Entertainment

Chinese Investment in Hollywood: Focus on Opportunity, not Fear

East West Bank Chairman and CEO Dominic Ng says current anxieties are overblown.

Since the start of 2014, Chinese investors have spent more than $5 billion on equity investments in the U.S. film industry, and millions more on movie production financing. This growth is driven by a soaring demand for high-quality entertainment by China’s middle class. Never before has a large single market for film grown as quickly as China has in the past decade.

Chinese firms are struggling to ramp up their capacity to meet that demand, and that means a once-in-a-lifetime opportunity for the United States to seize on its comparative advantage in the creative industry and further boost Hollywood’s global reach, which will support thousands of jobs in Southern California and elsewhere.

Now, an aggressive publicity campaign by lobbyist Rick Berman — funded by unidentified sources — has fueled anxiety about censorship and other potential risks from Chinese investment in the U.S. entertainment industry. Politicians in Washington have picked up the topic, putting it on the policy agenda. While a debate about potential risks is legitimate and important, it needs to be balanced and based on facts. Despite the recent increase of Chinese investment, the scale of Chinese ownership in Hollywood is far from a threshold where it could undermine its diversity and openness.

(Photo credit): Gettyimages.com/Jiyun Kang/EyeEm

"While a debate about potential risks is legitimate and important, it needs to be balanced and based on facts."

Chinese inroads to Hollywood

Since 2015 Chinese presence in the U.S. movie industry has expanded rapidly. Investors from China are using equity investments and other financing arrangements to expand their footprint in movie production, distribution and screening.

Direct investments have been a particular interest for Chinese investors. Since 2014 through 2Q 2016, Chinese investors have spent more than $5 billion on 13 equity investments in the U.S. film industry. Most of those investments occurred in movie production. Several Chinese companies have set up new greenfield operations in California, including Huayi Brothers and LeEco. Others have invested with established local producers, such as Tencent’s investment with Tang Media Partners into IM Global, and Fosun’s stake in Studio 8. In other cases, Chinese companies have outright acquired existing production firms, such as in the case of Wanda’s acquisition of Legendary Entertainment. Wanda, China’s largest entertainment conglomerate, has also notably become the largest theater chain operator in the United States through its acquisitions of AMC in 2012 and Starplex in 2015.

In addition to equity investments, Chinese investors have also put capital to work in the U.S. movie industry through other channels, particularly film co-financing. Huayi Brothers signed a deal in 2015 to co-produce more than 18 films with STX. Hunan TV signed an agreement in 2015 to finance Lionsgate productions and Bona Film Group, through its investment in TSG Entertainment Finance, struck a deal to invest in 20th Century Fox’s slate. The trend has continued in 2016 with significant financing agreements between Alibaba Pictures and Amblin Entertainment, the production outfit backed by Steven Spielberg; and Perfect World with Universal. And moviegoers have already seen the fruits of earlier financing agreements, including Star Trek Beyond, X-Men: Apocalypse, and Jason Bourne.

Entertaining China’s middle class

Hollywood is not alone with this influx of Chinese capital. Chinese investors are buying into sports and entertainment assets worldwide, including soccer clubs, online gaming developers and triathlon operators. The main driver of this global investment boom is a gap between growing demand for high-quality entertainment and the ability of Chinese companies to meet that demand. China’s middle class has expanded rapidly in recent years, with per capita incomes growing from $1,750 in 2005 to $8,000 in 2015 nationwide. In some eastern coastal provinces and municipalities, per capita incomes have now reached $17,000, well above the World Bank’s threshold for high-income economies. This rise of affluent middle class consumers has boosted demand for entertainment. Box office revenues have grown spectacularly in recent years, from $900 million in 2009 to $7 billion in 2015. It is reasonable to expect China to become the largest movie market in the world within the next 3 years, perhaps in 2018.

Chinese businesses are trying to keep up with this demand, especially in highly complex areas such as movie production. You cannot build another Hollywood in five years, even if you had all the money in the world. Overseas acquisitions and joint ventures in the United States are a logical choice for Chinese investors seeking to quickly gain a foothold in the global movie production industry, and build out their expertise in all aspects of the film industry. Local presence in Hollywood is also of critical importance for any entertainment company with global aspirations, and emerging conglomerates such as Wanda or LeEco certainly have that vision.

(Photo credit): Gettyimages.com/Usman Ghani/EyeEm

"The scale of Chinese ownership in Hollywood is far from a threshold where it could undermine its diversity and openness."

Not just a source of capital

Creative industries are a critical driver for the U.S. economy and are particularly important for local clusters such as film in Hollywood. Movie production accounts for about 10.6 percent of the gross economic output in the greater Los Angeles region, providing over 400,000 jobs directly and many more indirectly. Foreign capital has for a long time been a significant part of Hollywood. According to the U.S. Department of Commerce, foreign firms currently have almost $60 billion of assets in the U.S. film and music industry, with the related companies employing more than 40,000 Americans.

The emergence of China as investor can further boost foreign investment in the industry and all related benefits for the local communities. However, it is wrong to merely see China as a source of cheap capital. It is much more than that: it is an exciting opportunity for linking U.S. movie production capabilities to a fast growing emerging market, which may soon be the largest economy of the world. After years of U.S. companies outsourcing to China, China is now looking to outsource high value-added and high-skilled activities such as movie production to the U.S., and foreign direct investment (FDI) is the vehicle for this process. These are exactly the kind of opportunities that globalization and economic integration with China offers, and the United States must embrace them.

The experience in other industries has shown that growing Chinese ownership can help modify existing import controls, which could help change China’s current quota system for foreign films. Greater linkages with Chinese firms through investment also offer tremendous opportunities upstream and downstream for U.S. entertainment companies in China. Greater exposure for U.S. franchises and stars means more commercial opportunities in other areas, including merchandising or theme parks.

(Photo credit): Gettyimages.com/jeff giniewicz

"Greater linkages with Chinese firms through investment also offer tremendous opportunities upstream and downstream for U.S. entertainment companies in China."

Censorship anxiety is overblown

Similar to the 1980s and 1990s, when Japanese companies made forays into Hollywood, there is concern that Chinese investment in the U.S. movie industry could give China the opportunity to control content of U.S.-produced movies and introduce a backdoor for censoring content that is deemed sensitive by the Chinese government. In recent weeks, an aggressive media campaign has further fueled anxiety, with irresponsible claims that Hollywood runs the risk of becoming a Chinese propaganda outlet.

Concerns about media censorship in China are legitimate. While we have witnessed great progress over the last three decades in the liberalization of Chinese culture in general, and film in particular, it is true that the Chinese government controls the content of movies screened in China. This process also affects foreign movies that are targeting a Mainland Chinese audience.

However, claims that Chinese investment in U.S. movie production could allow Beijing to undermine freedom of expression and speech, and turn Hollywood into a Chinese propaganda outlet are far-fetched. For one, the U.S. entertainment industry is diverse and despite the recent growth, China’s position remains small and far from a combined threshold that would allow China to control opinion. According to the U.S. Bureau of Economic Analysis, the private fixed asset stock of the U.S. movie and recording industry was approximately $300 billion in 2015. Foreign investors accounted for 20 percent of those assets. The share of Chinese companies was too small to be broken out separately, but the combined value of all equity investments through 2015 suggests that it was less than 1 percent. A number of acquisitions in 2016 has increased the role of Chinese companies, but it is safe to assume that China’s share in total U.S. entertainment industry assets remains well below 5 percent.

More importantly, there is a strong business case against manipulating content: the value of movie companies and other creative enterprises is closely tied to their brand, their reputation and their talent. Hollywood producers with Chinese ownership will receive special scrutiny and any attempt at censorship would be noticed right away. This in turn would taint that company’s reputation and drive talent away, which would immediately wipe out a significant share of the company’s value. It is important to have a debate about potential risks, but that debate must be based on facts and not fear.

A once-in-a-lifetime opportunity

The rise of China’s middle class and the appetite of Chinese companies to participate in the global entertainment industry is a unique opportunity for the U.S. film industry and the U.S. economy as a whole. Hollywood needs to stay creative to capitalize on this opportunity. At the moment, the linkages provided by direct investment and slate financing from Chinese investors are one of the strongest means to doing so.

Read more of Dominic’s Take on U.S.-China business