Covering China

Dreamworks' Kungfu Panda has been a big hit in China (Din♥ra via Flickr)

By Howard Tsang

Dreamworks Animation SKG, Inc. will gain market access to the fastest growing entertainment market through a joint venture deal with Chinese state-owned media groups. The new venture, Oriental DreamWorks, is expected to allow the U.S. film studio Animation China quota restrictions on foreign films. However, China market’s access has a price tag on it. The Chinese groups will collectively hold a majority stake of approximately 55% in Oriental DreamWorks, with DreamWorks Animation holding the remaining stake.

On February 17, DreamWorks Animation announced its joint venture agreement with China Media Capital 中国华人文化产业投资基金 (CMC), with plans to include Shanghai Media Group 上海文广 (SMG) and Shanghai Alliance Investment, Ltd. 上海联和投资有限公司 (SAIL), to establish a leading China-focused family entertainment company.

Oriental DreamWorks will engage in the development and production of original Chinese animated and live-action content for distribution both within China and to other territories around the globe. In addition to content creation, the joint venture will pursue business opportunities in the areas of live entertainment, theme parks, mobile, online, interactive games and consumer products. The enterprise will initially be capitalized with cash and intellectual property valued at $330 million. The joint venture plans to launch business operations in Shanghai later this year.

According to Financial Times, Jeffrey Katzenberg, Dreamworks Animation’s chief executive, emphasized that the deal was personally approved by Xi Jinping, the vice-president of China and presumptive new party leader, who was in the United States last week on his first state visit. Katzenberg was quoted as saying: “When you look at this in the context of what the world will look like in five to seven years from now, China will be the world’s number one media market. It will be the largest live entertainment market, the number one consumer products market … so to create a family-branded entertainment company [in China] is an honour for us and a huge opportunity.”

In China, Dreamworks Animation’s production “Kung Fu Panda 2″ grossed a record-breaking 597 million yuan (about $93 million) during the summer of 2011. China is the fastest growing cinema and movie market in the world, adding cinema screens at a rate of about three screens a day, and the nation’s theaters recorded $2 billion in box-office receipts in 2011.

Although China joined the World Trade Organization in 2001, film distribution is still a duopoly controlled by the state-owned China Film Group and its sister company Huaxia Film Distribution. The Chinese government still caps the number of imported titles at 20 per year, and only approved films are allowed to share in a percentage of the gross ticket sales they generate.

In 2007, the U.S. brought a complaint to the WTO. Two years later, the WTO ruled that China had broken its trade rules by restricting imports of foreign movies and other media. In an attempt to resolve outstanding issues related to films after the U.S. won in a WTO dispute last year, China made a concession last Friday.

According to Motion Picture Association of America, China will permit 14 premium format films (IMAX, 3D) to be exempted from the 20 import title quota, which remains in place, and the box office share US studios earn under the master contract will increase from to 25% from 13%.

Despite China’s latest concession, the number of foreign movies and the revenue share of box office receipts are still strictly controlled in China. This situation highlights the merits of Dreamworks’ joint venture deal as a way to circumvent the aforementioned restrictions.

According to Caixin Media, a source close to Dreamworks Animation was quoted as saying that the new joint venture’s films will be produced entirely in China and Chinese side will have final say on content. In other words, Oriental DreamWorks’s productions will be branded as “Made in China” and exempted from import restrictions.

Dreamworks Animation’s choice of Chinese partners is also highly strategic.

According to Caijing Media, CMC, established in April 2009, was China’s first media sector focused fund approved by China’s National Development and Reform Commission (NDRC). CMC’s key founding partners included Shanghai Dongfung Huijin 上海东方惠金文化产业投资有限公司 (a subsidiary of state owned Shanghai Media Group上海东方传媒集团有限公司 (SMG)) and China Development Bank (whose founding chairman is Chen Yuan陈元, son of powerful revolutionary-era leader Chen Yun陈云).

Another Chinese company that plans to be included in the Chinese group is Shanghai Alliance Investment, Ltd. 上海联和投资有限公司 (SAIL), which is managed by the Stated-owned Asset Supervision and Administration Commission of Shanghai Municipal Government (上海市国有资产管理监督委员会).

According to political scholar Zhiyue Bo (薄智跃), the Shanghai Municipal Government established Shanghai Alliance Investment Ltd in 1994. Jiang Mianheng (江绵恒), son of former President Jiang Zemin (江澤民), was made its legal representative, and then made Chairman.

A CNN report from 2001 highlighted Jiang Mianheng’s role. He was described as working “behind the scenes, outlining strategy for about a dozen companies and investment firms, securing funding from Chinese and international investors, and putting together deals based on his extensive network of relationships among China’s ruling class.” A Hong Kong venture capitalist likened him to Silicon Valley’s prominent VC John Doerr.

The deep connection with the “Shanghai faction” and the involvement of a heavyweight princeling within the CCP, plus Xi Jinping’s public approval of the deal may arouse further speculation on intra-party balance before party leader transition.

According to a cable from U.S. Embassy Beijing that was leaked by Wikileaks with the subject line “Top Leadership dynamic driven by consensus, interests,” dated July 2009, the U.S. Embassy’s “well-connected contacts” reported that “China’s top leadership had carved up China’s economic ‘pie,’ creating an ossified system in which ‘vested interests’ drove decision-making and impeded reform as leaders maneuvered to ensure that those interests were not threatened.”

In China, market access has never been equal or free. Multi-national corporations still have to play according to the China’s rule of game.