The Global Forces Behind Rhythm & Hues' Bankruptcy

This story first appeared in the March 1 issue of The Hollywood Reporter magazine.

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Globalization is wreaking havoc on Hollywood's visual effects community.

Cheap labor in China and India and seductive tax incentives like British Columbia's 33 percent credit on local labor have allowed foreign firms to trigger competitive bidding so intense that the biggest VFX houses are surviving on slim profit margins, often less than 5 percent annually, in a hot-and-cold business. Rhythm & Hues, Oscar-nominated for Life of Pi, filed for bankruptcy Feb. 13, laid off 250 employees and is relying on $17 million in court-approved loans from studios.

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R&H tried to adapt by opening facilities in Mumbai, Vancouver, Malaysia and Taiwan -- but didn't move fast enough. "Infrastructure and head count in these territories is only adding cost" for California-based companies opening branches abroad, says Ed Ulbrich, CEO of VFX rival Digital Domain, which went through bankruptcy in 2012 and was acquired by India's Reliance MediaWorks.

Adds another insider, "If VFX companies think they are solving the problem by moving to a different city for tax credits, they are smoking crack."