Chris Castro said. It probably will take several years for Disney’s investments in China to bear fruit. But eventually China could become a key market for Disney, even more so than Japan, where Disney just opened a second theme park.

“It takes a long-term view,” said Bill Roedy, president of MTV Networks International. “We cannot have an international growth strategy without China.

Iger shares the sentiment.

“Not only does it take patience, but a level of cooperation with the government that is obviously unique,” he said. “There are issues, yes, but none that I would consider large enough to prevent us from building a business there.”

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Times staff writer Tyler Marshall contributed to this report.