China Opportunities?

We always like to keep an eye on what’s going on in the movie business around the world and lately there’s been a lot. Over the course of 2009 movie revenues have continued to rise in almost every country, continuing a now long-established trend. And some places are expanding faster than others, in particular China, where they’re in the process of building thousands of new movie screens around the country. More than half of all box office revenue is earned by Chinese-made movies, and income is growing by more than 40% annually, according to the Wall Street Journal.

However all is not as it seems, since new screens doesn’t mean increased access for Hollywood movies and the state-controlled China Film Group is the sole arbiter of which foreign movies are allowed to play in the country. For years Hollywood has complained that China limits the access of foreign movies – currently only 20 titles a year, up from the previous 10 – and just last week Chinese cinemas were ordered to stop showing 2-D versions of Avatar, the runaway global box-office behemoth. Avatar, apparently, was doing too well in the lead up to the Chinese New Year holiday and was replaced by a local language biopic of Confucius.

A December ruling by the WTO stipulates that China must open up its market to foreign films within a year. Going back a decade or more China was concerned that flooding the market with foreign movies could hinder the local movie sector, but the demand for locally produced movies is now strong and the quality has risen considerably. China is on target this year to overtake Korea as Asia’s largest movie market and will surpass Japan within five years. This exponential rise in movie-going and the likely opening up of the market to international films means the opportunities are too exciting to ignore.

One key factor to doing business in China has always been having the right local partner. Recently, we were approached by a well-connected Chinese group seeking to co-produce 3-D films for the fast-expanding 3-D and IMAX sector, as well as to co-manage a new film fund targeting the Chinese market. We’re well aware of the challenges of accomplishing such goals – the right partners, administrative red-tape, differing expectations and cultural idiosyncrasies – along with the time it can take to get things done in a country where they definitely take the long view. Our Movie Portfolio Fund is an international vehicle with its roots in Asia, so we’re comfortable doing business in the region and the challenge of getting something new done right in China is too great to pass up.

We were invited to work on a China fund a few years back and all in all we spent more than a year in planning, discussing, and structuring the right sort of investment vehicle, and in making presentations back and forward with a different government-linked group. The fund didn’t fly, our partner changed their priorities as time passed, and the opportunity was missed. However we’re optimistic this time that we can get something done. Gong Xi Fa Cai!

The Out Of Obscurity team.