2015 was a record year for Chinese investments in Hollywood. They have grown rapidly over the past couple of years, and with significant deals such as TIK Films’ 3-year slated deal with Lionsgate, Bona Film Group’s 6-picture deal with 20th Century Fox and Huayi Brothers’ 18-picture deal with STX Entertainment, the Chinese investment market is set to soar to yet another high in 2016. This is in no small part due to the aggregate of $4.7 billion in deals announced in the first half of 2016 (Dalian Wanda Group’s acquisition of Legendary, Film Carnival’s investment in Dick Cook Studios and the partnership between Perfect World Pictures and Universal Pictures, etc.).
Forms of Investment
These massive investments are flowing into Hollywood through various channels. Some acquisitions of existing U.S. entertainment companies have introduced a significant and high-profile influx of Chinese capital into the western market. The earliest evident deal would be Wanda’s $2.6 billion acquisition of AMC Entertainment in 2012. Years later in January 2016, Wanda made another huge $3.5 billion purchase of Legendary, which marks the first time a U.S. movie studio known for producing blockbusters is owned by a Chinese company. Co-financing has been another significant component of these investments in Hollywood, with a majority of the earlier deals being pure capital financing in nature, without Chinese parties getting involved in the production or distribution process. Recently, these deals that provide co-production and co-distribution opportunities have only been increasing.
Motivations and Drivers
Chinese investments in Hollywood are driven by a combination of various factors. From a macro perspective, China as a whole is shifting toward a consumption-oriented economy, and entertainment is one of the areas of focus. In addition, the Chinese government has made various efforts to encourage Chinese businesses to make global investments, including its “Going Out” policy and the recent reform of government approval process for foreign direct investment. Furthermore, investments in Hollywood are consistent with the Chinese leadership’s strategy to promote Chinese culture and China’s soft power on the global stage.
In addition to the macro environment, Chinese entertainment companies are motivated by their own business goals and conditions. Chinese studios are facing fierce competition in the domestic market, not only from Chinese productions, but also from Hollywood blockbusters. Such competition will only become more intense, as industry analysts predict that China’s film import quota system will further loosen up in early 2017. As a result, China looks to Hollywood for expertise in movie production and distribution. Their goals are to increase brand value and to produce movies that are appealing to both a Chinese and a global audience. In addition, by teaming up with Hollywood, Chinese companies may gain theatrical distribution rights in China for those films, as well as rights for television, video-on-demand and ancillary exploitations.
Outlook
This foray of Chinese investment in Hollywood is only expected to accelerate further over the coming years. Still, there may be limiting factors in the investment flows, some of which could include the possibility of increased capital controls in China, and the further devaluation of the Yuan against the U.S. dollar, which decreases Chinese overall purchasing power. Although the Chinese government’s regulatory policies can change rather quickly, the long-term drivers of investment will remain: encouragement by China’s central government to develop entertainment and cultural business; demand for Hollywood’s industry knowledge and expertise; increasing global appetite by Chinese companies; and a deepening pool of Chinese investors, including those from other industries that are developing a keen interest in entertainment.
In terms of the type of deals, we will likely see more slate financing deals compared to equity investment. This is because Chinese companies typically expect to have certain rights or controls over the U.S. studios or production companies as part of their equity investment. However, the studios, especially the majors, do not involve their investors much in the project selection, creation and distribution process. Additionally, Hollywood is trying to gain a foothold in China’s booming film market. Therefore, the new deals will likely be based on the long-term business goals of both sides. When choosing business partners, both China and Hollywood are looking to see how they can create more value and generate more business opportunities by combining their existing experience and resources.
