China's Film Industry Steps Out of the Shadows
China's WTO commitments are opening up the film industry—and not just to foreign investment
by William Brent
In 1994, The Fugitive starring Harrison Ford made history by becoming the first Hollywood blockbuster to be released in the PRC on a revenue-sharing basis. In the film, Ford's character, Dr. Richard Kimble, is convicted of his wife's murder. He proclaims his innocence, escapes, and embarks on his own investigation to find the real killer—an elusive one-armed man with a metal-hook prosthesis.
Unlike Dr. Kimble, however, the Chinese government has only its own clumsy iron fist to blame for the pounding the Chinese film industry has taken in the last 10 years. Yet a miraculous recovery seems imminent, in large part because the government is finally relaxing its tight grip on the industry.
When I started working in the Chinese film industry a decade ago, it was a time of optimism. The government was actively discussing reforms, and a more open film market seemed just around the corner. But as so many businesses in China have discovered, around one corner lies another, and then another, until one day you find yourself trapped in a Hitchcockian maze. Ever the optimist, at the end of each year I would turn to whoever would listen and say, "It can't get any worse." Each year I was wrong. Piracy worsened, box office receipts declined, and private investment in production or distribution companies remained forbidden. But a wise man once told me that if you spend 23 hours saying, "The sun is going to rise," eventually on the 24th hour, the sun does rise. Starting in 2002, the sun finally rose over the Chinese film industry.
Dawn breaks
Among the most onerous of the longstanding restrictions on the PRC film industry was the requirement that all foreign films destined for theatrical release be sold to China Film Group—a state-owned enterprise. China Film bought all foreign films for very low flat fees, and the foreign studios did not share in the box office revenue. Only 10 foreign films were distributed on a revenue-sharing basis per year in China before it joined the World Trade Organization (WTO). Before China's WTO entry, foreign companies were forbidden to invest in movie theaters.
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Dazzling, released in late 2003, was Cinezoic's first film.
Photos courtesy of Cinezoic Film and Television Corp.
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After years of hemming and hawing, Beijing announced that beginning in February 2002, it would allow private Chinese companies to produce and distribute movies independently. With the June 2003 announcement of the end of the 50-year state monopoly on the import of foreign films, as well as the emergence of more mature capital markets and a new generation of savvy producers, the pieces of a twenty-first century film powerhouse have begun to fall into place.
These developments do not herald the first age of Chinese film. Shanghai was the center of a vibrant private film industry prior to the communist takeover in 1949. After the revolution, the heart of the industry was moved to Beijing, where it has remained under the watchful eye of conservative propaganda censors. The world caught a glimpse of the global potential of Chinese film in the late 1980s and early 1990s, when films by Zhang Yimou and Chen Kaige found an international audience, but international interest quickly faded except for a loyal art house following.
But now, with the overall market shift that China's entry into the WTO requires, China's film industry is also reaping benefits. According to China's WTO commitments, upon entry in 2001, the country had to allow foreign investment of up to 49 percent in the construction and renovation of movie theaters and joint venture distribution of video and sound recordings (excluding motion pictures). In addition, China must allow 20 foreign film imports a year on a percentage rental (i.e., revenue sharing) basis, up from the previous 10. The commitment to allow foreign investment in the industry, which the government has largely honored, has ironically given Chinese domestic companies greater leeway to acquire the knowledge and capital needed to compete with the Hollywood juggernaut.
One of the first steps the government took to open up the domestic film industry was to end the production monopoly of the large state-owned studios in 2002. Licensed private Chinese film companies may now apply directly to the government for approval to produce and distribute a movie. In the past, private producers were forced to buy a permit from one of three dozen state-owned studios, which received a fixed quota of permits from the government each year. Since state control was lifted, the government has approved a select number of private Chinese production companies, including my company, Cinezoic Film and Television Corp.
The decision to break state control reflects government recognition that the old system had failed. Even as the heavily subsidized state-owned studios struggle to stay afloat, the reforms are finally attracting the attention of domestic investors. And like China's TV industry, which was quickly transformed from a propaganda tool into a true industry during the 1990s—when the money involved got everyone's attention (including the tax-hungry government)—the film industry is about to exit political purgatory and become a full-fledged market.
Several developments offer a clear vision of this future:
- The success of Zhang Yimou's Hero, a martial arts epic made in 2001 at a cost of $30 million, according to the producers, and released in 2002, is the clearest indication yet that China will have a large market for homegrown blockbusters. Hero broke box office records in China for domestic films, bringing in about ¥240 million ($29 million). The major Hollywood studios all realize the potential signaled by Hero, and Columbia-Tristar Motion Picture Group, Warner Brothers Entertainment Inc., and Miramax Film Corp. are leading the way in localization by cofinancing, marketing, and sometimes distributing Chinese films abroad. (Foreign companies still may not distribute films in China.)
- With the launch of the 24-hour Chinese-language Celestial Movie channel broadcast out of Hong Kong, the growing strength of China Central Television's Movie Channel, and the planned creation of other national Chinese movie channels, movie producers can now treat TV sales as a legitimate revenue source.
- New policies allowing private Chinese equity in theatrical distribution, which took effect in June, paved the way for the creation of Huaxia Film Distribution Co.—the new distribution company that started to compete against erstwhile monopoly movie importer China Film Group in August with the release of Terminator 3.
Private distribution companies targeting domestic movies have also been popping up. Seven companies, such as Beijing Bona Culture Co. and Huayi Brothers, have been approved by the State Administration of Radio, Film, and Television (SARFT) to enter the fray, some of them with backing from major Chinese conglomerates.
- Because private capital has been permitted to enter video distribution, many of the video pirates who made a fortune selling illegal copies of Hollywood films are now turning semi-legitimate. This is crucial, since the Motion Picture Association (MPA) estimates that more than 90 percent of film titles sold in China are pirated. One sign of this shift toward legitimacy was the video rights purchase price for Hero, which was bought at auction by Guangdong Weikai Audio and Video Production Co. for nearly ¥18 million ($2.12 million), a previously unheard-of sum.
- The Chinese courts are starting to enforce China's laws against piracy, supporting the efforts of the MPA, whose members are the top seven US studios. A court in Shanghai recently awarded damages to Twentieth Century Fox Film Corp., The Walt Disney Co., and Universal Studios Inc. after finding retailers guilty of selling pirated videos. The MPA plans to press its point by filing more lawsuits in the coming months. Domestic producers are also increasingly litigious in protecting their copyright.
- Companies such as Poly Group Corp. and Stellar Megamedia Group Co. Ltd., which are investing in local distribution companies, are also moving aggressively to enter the exhibition market by acquiring existing cinema chains. Such moves signal a future in which a handful of large companies will control both exhibition and distribution. The major Hollywood studios are following suit. Earlier this year in Shanghai Warner Brothers opened its first Chinese multiplex, which is already the top cinema in terms of revenue in the city, and has selected locations nationwide to open 10 more. Warner Brothers's strategy is simple: first build a chain of cinemas, and then wait for restrictions on foreign investment in distribution to be lifted, something that is widely expected within the next five years. In addition, China Film is installing digital screening systems in 100 screens nationwide, which if successful, could significantly reduce the cost of producing and distributing film prints.
- SARFT plans to introduce a movie rating system for the first time in China next year. The long-debated decision should help reduce the role of censorship by turning what were once highly subjective standards into more objective guidelines that leave less room for political interference. Moreover, there has been some discussion within SARFT about devolving censorship to local governments, but just how that plays out remains to be seen.
- Besides letting Hollywood release more of its films under the WTO agreement—60 films total within three years of China's WTO entry in late 2001—the government has also exempted Hong Kong films from the quota limiting foreign film imports, instead treating Hong Kong movies as domestic films.
An infant industry
Despite these positive signs, the Chinese film industry is miniscule when compared to Hollywood. A wide-release film in the United States, for instance, requires around 3,000 prints. In China a wide-release film such as Hero required just 300 prints. Moreover, Hollywood generated box office revenue of nearly $10 billion in 2002, according to the MPA. In comparison, Chinese distribution executives estimate that China's box office revenue in 2002 was roughly ¥1.2 billion ($145 million), or 1.4 percent that of Hollywood. That's a humbling figure, especially since Hollywood films account for more than half of box office revenue in China, but it is also an exciting one. Because the film industry has only just started to gain access to capital markets and foreign investment, there is lots of room for growth.
Merchandising is one example of a largely untapped market for China's film industry. Another is marketing, which is weak. Distribution systems, too, are immature. Despite the growing number of comfortable, high-end multiplexes in China, the exhibition market remains underdeveloped, with only one screen for every 122,000 people compared to 8,600 screens per person in the United States, according to the MPA. And the government remains responsible for the continued incentive to pirate by limiting the number of video titles allowed into the country each year. It is also failing to stamp out growing broadband piracy. All of these issues, while potential obstacles, are also great opportunities for foreign and domestic film companies to stake a claim in China's film industry.
| China's Top 10 at the Box Office, 2002 |
| Title |
Place of Origin |
Box Office Revenue |
| 1. Hero |
PRC, USA |
¥245 million |
| 2. The Lord of the Rings: The Two Towers |
USA |
¥60 million |
| 3. Harry Potter and the Chamber of Secrets |
USA |
¥50 million |
| 4. Star Wars: Episode II - Attack of the Clones |
USA |
¥40 million |
| 5. The Touch |
PRC, HK |
¥27 million |
| 6. The Lion Roars |
HK |
¥23 million |
| 7. Chinese Odyssey 2002 |
PRC, HK |
¥22 million |
| 8. Ghosts |
PRC |
¥17 million |
| 9. Together |
PRC |
¥14 million |
| 10. Mighty Baby |
HK |
¥10 million |
| Total |
|
¥508 million |
| Source: Cinezoic Film and Television Corp. |
The continuing decline of the film business in Hong Kong and Taiwan, and a growing awareness among Chinese film audiences of Japanese and South Korean movie and television stars, has meant that many in the Asian film community are starting to turn to China, with pan-Asian cofinancing becoming more commonplace for mainland productions. Foreign investment in Chinese productions has always been allowed on a project basis (as opposed to taking equity in a Chinese production company, which is still technically prohibited). Sino-foreign coproductions must undergo a special approval process and pay a management fee to the China film coproduction bureaucracy.
But some things have changed. For example, coproductions are now allowed to print two versions of a film, one for domestic release, the other for foreign release. Content control on the foreign release prints is less strict. As for domestic financing, in the last decade money often came from real estate developers, who used loopholes in Chinese law to write off film investments as a corporate marketing expense. Now more investment is coming from institutional investors that make strategic decisions, as opposed to opportunistic ones.
The changes in China's film industry should eventually create a virtuous cycle in which producers can find investors willing to put up money for bigger budget films, which will be marketed and distributed without the threat of rampant piracy. This, in turn, will allow brand new multiplexes to earn greater box office receipts and the post-theatrical market, including video and TV sales, to flourish.
William Brent is managing director of Cinezoic Film and Television Corp., a private Shanghai film studio, which will release the film Bamboo Shoot in 2004.
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