It’s been said that China is remaking the global film industry, and that’s not an exaggeration. At the end of 2016, China surpassed the U.S. in the number of cinema screens, and its box office revenue has grown 144 percent since 2012, compared to 6 percent in North America. These days, a film can be a total flop in Hollywood but still become a financial success, largely thanks to the power of the Chinese market. Just look at this year’s “Transformers: The Last Knight”: it made $123 million in its opening weekend in China, whereas it opened with just over $69 million in North America.
China is an entertainment powerhouse—and rightfully so—but with that power comes certain challenges. “It’s easier to raise money in China [for films], and probably easier to make a movie,” says Bennett Pozil, executive vice president and head of corporate banking at East West Bank, who has helped facilitate some of Hollywood and China’s biggest co-production deals. “But it’s also easier to lose that money.”
As large as it is, China can be a tough beast to understand. What is it like to actually work and make films in China’s entertainment industry? Pozil and other Hollywood veterans share their experiences and things to keep in mind when doing business in the Middle Kingdom.
Anyone who has ever done business in China will tell you that it’s important to develop a friendly relationship, or guanxi, with Chinese businesspeople—and it’s no less different in the entertainment industry.
Bo An, a development executive at China Lion Entertainment, likens Chinese practices to those of old Hollywood, when people made deals with those they considered friends. “In the U.S., everything fundamental will be discussed beforehand, or at least in the first few rounds of the negotiation,” she says. However, An warns people to not assume that, just because the Chinese companies don’t immediately bring up disagreements in the initial meetings, doesn’t mean everything is golden. “They just tend to make it friendly at the very beginning,” she notes. “When they feel like they’ve set up a stronger relationship, one that can handle this kind of unpleasant atmosphere brought by disagreement, then they can bring it up.”
After the initial niceties, deals move very quickly in China, according to William Pfeiffer, executive chairman and cofounder of Globalgate Entertainment. “People are less focused on getting the letter of the contract correct, as much as they are trying to find the right strategic justification for a certain business opportunity,” he shares.
"It’s easier to raise money in China…but it’s also easier to lose that money."
Chinese companies will often bring in other partners outside of the entertainment industry to invest in the movie. For instance, Pfeiffer says that a film studio could bring in a cinema exhibition chain to increase the film distribution, or an online video platform to do digital marketing and promotion. That’s another difference in China versus the United States. “For film marketing in the U.S., there’s still a heavy reliance on television ads, billboards, newspapers ads and other traditional media,” explains Pfeiffer. “A large percentage of exposure to film promotion is achieved through the online platforms.”
For international companies looking to do business with Chinese film companies, Pfeiffer suggests that they look at the overarching picture of what the Chinese companies are looking to gain, rather than just that individual deal. “It’s important to consider the strategic objectives of that company and their motivations, in order to ensure that you have a good long-term relationship with them,” he advises.
Whether it’s the wording of a contract, or whose name gets included in the film credits, it’s important to remain conscientious about the cultural differences in language.
“You might have an English translation (of the contract) and negotiate off of that. Then, you have to be careful to make sure that the Chinese translation is accurately reflecting the negotiated points,” says Pfeiffer. “There are differences in languages, in terms of the legal meanings and definitions that would be included. You still have to be very careful about definitions of rights. On top of that, there still is piracy of DVDs as well as online piracy in China—how are you going to protect yourself in that regard?”
An adds that, when structuring deals, Chinese companies handle film credits differently than U.S. ones. “In China, the most important credits are given to the big bosses of the financiers,” she explains. “When we talk about ‘produced by’ or ‘producer,’ it has a different cultural meaning in China. In China, the zhipianren or zong zhipianren—the general producer—when they talk about these two credits, they actually mean the big bosses of the major financiers and distributors. They’re not referenced to the creative producer, or the producers who are working on a day-to-day basis on ground or on set.”
Considering that it only took about 20 years to transform Shanghai’s Pudong district from barren farmland into a modern financial hub, it should come as no surprise that China’s film development and production process also happens at double-speed.
"People are less dependent on getting the letter of the contract correct, as much as they are trying to find the right strategic justification for a certain business opportunity."
“Things in China are different to the extent that the whole process of shooting and development is much faster than it is in Hollywood,” says Pfeiffer. ”The time that it takes to conceive a film concept, get it written, complete preproduction, produce, and finalize the picture is generally much shorter than in Hollywood.”
An adds that, because there aren’t any unions protecting those working in China’s entertainment industry, they can push for longer hours and quicker turnarounds.
It’s also simpler talking directly to the talent, An says. Although Chinese actors are often signed to long-term, multi-picture contracts with big film studios, it’s much easier making deals with them. “You can even talk directly to the talent,” says An. “If he or she is interested in the project, then you can just make a deal in a way easier fashion with his or her agent. In the U.S., if you want to sign a talent, you need to talk first through their manager, then their agent, and then their lawyer. You have to finish all the conversations and negotiations with this group of people, and then you can start to work with the U.S. talent.”
Conversely, Pozil states that it is much harder keeping talent thanks to the bevy of opportunities in the Chinese film industry. “They kept getting offered more jobs with more money,” he says. “We saw a lot of people moving around, but since the film business has slowed down a bit, we’ll probably see more stability of working.”
The flow of Chinese money going into Hollywood is diverse and well documented, but China also has its own unique way of financing its homegrown films.
In Hollywood, An states that studios don’t always use equity financing, or what she refers to as “real” money. Production studios will first try to find as much “soft” money—i.e. tax credits or rebates for filming in certain locations, and money from international distribution presales that they can use as collateral for bank loans—before they lock down any “real” money.
“In China, we don’t have any of that—at least it’s not the standard yet,” says An. “Most of the time, a financier will ask a film producer how much money they need to produce a film, and then just give them 100 percent of whatever is needed—equity financing.” However, Chinese film financiers don’t just wire the entire lump sum; they will wire the money in installments, dependent on what stage of completion the film is in.
Although the funding process seems simpler in China, Pozil cautions that it comes with its own risks. Since Chinese filmmakers don’t often rely on presales and tax credits to recoup the cost of the movie, they have to rely heavily on ticket sales. “If you’re in China, if you’re making a movie, you basically have your one or two-wave theatrical release, but you may or may not have any other value associated with it,” Pozil says.
To ensure that the complex Hollywood financing structure works, An says that studios use completion bonds to guarantee that films are delivered on time and on budget. Even the equity money is usually wired to the completion bond company’s escrow account, not the production company’s. However, that concept of a film bond doesn’t exist in China.
"When you describe this complicated financing structure…to a Chinese film investor, they are less likely to invest—most of the time, it’s been the deal-breaker."
Aoni Ma, chief operating officer at bond company Film Finances Asia, says that, although people are opening up to the idea of film bonds, it has been a difficult process. “It’s still a little harder for us to get into the Chinese market,” she admits. “In China, there’s not a bond process. For them, the first time they hear about us, they’re like, ‘oh, we’re an extra cost in the budget.’ What they don’t understand is that we’re actually here to monitor the process and get things finished.”
An adds, “When U.S. film producers do this kind of complicated financing structure, they think they’re saving money and undertaking smaller risk. But when you describe this complicated financing structure with loans, soft money, presales to a Chinese film investor, they are less likely to invest—most of the time, it’s been the deal-breaker.”
However, Ma has a hopeful outlook on the future of film completion bonds. “When we do this [bond], production loses a lot of the control. That’s why they’re scared,” she believes. “They’re like, ‘what do you mean you can take over? What do you mean you can talk to the directors and producers?’ So they tend to hold back a little bit. But I think, now, people are more open to it—they realize this is how the whole world is doing it, and they need to catch on.”