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China's Film Industry Prepares for Big Leaps in the Year of the Rabbit

A World Trade Organization ruling could change the landscape for China's industry.

BEIJING – After an astounding 2010 in China’s film industry, when the box office gross soared 64% to reach $1.5 billion in tickets sold, it sounds almost immodest but nearly everyone in the business is predicting even more growth in 2011, the Year of the Rabbit.

A flurry of partnerships have girded China’s moviemakers against an imminent increase in market penetration by the Hollywood studios, whose executives have caught the scent of the yuan after seeing several of their films gross more in China than any territory outside the United States.

With the March 19 deadline for China to show the World Trade Organization its progress toward allowing even greater foreign participation in the historically state-controlled distribution of films there’s little doubt that Hollywood has planted its flag in the Middle Kingdom and intends to fly it high.

Hollywood imports, though limited to 20 per year allowed to share in the box office gross, made more money on average in 2010 than their leading Chinese-language counterparts. According to Shanghai consultancy Artisan Gateway the top 10 Hollywood imports, led by Avatar, each grossed an average of 330.3 million yuan ($48.9 million) in China, whereas the top 18 Chinese films, led by Aftershock, each grossed an average of only 213 million yuan $31.5 million.

Notably, Avatar took in about $206 million to become the highest-grossing film in China’s history, doing so at a level more than double China’s all-time highest-grossing homemade hit, the late-December release Let The Bullets Fly, which took in more than $100 million in early 2011.

It’s against this backdrop of high-stakes competition for the attention of China’s roughly 200 million potential middle class moviegoers that Chinese companies are forming partnerships designed both to improve their films’ competitive edge and establish footholds in the growth areas of exhibition, Internet distribution and online gaming.

“While foreign players show increasing interest in the mainland Chinese industry via local partnerships, we also see Chinese operators reaching outward either directly or via trusted relationships to enhance and expand core businesses,” says Artisan Gateway president Rance Pow. “Two motivated sides will make more deals happen, and may serve to further energize the value of Chinese product overall.” 

Just after Filmart 2010, Beijing Galloping Horse Film & TV Production, backer of John Woo’s upcoming Flying Tigers film, signed a strategic partnership with state-owned retail group China Resources Vanguard. The partners said they would develop 200 new cinema screens by 2016. Since the signing, the pace of China’s cinema market growth caused that deal to bolt out of the gate, Galloping Horse CEO Ivy Zhong told The Hollywood Reporter last week: “We now plan to have almost 500 screens in three years,” she said. 

By the end of 2010, the State Administration of Radio Film and Television said all of China had about 6,200 screens in approximately 2,000 cinemas, this after adding 1,500 screens or about four per day.

“The key to staying competitive in this market is getting a good price at a good location,” Zhong told The Hollywood Reporter. “We worked with a big developer so we can put our superstar films into these theaters.”

And the idea of one company trying to capture revenue at every stage of the filmmaking process is growing in China these days like it’s headed back to Hollywood’s Golden Age, when the studios owned a piece of everything from script to screen from the 1920s to early 60s.

In this vein, last year Beijing-based Chengtian Entertainment, to boost the quality of its filmmaking, not only invested in Legendary Pictures of Hollywood, but, like Galloping Horse, also is planning on adding 200 new screens in China in the coming years to supplement its current cinema holdings of about 300 screens across East and Southeast Asia.

“Cinema expansion won’t slow down for the next five years. After five years we’ll see some consolidation,” says Zhong, expressing a sentiment with which Artisan Gateway’s Pow agrees: "Partnerships in co-production will continue to lead the way, but discussions about consolidation in other links in the industrial chain have already begun, with the more aggressive companies looking to become buyers and avoid being targets.”

While all this deal-making and jockeying for position goes on around production and exhibition, some companies must still strive to ensure that finished films look good when they’re projected. To this end, the Shanghai Film Group last June agreed to establish a joint-venture digital film facility with Technicolor, which has worked on recent films by Feng Xiaogang (Aftershock) and Zhang Yimou (Under the Hawthorn Tree). 

Billy Wu, Technicolor’s chief China representative tells The Hollywood Reporter that there has been lots of activity around selecting the Shanghai site for the facility, which eventually will outsize Technicolor’s Bangkok plant. Initial collaboration will focus on the processing of film dailies from projects in production. “Sound, [theatrical] release printing and animation will come later,” says Wu, hinting that full details will be unveiled in June at the Shanghai International Film Festival.

Considering that most Chinese feature film budgets still are about one tenth the size of their Hollywood counterparts, Wu says China’s not yet able to produce competitive high-end movies with lots of expensive effects. But he sees change projected on the screen of the near future.

“The trends are very clear: more Chinese directors at all stages of their careers are learning the digital techniques and as budgets rise directors are willing to spend on money on technology,” says Wu adding that the challenge lies in learning the newest cameras, editing bays and computer effects software.

“The challenge is the people, the artists. China just started this high tech part of its industry about four years ago and has a long way to go to compare with the movies of the West,” Wu says.

Some elder statesman with backing are making progress already: director Feng Xiaogang shot Aftershock in the giant screen Imax format, and it and Avatar deserve no small credit for boosting the 2010 box office take by drawing Chinese consumers willing to pay a premium for something never before experienced.

The 11 Imax format features released in China in 2010 on the nation’s 22 Imax screens made China the second largest market in the world for the Toronto-based company after the U.S. Imax plans to expand its China theaters to 50 by 2012 and started recently with a four-theater deal with East China’s Jiangsu Broadcasting Corp. 

If you’re not Feng Xiaogang but an unproven director, one way to test your mettle cheaply — before asking for a big feature film budget — is to throw yourself at China’s ravenous Internet population, now 457 million strong and hungry for entertainment.

Testing this fertile feeding (and selling) ground, the state-run China Film Group and U.S. auto giant General Motors worked with leading online video web site Youku to sponsor a short online film contest. One entrant, Xiao Yang, a thirty-something advertising industry acolyte attracted roughly 75 million views with his short Lao Nan Hai (Old Boy). 

Eventually, Donny Liang, CEO of start-up film outfit FromMovie Entertainment in Beijing partnered with Xiao to do a sequel which Liang told The Hollywood Reporter FromMovie plans to co-release with Youku in April, hoping to make back its investment from online advertising.

“Online is a good platform to nurture new writers and filmmakers and it’s cheaper and more free, less censored,” said Liang, whose company board includes Mason Xu Liang, the chief financial officer of Bona International Film Group, which listed its shares in New York in December. “We’re betting that some revenues from online will make more money than theatrical releases,” Liang said.

Lest it be seen to be stray too far from its roots CFG also drew GM into a partnership on a propaganda film, surely a modern Communist’s idea of a practical joke. In exchange for a spotlight on its luxury Cadillac brand, GM committed to co-fund the upcoming The Founding of a Party, a film celebrating the 90th anniversary of the Communist Party of China in 2012.  

Pow of Artisan Gateway expects that all kinds of partnerships will flourish in China in the coming year: "They’re a natural evolution of the marketplace, especially since the forecast is for some 2,800 new screens being added in 2011. It makes sense that Chinese partners continue to look to one another to share skill sets and position themselves to be more competitive in what's sure to be another explosive growth year."