The China Syndrome 2018

By Mark Ehrenkranz

Crazy Rich Asians may be this year’s Black Panther for Sino Americans, but the latest proposed round of tariffs on $200 billion worth of Chinese goods includes hundreds of products, and one of particular interest to the entertainment industry: Movies!

Last year Dalian Wanda Group, the Chinese real estate and entertainment giant, announced it was buying Legendary Entertainment studio, producer of blockbusters like Jurassic World, for $3.5 billion, adding to an entertainment portfolio that includes AMC Entertainment, the U.S. theater-chain giant, and Odeon & UCI, the biggest in Europe. In the fall, Wang Jianlin, Wanda’s founder and China’s wealthiest man, struck a deal with Sony Pictures to finance films and also agreed to a $1 billion acquisition of Dick Clark Productions, which produces the Golden Globes and American Music Awards.

Chinese e-commerce king Alibaba and online gaming giant Tencent, already among the world’s biggest tech companies, have hunted for content in Hollywood, investing in small studios and bankrolling films like the latest Mission: Impossible and the summer’s Star Trek Beyond and Teenage Mutant Ninja Turtles: Out of the Shadows. In October, Alibaba announced it was partnering with Steven Spielberg, Hollywood’s top-grossing director, to produce, distribute and finance films globally — and in China. Even the state-owned broadcaster from Hunan province, Chairman Mao Zedong’s birthplace, has poured money into Lionsgate, the studio behind the Hunger Games series.

Crazy Rich Asians – Warner Bros.

Japanese, Middle Eastern and European companies have long spent big in Hollywood and Media Capital (CMC), a private-equity firm has partnered with Warner Bros., DreamWorks and Imax, among others. Chinese films are only a fraction of the overall imports of goods into the U.S., but the proposed tariff only adds to industry worries that Hollywood will get swept up in the trade war, and that Beijing will respond with its own retaliatory measures on U.S. studio product.

The new tariff comes at a time when Hollywood had actually been hopeful that China would ease some of the restrictions and even increase its quota on non-Chinese productions. Were China to retaliate, it would hit one of the rare business sectors where the U.S. has a trade surplus.

Foreign films (predominantly Hollywood studio titles) earned some $4 billion of gross revenue in China in 2017, a figure which dwarfs the stateside box office of Chinese films. The nature of those earnings equates to close to $1 billion of profits remitted to the Hollywood majors.

China last expanded its quota and eased other restrictions in an agreement reached in 2012. Negotiations on a new agreement, which started in February of last year, have raised hopes that China will further open up its market for movies. But a new pact has been delayed, in part because of a change in the Chinese authority responsible for the film sector and in charge of negotiations.

Tencent

The current agreement works on several levels. Some 34 films per year are allowed to be imported into China, to be distributed on a revenue-sharing basis. A further 30 to 40 films per year can be imported on a flat-fee basis, in which Chinese companies license them for foreign distribution but do not give studios a cut of box office.

Joint U.S.-Chinese productions have been growing, and China has been dealing with piracy issues for the first time in a very meaningful way. It is unclear whether China would be so enthusiastic if the new tariff round goes ahead and there is a danger of all it being rolled back.

Even though Hollywood may not be important in the context of the overall trade dispute, there is the worry that the Chinese government will see the U.S. film industry as a high-profile target.
China has begrudgingly allowed U.S. studios access to the Chinese box office, and they would gladly take this to zero if they could. The trade war with America gives them an excuse to do it.

It is not clear whether such an aggressive, retaliatory approach is likely to be adopted by the Chinese. A more optimistic scenario would see renewal talks run into the sand, and the current quota regime simply left in place.

The Chinese government would like to see as many of its homegrown movies to score with audiences as possible, but it also recognizes consumer demand for major Hollywood product.