Hollywood's Coming China Problem
Author’s Note: If you want to watch the video, you can below:
I don’t think I am writing anything that the current movie industry already knows. The trade magazines in the film industry have been reporting a drumbeat of separating interests for months now.
I wrote and recorded this video before Spider-man No Way Home, and that movie has overtaken The Battle at Lake Changjin as the top grossing movie of the year. Notably, Spider-man opened and has done about a billion dollars in the global box office without a China release. China might still open the movie - last I heard, some time in mid-January - but the absence is very noticeable.
In 2020, China overtook the United States as the world's largest box office. The pandemic had a lot to do with it, of course, but it is still a sign of the times.
Over the past two decades, the American movie industry increasingly leaned on the Chinese market. Producers and studios bent their movies' content to appeal to Chinese audiences.
But the Chinese theater market is changing. Chinese studios are making better movies across a variety of genres. And the country is looking to turn its growing movie-making strengths into a massive cultural export machine.
Hollywood and the Western movie industry hoped China would mature into a cash cow. But China is actually turning into a competitor. In this video, I want to talk about the industry’s coming Chinese competition.
China's Movie Market
As opposed to the United States, China is adding thousands of theater screens to the market each year.
As of this writing in 2021, there are nearly 76,000 screens. They have added 5,794 in the past year - a pandemic year.
For many years, the western movie industry has been searching for way to replace declining DVD revenues.
At the same time, movies are getting more expensive. Either because of the rising costs of visual effects or because of higher star salaries. Budgets for blockbusters regularly run into the hundreds of millions - including marketing.
So every time a new film opens in the box office, they have to make back those millions. During the 2010s, the Chinese box office looked to be the way to help win back some of those declining DVD revenues.
How the Market Works
American movies entering the Chinese market have three major options to choose from. There is a flat-rate option, where a Chinese partner purchases the film distribution rights for a flat sum and gets to keep all the profits.
The American producer gets less upside here. And the FOMO can be quite great. For instance, in 2016 Leomus Pictures acquired the American film "Resident Evil: the Final Chapter" for something like $5-10 million.
But the movie ended up making $160 million in China, half of its total global box office. The producer did have a secondary deal lined up but their bottom line definitely missed out.
The other option is the one most often chosen by the big studios. This is a revenue sharing agreement where a Chinese distribution and exhibition partner takes 75%. The film importer gets about 25% of revenue.
Most of the big American blockbusters like Venom and the Avengers are released this way. 25% is less than the 40% that American films get elsewhere, but hey it is better than nothing, right?
The catch is that only a few movies a year get released like this. Right now, that quota is 34. Furthermore, the rules for receiving a quota slot are vague and up to the whims of the government.
The final type of market entry is a co-production. This is where the American film studio works directly in conjunction with a Chinese partner. This also requires a great deal of Chinese partner involvement and script approval, but the revenue share is much higher.
For instance, the Meg - a shark movie co-production masterpiece between Warner Brothers and China Media Capital’s Gravity Pictures. This is the largest grossing US-China co-production of all time with $527 million global gross.
Entering the Market
Hollywood has been selling films to China for decades. The first 25% revenue sharing film was the Fugitive from Warner Brothers, released in 1994.
For many years since then, Hollywood treated China as any other international distribution market. That changed as China opened more screens and Chinese people got more used to watching more films. Chinese box offices grew. For some films, China grossed a third or more of the total haul.
This caught producers' attention. And from there, you start to see a few scattered efforts to localize American films for the China market. This might mean including more Chinese elements into the plot, casting a Chinese person in the film, or modifying the film to please audience tastes.
For instance, there is a Chinese space station in the film Gravity. In Zootopia, they swapped one of the characters from a moose into a panda.
There is little evidence that these tweaks really help American blockbusters do better in the China market. And that is why American studios have pursued co-productions, partnerships and even acquisitions.
For instance, Legendary Pictures - which had been involved in the Dark Knight trilogy, the new Godzilla movies and Dune - selling itself to Chinese conglomerate Dalian Wanda in 2016. Or the aforementioned co-production Meg. Or the 2017 classic with Matt Damon, Great Wall.
None of these efforts have really panned out either. Perhaps in time, they could have resulted in better access and more successful product. But then, domestic competition caught up.
China’s Liberalizing Market
I think there is a tendency to dismiss Chinese-made movies as being boring propaganda pieces made by the government to stir up anti-Western froth.
Those do sometimes come out. For instance, the 2009 "Founding of a Republic", 2011 "Founding of a Party", and 2017 "Founding of an Army". So far as I know, these were produced in close collaboration with the Party.
But those movies did not do particularly well in the market despite boasting star-studded casts and favorable placements. Founding of an Army did just $60 million in the box office. Not a total flop, but not amazing either.
The reality of the contemporary Chinese movie market is that it is as market driven and dynamic as America’s. Over the past decade, the Chinese government gradually liberalized its domestic cinema market to the point where even the Party’s heavily backed films need to compete against other fare.
If you look at the top grossing movies in the Chinese market, you see the highest spots taken up by products from privately owned studios.
The way that liberalization happened is not by allowing more foreign movies into the market. But rather, by nurturing a China movie studio industry capable of making movies that are just as or even more popular with audiences as an American Avengers flick.
It is hard to develop a domestic industry capable of standing up to existing foreign competition without some foreign technology transfer. But for the most part, as I mentioned, there remains a divide between Hollywood and China.
With a few rare exceptions, you have not seen American filmmakers go over to China. For instance, Wolf Warrior 2, the 2017 $875 million box office hit, consulted with the Russo Brothers through their Anthem & Song startup studio.
This divide is in part due to the sheer logistical and cultural challenges involved. For instance, the making of the aforementioned flop Great Wall required 100+ translators, problem-solving conflicts between the two staffs, and the crafting of a story that somehow accommodated both Eastern and Western characters appearing together.
The Chinese domestic film industry has learned a whole lot more from working with Hong Kong. Hong Kong film has thrived ever since the 1970s, exporting films admired by audiences worldwide. Jackie Chan, Shaw Brothers, etc. The Hong Kong cinema industry is widely respected. I still like Infernal Affairs.
Starting in 2004, the Chinese government passed new measures to allow Hong Kong film companies greater access to the China market. HK companies can bypass the quota and take more of the box office proceeds.
Hong Kong-China productions surged to record highs, more than 30 films a year. Major early successes include Stephen Chow's the Mermaid (2016), Operation Red Sea (2018), and Monster Hunt (2015). Chinese companies rapidly gained production skills, a box office track record, and most importantly, talented people.
For instance, Andrew Lau, co-director of Infernal Affairs. He helmed the aforementioned Founding of an Army. His next project is a movie about Wuhan’s doctors during the pandemic.
The Rise of China
The second half of the 2010s has seen some massive domestic blockbuster hits by China-only private studios. Three in particular are indicative of the culture’s tastes.
The first is China’s latest box office hit: The Battle at Lake Changjin. This $200 million movie is China's first stab at premium Hollywood blockbuster filmmaking. It is based on the Battle of Chosin Reservoir during the Korean War.
Together with movies like Operation Red Sea and the Eight Hundred (see the video embedded above for that movie’s story), this category of action blockbuster is always popular with domestic audiences. That being said, I do not think this type of movie is going to play well abroad.
The second is China’s biggest science fiction hit ever: The Wandering Earth. Based on a story by Liu Cixin, who wrote the Three Body Problem, it follows a group of scientists who try to push the Earth to Alpha Centauri with 12,000 rockets.
It is notable for being picked up by Netflix for streaming - meeting a critical criteria. If third parties start buying and distributing it, that is export discipline at work.
Side note. Wu Jing starred in this. He was also in the Battle at Lake Changjin and Wolf Warrior 2. Dude must be the biggest movie star that nobody in the West has ever heard of.
Author’s note: Below is an old Asianometry video review of Wolf Warrior 2
And finally, China’s big animation hit film: Ne Zha. The movie features a protection deity from traditional Chinese folk religion and is loosely based on a 16th century novel. Despite not featuring any known actors, the movie made $742 million in the box office.
Animation is a powerful and lucrative category. Families love them, and they can be made at lower cost than live action flicks. Illumination Entertainment, for instance, made Despicable Me 3 for $80 million and it returned a billion dollars in the global box office.
The Five Year Plan
Recently, the China Film Administration released its Five Year Plan for the country's domestic film industry. It is worth studying as it gives a glimpse into future policy.
The Plan notes that China is expected to have 100,000 theater screens by 2025. This is over twice as many as the 44,000 in the United States. Theaters have become a critical part of Chinese culture.
The first major goal would be to improve the quality of the movie going experience. For theaters, that means promoting better cinema technologies. For instance, IMAX. China is one of IMAX's biggest markets, but there are a few domestic competitors.
For instance, Poly Pictures in 2011 introduced a competing standard of theater technology called POLYMAX. Another format is China Film Giant Screen. Neither have really caught on.
A Strong Film Power
With 100,000 theater screens in the coming years, the plan calls for the domestic film industry to provide a supply of content for them to show. And in the process, turn China into a "strong film power" that regularly exports movies that promote Chinese spirit, values, and power.
Kind of like what South Korea has done with its film and cultural exports.
Numerically, it calls for fifty domestic movies with a box office of at least $15 million USD (100 million RMB). Domestic films need to maintain 55% box office share of the China market.
Very achievable considering that local films were taking 60+% share even before the pandemic cut off the flow of Hollywood films.
When it comes to plots, the Plan calls out movies covering Chinese history, party history, reform and opening.
A sequel to Battle at Lake Changjin starring Andy Lau and Wu Jing is already being prepped.
Historical events of note include the Second Sino-Japanese War and World War II. So I am really hoping the Party approves that Asianometry spec script I submitted last week.
Additionally, they called out science-fiction and animation films. Battle at Lake Changjin grossed over $800 million USD, but I think policymakers recognize that those movies won't play well abroad.
By contrast, movies like the Wandering Earth and Ne Zha have more global appeal and export potential. More chances to display China's strengths and values.
Special Effects and VFX
The most interesting bit is the plan's focus on special effects. Expensive blockbusters have ambitious set pieces built on advanced visual effects. Only the United States is able to release more than a handful of these CGI-heavy blockbusters each year.
The Battle of Lake Changjin featured 575 VFX shots and 100+ assets. The Wandering Earth had 216 VFX shots and 100+ assets as well.
Delivering those effects will cost an immense amount of financial investment. But if the numbers for the Chinese box office are to be believed, there is more than enough money sloshing around to fund that. Though I am really curious what’s going to happen when these pioneering studios inevitably start producing their first big budget flops.
Side note. Something that really fascinates me is how much of those millions of dollars do the creatives see? Ne Zha made over 35x its budget. We all heard of Hollywood accounting. Is there a Chinese version of that too? Who got rich from this? The studios? The theaters? Just wondering.
Hollywood is and still will be the dominant entertainment capital. They eventually found a way to replace those declining DVD revenues with direct-to-consumer streaming. And I think streaming will be the money train really feeding all of these production companies going forward.
Furthermore, I think American films are going to hold strong market share for the foreseeable future. I don’t think Chinese films will ever get to be as popular in the USA as much as American films are enjoyed in China.
Overseas, the story is different. It is not hard to imagine a world where a film like Godzilla versus King Kong or the Minions has to compete with a Chinese film like the Wandering Earth 2 or Ne Zha for limited theater slots in Indonesia or Mexico or elsewhere.
For the longest time, only Hollywood was capable of making Hollywood-scale films. The China film industry is looking to change that.