With a very vocal Donald Trump ready to become President of the United States, his appointments of trade policy maker Peter Navarro (who penned the book and subsequent documentary Death By China) and protectionist advocate Robert Lighthizer as United States Trade Representative, and Republicans and Democrats alike questioning China’s moves in the U.S., the political climate between China and the U.S is tense. It also means Chinese companies and their growing investments in the entertainment industry will face even greater scrutiny in 2017.
Not only are Chinese firms in general buying up farmland in the U.S. Midwest, hotels, insurance companies and real estate in the biggest American cities, but in 2015 and 2016, Middle Kingdom movers also began descending on Hollywood in a big way. And maybe it’s because of Trump’s insight into what has been happening in the U.S. real estate market that has led to his well-established and oft-stated negative views on China: Remember, Beijing-based real estate conglom Dalian Wanda Group’s U.S.-owned theaters via AMC and now Carmike (the latter in a just-closed $1.2B deal that creates the largest movie exhibitor in the U.S.) are sitting on prime real estate and have gathered up a fair share in the U.S.
Money talks in a capitalistic society, and as Stanley Rosen, a professor of political science at USC specializing in China, told Deadline this year: “Basically, Hollywood is cashing in and Hollywood is in the business of selling out.”
All of this comes as the USTR will begin negotiating a new contract with China in February on behalf of the film industry.
The current Hollywood acquisitions spree isn’t seen as slowing in the face of a crackdown by Chinese authorities to investigate deals outside companies’ core businesses (as is thought was an issue with Anhui Xinke’s proposed – and aborted — acquisition of Voltage Pictures last month). Says one industry observer: “The money is always going to be there… it’s a free market economy. In this period, China is always going to win.”
Wanda led the Hollywood charge by opening 2015 with the acquisition of Legendary Entertainment in a deal for $3.5B cash. It is built on performance guarantees and was said to have provided no upfront cash to Legendary co-founder Thomas Tull. (Wanda decided later in the year to delay putting the company into its entertainment portfolio because of the tenuous state of China’s stock market).
Wanda Group chairman and CEO Wang Jianlin, one of China’s richest men and who heads the company that already bought AMC in a $2.6B deal in 2012, has made no bones about wanting to own a major Hollywood studio. He almost got his wish last year at Paramount under Rob Moore, the vice chairman who proposed to his Chinese girlfriend Betty Zhou (host of a Chinese TV show he co-created) just days before he was shown the door in September.
However, Paramount parent Viacom said no to a deal that would have allowed Wanda a 49% interest in the studio. Interestingly, Paramount’s Oscar contender Arrival shows the Chinese as the world’s aggressor and then peacemaker against aliens. One of the major concerns from American politicians is propagandized content.
Paramount had — and continues to — open its doors to Chinese investment. Alibaba Pictures made its first investment in Paramount/Skydance’s Mission: Impossible – Rogue Nation in 2014 and then invested in the studio’s Teenage Mutant Ninja Turtles: Out Of The Shadows, and Star Trek Beyond. Huahau Media has also increasingly been a marketing partner. Alibaba Digital Media & Entertainment Group recently said it is planning to invest another $7.2B over the next three years.
Perhaps to strengthen its ties in Hollywood, Wanda also made a a deal with Sony which has a theme park component. The deal allows Wanda to take minority stake in some studio tentpoles. For Sony, it gives them production coin while also giving its product an outlet in Wanda parks, extending the revenue stream there and in other areas. There is currently a line of thinking in town that Sony might eventually sell a portion or all of the studios to Wanda.
Many more entertainment companies have sought and received investments from China, such as STX Entertainment and Studio 8. And it seems everyone is lining up to live-stream into China. (Yes, Wanda has even tried to acquire STX). Netflix tried to get into the marketplace but was late to the party (or shut out). Lionsgate, which has been streaming through China’s largest online video platform iQIYI since fall 2014 — recently signed a long-term output deal for its features and library titles.
In October, with an election looming between Trump and Hillary Clinton and Wanda having already come under scrutiny from 17 lawmakers on both sides of the aisle who wanted the company investigated for possible violations of the Foreign Agents Registration Act, Wanda forged ahead with a presentation in Los Angeles.
FARA, initiated to thwart foreign agents from infiltrating the U.S. government with propaganda, requires those acting as agents of foreign countries to make a public disclosure of their relationship with their government. Wang makes no bones about his tight allegiance and friendship with the Chinese government. USC professor Rosen told Deadline earlier this year that “There’s no such thing as purely private company in China because of the importance of Communist party committee, so any private company has to be very careful of not falling afoul of what the Communist party might expect. Wanda more than most because of (Jianlin)’s 11 years in the military, he is also from Dalian and he has other ties to party officials.” Fosun chariman and Studio 8 financier Guo Guangchang went missing last year right about this time — it was widely thought that he was picked up for questioning by the Chinese government.
On October 16, Wang and Jack Gao, Wanda’s chief executive of international investments and business developments for the Wanda Cultural Industry Group, descended on LACMA on Wilshire Boulevard joined by Academy of Motion Picture Arts and Sciences president Cheryl Boone Isaacs and Los Angeles Mayor Eric Garcetti all pitching better China-Hollywood relationships. The center of attention was Wanda’s state-of-the-art Qingdao Movie Metropolis complex, where the filmmaking community was urged to make movies. Chinese officials announced as a motivator a 40% subsidy, which is considered high in comparison to what other countries provide.
Some are biting: Joe Johnston will be directing Starfall, a $100 million-budgeted sci-fi film at Wanda’s Qingdao Studios with Lorenzo Di Bonaventura, Erik Howsam and Infinity Pictures’ Dede Nickerson producing. The film will be co-financed by Lionsgate, Wanda and Infinity Pictures, which is a China Media Capital-backed company.
Others are not that thrilled about traveling halfway around the world to shoot a film. As one filmmaker told Deadline, “I don’t know why we couldn’t just shoot here (in the States). We have blue screen here.”
Still, just this week, it came to light that Passengers producer Stephen Hamel is opening an office in Beijing for his Company Films to produce a slate of both English- and Mandarin-language film and TV projects, some of which will star Hamel’s friend/partner Keanu Reeves.
Regardless of political maneuverings, China is a market that cannot be ignored because it is seen as the next frontier, with more than 1.2 billion potential consumers. Wanda is expanding in exhibition in China, building out more theaters in the territory expected overtake North America box office by 2018 — and becoming the No. 1 market in the world — despite a slowdown in growth in 2016. Box office receipts in China are expected to double U.S. results by 2023.
At the Los Angeles gathering in October, AMPAS’ Boone Isaacs rallied in support of Wanda, taking to the stage at the Chinese company’s dog-and-pony show to say that the U.S. film history wing will be renamed the Wanda Wing. What she didn’t say there was that it came after Wanda donated $20M to the Academy.
She also said of China, “We have so much in common, not just because the industry is global but because the values are universal.” This, as the Human Rights Watch has consistently condemned China for human and civil rights violations. It is no secret the government keeps certain American films out of circulation there (Ghostbusters comes to mind, though ghosts are on the list of China Film Bureau’s no fly-zones even for Chinese movies) and they also heavily censor the Internet and have banned Twitter since 2012.
Boone Isaacs’ sentiment about “sharing the same values” would be reiterated a month later when Chinese businessman Jack Ma announced his e-commerce conglom Alibaba was taking a minority stake in Steven Spielberg’s Amblin Partners.
Also at the L.A. event, Garcetti called Wanda’s Gao “a brother,” noting Chinese companies’ large real estate holdings in Los Angeles — it is estimated that Chinese firms now own half of the buildings in downtown LA — and urged filmmakers to head out of Los Angeles and into China. This, as runaway production is a constant concern among local unions in Los Angeles.
MPAA chairman and CEO Chris Dodd also, surprisingly, took part in a promotional video for Wanda. The MPAA has long battled piracy and has named China as one of the worst offenders. Dodd’s predecessor, the late Jack Valenti, worked vigorously to stop China’s pirating of films.
When Trump started talking tariffs against China during the campaign, Wang said he asked Dodd to send a message to the eventual President-elect, threatening Trump’s hard stance against China and saying that position could cost the U.S. about 20,000 jobs (he was counting the number of companies in which they are invested).
The last USTR film industry contract in 2012 saw the quota rise from 25 to 34 films with a revenue-share hike. (There is a widely held misconception that the revenue-share films are currently capped at 34 per year. But, according to the agreement, 34 is a floor and not a ceiling.) It’s understood that the companies are beginning to align on what terms will be sought.
There is a hope that the big studios may, at some point, release their own films. Local companies can already apply for distribution licenses but have not taken advantage of the ability thus far. Even if they did, they would still need to go through the censorship process, and only China Film Group, which essentially controls the market, can apply for an import license.
Meanwhile, no true ancillary markets exist in China, so Amblin’s play, for example, was economic. As one former executive with experience overseeing a studio’s international division put it: “It’s the only ancillary money you get out of China. Alibaba is Amazon and Walmart put together. They are enormous so everyone is rushing to do a deal with them.”
Why? Because there is a 50% tax to the government on box office and then they split 50-50 with the distributor, so only about 25% is actually coming back to Hollywood (although that’s considered pure-play, falling directly to the negative since P&A is inexpensive in the PROC, though growing). TV is also controlled by the government. The DVD market is basically pirated. Alibaba right now, we’re told, is talking about possibly giving better terms than a 50-50 split.
Still, with Trump on his way with a new trade czar who is suspicious of China, along with lawmakers already leery, 2017 may just be the year that Navarro alluded to when he wrote his 2006 book The Coming China Wars.
One U.S. executive who has been working with the Chinese reckons that if the Trump administration continues on its present course, that “could be the biggest challenge facing Hollywood” in 2017.
“The first place you see retaliation from the Chinese government is shutting down messaging from the West (in the form of movies, TV, press, etc.). The Ministry of Propaganda controls messaging to the masses, and mitigating messaging from the West is part of that.” The exec notes that the exception would be messaging that may show the complete dysfunction of the U.S. government, à la House Of Cards.
In the meantime, those who know the situation with Wanda say that Wang is over-leveraged in real estate bets in two-tier and three-tier cities and has looming debt issues, and is doing whatever he can to beef up the company. And in China, even in business, you must show “a cultural good” for the people when you buy and sell property. “People talk about censorship and content, but it’s not about content,” said one U.S.-based executive who works with Chinese firms. “He is trying to buy assets to bring into China, to shore up his multiple to wash away debt.”
So it seems partnerships may be mutually beneficial in some cases, but with the Trump administration coming this month and all eyes on Chinese investment, the future remains tenuous.
Chris Fenton, a trustee of the Washington DC-based U.S.-Asia Institute and also president of Los Angeles- and Beijing-based DMG Entertainment, recalls being in China during the U.S. election. “Sentiment there regarding the results was initially positive. They viewed President-elect Trump as a transparent businessman and someone they could comfortably negotiate trade policy, etc. with,” he told Deadline. “That said, much has happened since, ruffling feathers in the U.S.-China relationship.
“The amount of calls I’ve received from offices of U.S. Congressional members expressing interest in the institute’s 2017 Congressional member delegation trips to China is unprecedented,” he continued. “Additionally, anxious calls from Hollywood executives curious how U.S. lawmakers and regulators will deal with the U.S./China relationship moving forward has surged. The motivation to understand the Chinese point of view and to find common ground is indeed there, but the challenges and obstacles look to be rising in the coming year.”