Filmart: Recent Setbacks Cloud Future of Chinese Dealmaking

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From sagging box office to a clampdown on outward investment, insiders say confidence in the Middle Kingdom’s once-booming film market has dimmed.

Uncertainties emanating from the massive mainland China market dominated industry talk during the first day of Hong Kong Filmart on Monday.

After years of serving as the global film industry’s heroic growth engine, recently China has offered multiplying causes of concern instead: from a nagging box-office downturn to a chill in big-ticket U.S.-China dealmaking due to rising protectionism on both sides of the Pacific to an absolute freeze in business activity between Beijing and South Korea (over escalating geopolitical tensions) — not to mention the impending high-stakes renegotiation of China's notorious import quota.

"Of course, everyone still wants to work with China or get into China, but there is a lot less excitement and confidence than there was just a year ago,” says an executive working for one of the U.S. studios in Beijing.

After averaging yearly growth of 30 percent for nearly a decade, China’s box office expanded just 3.7 percent last year. “The box-office slowdown is a necessary step that we have to go through,” says Kenneth Wong, Zhejiang’s Hewen TV & Film’s creative director. “At this point, quality of the content is the core concern."

Elsewhere on the sales floor, industry insiders were fixated on Beijing’s recent clampdown on overseas investment activity. The number of deals derailed or delayed by the uptick in regulatory scrutiny continues to climb. The latest casualty: Dalian Wanda Group’s $1 billion takeover of Dick Clark Productions, the TV production company behind the Golden Globes. Dick Clark owner Eldridge Industries said Friday in a statement that one of its affiliates “terminated” the deal “after Wanda failed to honor its contractual obligations.” The DCP-Wanda meltdown follows the aborted sale of The Hurt Locker producer Voltage Pictures to Chinese metals manufacturer Anhui Xinke New Materials for $350 million in February.

“More than just a freeze in moving money or some kind of political backlash, I think what’s happening is the Chinese government is looking very closely at whether these acquisitions — and their valuations — actually make sense for the Chinese buyers,” says Jonathan Younger, vp international sales for Millennium/Nu Image, which has a pending deal to sell a 51 percent stake to China’s Recon Group for $100 million. “And if you look at the deals that fell apart, it’s pretty clear that they didn’t.”

Looming large in the background is Hollywood’s pending renegotiation of the terms of doing business in the mainland market, after the expiration last month of the five-year U.S.-China trade agreement limiting foreign film imports to just 34 titles per year on revenue-sharing terms.

“The quota system has become less important in and of itself,” says Stanley Rosen, a professor of political science at USC, noting that China’s regulators voluntarily let 39 revenue-shared titles into the market last year, instead of the usual 34, in order to maintain market growth.

Once negotiations on a new agreement kick off, the MPAA can be expected to push harder for other priorities, Rosen says, such as getting China to bring its revenue share above 25 percent, closer to the 40-45 percent common in most international markets, and grant foreign companies greater control over local marketing.

“Whatever the details, more Hollywood movies will be coming,” says Jerry Ye, CEO of leading Chinese studio Huayi Brothers. “For the Chinese industry, what we must do is clear — produce bigger and better movies.”

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