Hollywood faces uncertainty in China as the film business slows

Feb. 18, 2019 5 AM PT

When the U.S. and China struck a landmark deal in 2012 to pry open the Asian country’s vast film market, Hollywood salivated. The hard-fought agreement was a boon to major studios, allowing huge returns for blockbusters such as “Transformers 4” and “Iron Man 3” while sparking a flurry of deals between U.S. and Chinese entertainment companies.

Seven years later, however, the unbridled optimism about China has been replaced by a more weary caution. Many film executives and producers are increasingly frustrated by the restrictions and unpredictability of the world’s second-largest film market, where the government has cracked down on celebrities and censored some of its most famous filmmakers.

The political climate in China has significantly cooled the frenzy of trans-Pacific entertainment deals and has made it more difficult for many U.S. distributors and producers doing business there.

“It’s a period of… uncertainty,” said Jeffrey Greenstein, president of Millennium Media, a Los Angeles production company. “People don’t know when they’re going to get money out, or what the censorship part is working toward.”

Limited market access remains a sore point. Major U.S. studios have long pushed for a greater share of box office in China than the 25% of ticket sales they receive under the agreement, compared with 50% in other nations. They also want better release dates during peak moviegoing periods, as well as more notice between a movie’s approval by censors in the market and its release date. A longstanding goal has been to boost the number of foreign films allowed into the country annually under the revenue-sharing deal (the current quota is loosely set at 34 films a year).

Furthering anxiety is the trade war between the Trump administration and China, which has put film industry issues on the back burner. Movie business matters are not expected to be addressed in the current discussions to secure a new China trade deal by March 1, when President Trump has said tariffs on $200 billion of imported Chinese products, including clothing and fish, will go up to 25%.

“The trade war suddenly cast a shadow over the whole thing,” said a studio executive who did not want to be named discussing China.

Though film discussions could resume after the U.S. and China reach a broader trade deal, few analysts think China will cave to the U.S. film industry, which has been overwhelmingly critical of the Trump administration.

I don’t think China wants to give Hollywood a victory in an area where Trump isn’t interested.

— Stanley Rosen

“I don’t think China wants to give Hollywood a victory in an area where Trump isn’t interested,” said Stanley Rosen, a USC political science professor and China film expert.

For American distributors looking to exploit China’s vast market, there are ominous signs, including China’s increasingly strict censorship, which has taken even experienced domestic icons such as director Zhang Yimou by surprise. Zhang’s “One Second,” set during the Cultural Revolution, was withdrawn suddenly from the Berlin International Film Festival for “technical reasons,” although observers believe censorship was the cause.

Zhang has won numerous international awards and is known for films such as “Hero” and “House of Flying Daggers.” He also produced the Beijing Olympics opening ceremony in 2008.

Last year, Walt Disney Co.’s “Christopher Robin” was blocked from release in China after a rash of earlier internet memes comparing Chinese President Xi Jinping with the animation of Winnie the Pooh. An earlier Disney film, “A Wrinkle in Time,” was also blocked.

In China, increasingly strict censorship has led to social media posts being removed, the closure of websites and a live-streaming site having to hire armies of their own censors to vet content or risk being shut down. Amid a crackdown on entertainment investments, major players such as Dalian Wanda Group, owner of Legendary Pictures and AMC Theatres, have scaled back their once ambitious plans.

“It’s very, very difficult to get anything done at all,” said another U.S. studio executive, who asked to remain anonymous because of the sensitivities in China. “There’s concern that people who touch the film business are compromised.”

China’s film industry has been in a state of near paralysis since film star Fan Bingbing was arrested last fall on suspicion of massive tax evasion and was forced to make a groveling public apology and repay almost $130 million.

A-list actors have been lying low, said Janet Yang, who produced “Dark Matter,” and “The People vs. Larry Flynt,” and was executive producer on “The Joy Luck Club.” Film production has slowed dramatically.

“In China it’s really a constant flow of political forces and a constant flow of market forces and sometimes they work nicely together and often they clash,” Yang said.

The scandal exploded after Fan was exposed on social media for a fake contract understating her earnings, a common practice in the industry. Authorities gave the industry until the end of last year to get its house in order, and celebrities and prominent companies were investigated.

Tax authorities reaped $1.73 billion from the industry in the crackdown, according to Xinhua News Agency. But fewer movies were made – meaning China will probably need to fill a gap next year, with the country fast building movie theaters. There were 60,079 cinema screens by the end of last year, 9,303 of which were added in 2018.

The Chinese market, though still essential for U.S. studios’ bottom lines, has proved challenging in recent years as the country’s growth has seen a dramatic slowdown from its rapid pace a few years ago. China’s box office grew 9% last year to $9 billion, a record but well below the torrid growth rates in 2014 and 2015.

Box office for Hollywood imports in China fell 7% last year to $2.9 billion, according to data compiled by Artisan Gateway, a consulting firm covering the Asian cinema industry. The downturn comes as competition for audience’s attention has increased in the market, thanks to a surge of homegrown hits supported by China’s government.

“The China market has slowed down to an uncertain dribble of business,”said Jean Prewitt, president of the Independent Film & Television Alliance.

The Warner Bros. romantic comedy “Crazy Rich Asians” was a hit in the U.S. but flopped badly in China last year. Audiences did not identify with the story of the ostentatiously rich male lead and his arrogant family.

Foreign distributors still face a raft of restrictions. Regulators block foreign movies from playing in theaters during major holidays, in order to showcase locally made films that show China in a positive light. During the Lunar New Year, China’s first successful space epic — the special effects-laden “The Wandering Earth” — earned $300 million in its first week of release, according to Artisan Gateway. The runner-up, the sci-fi comedy “Crazy Alien,” grossed $216 million. But as usual, U.S. studios couldn’t participate in the bonanza.

“What the studios want is more slots,” said one U.S. producer who asked not to be named because of business dealings in China. “I think that’s all about whether the Chinese feel they need the movies or not.”

Another problem is studios have little control over when their movies get released. Once a film is approved by censors, studios often get less than four weeks to prepare their promotional push. “Once Upon a Deadpool,” a PG-13 version of Fox’s “Deadpool 2,” was granted a Chinese release less than two weeks ahead of its allotted slot in January and grossed a modest $40 million in the country.

Short lead times make it difficult for Hollywood movies to succeed, unless the films have significant built-in awareness. “Captain Marvel,” which opens in China next month, is expected to do well there because of the huge fan base built by movies such as “Iron Man 3” and “Avengers: Infinity War.” “Star Wars” films, however, struggle in the country that has no nostalgia for the Lucasfilm series.

Some U.S. studios team up with Chinese partners to bolster marketing efforts.

Universal Pictures’ 2017 film “A Dog’s Purpose” benefited from having Alibaba Pictures, the film arm of Chinese e-commerce giant Alibaba, as a marketing partner. The company used data collected from people buying pet products on its online platform to target promotions for the film. It grossed an impressive $88 million in China.

Marvel antihero movie “Venom,” produced by Sony Pictures Entertainment, was buoyed by support of Chinese investor Tencent, which promoted the film through its music streaming platform. “Venom” took in a huge $270 million in China.

“In China, there are substantial restrictions on what you can do to market a movie before you have an approved release date,” said Rob Moore, a former vice chair of Paramount Pictures with extensive experience in China. “Movies that have broken out are franchises that have existing awareness or a massive Chinese partner.”

In a silver lining for Hollywood, the broader slowdown in box office growth has spurred China to allow more foreign films into the country in order to hit revenue growth targets, according to analysts. Last year, China approved Warner Bros.’s superhero movie “Aquaman” for a release date in a time period normally reserved for local movies. “Aquaman” grossed nearly $300 million in China.

In all, 38 foreign movies were released in China in 2018, according to Artisan Gateway, up from 35 in 2017. In 2014, 29 films were released under the revenue-sharing deal.

The flexibility over the quota illustrates how China is trying to balance two goals: maintaining revenue growth while boosting domestic films, said Marc Ganis, co-founder and chief executive of Jiaflix, which helps studios distribute movies in China.

“The quota is a great political tool to be utilized,” he said, “but it’s a line written in tinsel that is moveable to the extent that the government wants to use it.”

Faughnder reported from Los Angeles; Dixon reported from Beijing.

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