By Dominic Ng
Since the start of 2014, Chinese investors have spent more than $5 billion on equity investments in the US film industry, and millions more on movie production. This growth is driven by demand for high-quality entertainment by China’s middle class. Never before has a large single film market grown as quickly as China has in the past decade.
Chinese firms are struggling to ramp up their capacity to meet that demand, and that means a once-in-a-lifetime opportunity for the United States to seize on its comparative advantage in the industry and boost Hollywood’s global reach, which will support thousands of jobs in Southern California.
An aggressive publicity campaign by lobbyist Rick Berman has fueled anxiety about censorship and risks from Chinese investment in the US entertainment industry. Politicians have elevated it to the policy agenda. While a debate about potential risks is legitimate, it needs to be balanced and based on facts. Despite the recent increase of Chinese investment, the scale of Chinese ownership in Hollywood is far from a threshold where it could undermine its diversity and openness.
Chinese inroads to Hollywood
Since 2015, Chinese presence in the US movie industry has rapidly expanded. Investors from China are using equity investments and other financing arrangements to expand their footprint in movie production, distribution, and screening.
Direct investments have been a particular interest for Chinese investors. From 2014 through the first half of 2016, Chinese investors have spent more than $5 billion on 13 equity investments in the US film industry, most in movie production. Several Chinese companies, including Huayi Brothers and LeEco, have set up new greenfield operations in California. Others have invested with established local producers, such as Tencent’s investment with Tang Media Partners into IM Global, and Fosun’s stake in Studio 8. In other cases, Chinese companies have outright acquired existing production firms, such as Wanda’s acquisition of Legendary Entertainment. Wanda, China’s largest entertainment conglomerate, has become the largest theater chain operator in the United States through its acquisitions of AMC in 2012 and Starplex in 2015.
Chinese investors have also put capital to work in the US movie industry through other channels, particularly film co-financing. Huayi Brothers signed a deal in 2015 to co-produce more than 18 films with STX. Hunan TV signed an agreement in 2015 to finance Lionsgate productions, and Bona Film Group, through its investment in TSG Entertainment Finance, struck a deal to invest in 20th Century Fox’s slate. The trend has continued in 2016 with agreements between Alibaba Pictures and Amblin Entertainment, the production outfit backed by Steven Spielberg; and Perfect World with Universal. And moviegoers have already seen the fruits of earlier financing agreements, including Star Trek Beyond, X-Men: Apocalypse, and Jason Bourne.
Entertaining China’s middle class
Hollywood is not alone with this influx of Chinese capital. Chinese investors are buying into sports and entertainment assets worldwide, including soccer clubs, online gaming developers, and triathlon operators. The main driver of this global investment boom is a gap between growing demand for high-quality entertainment and the ability of Chinese companies to meet that demand.
China’s middle class has rapidly expanded in recent years, with per capita incomes growing from $1,750 in 2005 to $8,000 in 2015 nationwide. In some eastern coastal provinces and municipalities, per capita incomes have now reached $17,000, well above the World Bank’s threshold for high-income economies. This rise of affluent middle class consumers boosts demand for entertainment. Box office revenues have grown from $900 million in 2009 to $7 billion in 2015. It is reasonable to expect China to become the largest movie market in the world within the next three years, perhaps in 2018.
Chinese businesses are trying to keep up with this demand, especially in highly complex areas such as movie production. You cannot build another Hollywood in five years, even if you had all the money in the world. Overseas acquisitions and joint ventures in the United States are a logical choice for Chinese investors seeking to quickly gain a foothold in the global movie production industry, and build their expertise in all aspects of the film industry. Local presence in Hollywood is also of critical for any entertainment company with global aspirations, and emerging conglomerates such as Wanda or LeEco certainly have that vision.
Not just a source of capital
Creative industries are a critical driver for the US economy and are particularly important for local clusters such as Hollywood. Movie production accounts for about 10.6 percent of the gross economic output in the greater Los Angeles region, providing over 400,000 jobs directly and many more indirectly. Foreign capital has long been a significant part of Hollywood. According to the US Department of Commerce, foreign firms currently have almost $60 billion of assets in the US film and music industry, with the related companies employing more than 40,000 Americans.
The emergence of China as investor can further boost foreign investment in the industry and all related benefits for the local communities. However, it is wrong to merely see China as a source of cheap capital. It is much more than that: it is an exciting opportunity for linking US movie production capabilities to a fast growing emerging market, which may soon be the largest economy of the world. After years of US companies outsourcing to China, China is now looking to outsource high value-added and high-skilled activities such as movie production to the United States, and foreign direct investment (FDI) is the vehicle for this process. These are exactly the kind of opportunities that globalization and economic integration with China offers, and the United States must embrace them.
The experience in other industries has shown that growing Chinese ownership can help modify existing import controls, which could help change China’s current quota system for foreign films. Greater linkages with Chinese firms through investment also offer tremendous opportunities upstream and downstream for US entertainment companies in China. Greater exposure for US franchises and stars also generates more commercial opportunities in other areas, including merchandising or theme parks.
Censorship anxiety is overblown
Similar to the 1980s and 1990s, when Japanese companies made forays into Hollywood, there is concern that Chinese investment in the US movie industry could give China the opportunity to control content in US-produced movies and introduce a backdoor to censor content that the Chinese government deems sensitive. In recent weeks, an aggressive media campaign has further fueled anxiety, with irresponsible claims that Hollywood runs the risk of becoming a Chinese propaganda outlet.
Concerns about media censorship in China are legitimate. While there has been progress over the last three decades in the liberalization of Chinese culture in general, and film in particular, the Chinese government still controls the content of movies screened in China. This process also affects foreign movies that target a Mainland Chinese audience.
However, claims that Chinese investment in US movie production could allow Beijing to undermine freedom of expression and speech and turn Hollywood into a Chinese propaganda outlet are far-fetched. For one, the US entertainment industry is diverse and despite the recent growth, China’s position remains small and far from a combined threshold that would allow China to control opinion. According to the US Bureau of Economic Analysis, the private fixed asset stock of the US movie and recording industry was approximately $300 billion in 2015. Foreign investors accounted for 20 percent of those assets. The share of Chinese companies was too small to be broken out separately, but the combined value of all equity investments through 2015 suggests that it was less than 1 percent. A number of acquisitions in 2016 has increased the role of Chinese companies, but it is safe to assume that China’s share in total US entertainment industry assets remains well below 5 percent.
More importantly, there is a strong business case against manipulating content: the value of movie companies and other creative enterprises is closely tied to their brand, their reputation, and their talent. Hollywood producers with Chinese ownership will receive special scrutiny and any attempt at censorship would be noticed right away. This in turn would taint that company’s reputation and drive talent away, which would wipe out a significant share of the company’s value. It is important to have a debate about potential risks, but that debate must be based on facts and not fear.
A once-in-a-lifetime opportunity
The rise of China’s middle class and the appetite of Chinese companies to participate in the global entertainment industry is a unique opportunity for the U.S film industry and the US economy. Hollywood needs to stay creative to capitalize on this opportunity. At the moment, the linkages provided by direct investment and slate financing from Chinese investors are one of the strongest means to doing so.
About the author
Dominic Ng is Chairman and Chief Executive Officer of East West Bank. Headquartered in California, East West Bank is a top performing commercial bank with exclusive focus on the US and Greater China markets. www.eastwestbank.com/reachfurther