[Hollywood Report III] Chinese Companies Are Bringing Money to Hollywood, but Money Isn't What Americans Want

This Chinese force has arrived in a rush, yet nobody seems to know where it is going. Everyone involved will have to answer two questions: what do they want Hollywood to give them, and what do they bring to Hollywood?

"The Chinese have come to Hollywood" stopped being news long ago.

People in Hollywood have noticed. The excitable ones, like Todd Hoffman, assume everyone is as excited as they are. Hoffman, founder of the IP agency Storied Media, had never met a journalist from China in Los Angeles before (we profiled him in our previous report). "Everyone in Hollywood says they want to do business with China," he said, turning away from his computer. Our visit seemed to confirm his hunch.

Hoffman is racing to develop two China-related stories: one about the American coach of a Chongqing American football team, the other about ping-pong diplomacy. As soon as the screenwriter finishes a script, he plans to bring in a Sony producer and approach Chinese companies.

"The story decides its own market. You don't even have to sell it," Hoffman said. He is right. Chinese companies eager to break into Hollywood will be glad to see foreigners developing a Chinese story with an international backdrop. What remains unclear is how far they have got in finding such stories.

Some have tried a more literal way of telling the story. TCL put itself in the most visible spot in Hollywood by buying the naming rights to the "Chinese Theatre." This is Hollywood in its best-known geographic sense: 6925 Hollywood Boulevard, a midpoint on the Walk of Fame. Every year 5 million visitors from around the world pass by and pose with the handprints in front of the Chinese Theatre, and TCL often shows up in the upper left or upper right corner of their photos.

TCL Chinese Theatre

By rights, at least 5 million people ought to wonder: who is TCL?

Yet the security guard at the entrance may be the only one who knows. He seemed well drilled and told us, almost without pausing, that a Chinese electronics company had bought the naming rights a few years ago. Before that, apart from the Ming dynasty stone lions at the door, this single-screen theatre called the "Chinese Theatre" had no real link to China. It was built under the lead of Sid Grauman, a Hollywood showman.

The tourists in the forecourt knew a little about Grauman, but when we asked about TCL, most looked blank. "Don't know." "Probably a company." "But I don't know what company. A country? Sorry, I don't know that either." One of them told me: "It doesn't matter."

Even for people who live in Los Angeles, it may not matter. Frank, a local Uber driver, got me to the theatre without checking a map. But he couldn't say who TCL was either. When I told him, he looked like another Hoffman, fully convinced the Chinese were unstoppable. "Ah! China!" he said.

In Frank, this force from the East showed a curious split: it has arrived in a rush, yet nobody seems to know where it is going.

Others in Hollywood are more guarded. They have learned that the $5 million reportedly paid for TCL's naming rights may not be accurate, though until now every outlet, The Hollywood Reporter included, has cited that figure.

In May this year, The Hollywood Reporter covered another Hollywood–China deal, between Huayi Brothers and STX (over the next five years, the two will cooperate on financing and distributing 18 films, but without the joint production announced earlier). This time the paper was especially careful: "Angelenos rolled their eyes when they first heard the news. After all, there have always been rumors of Chinese investors arriving with a pile of money, only for them to prove untrue."

There are indeed plenty of rumors about the Chinese coming to Hollywood. Not long ago Youzu, a young Chinese film company, announced a film fund with CAA, America's largest talent agency, and the American media company Bliss Media, to invest in, produce and globally distribute international films. Almost no foreign media reported it.

Still, Angelenos can name quite a few well-known Chinese players. Fosun, the Chinese company that bought Club Med, the world's best-known resort group, last year put hundreds of millions of dollars into Studio 8, a Los Angeles start-up studio. Its founder, Jeff Robinov, is a former president of Warner Bros. Pictures, and it is very likely aiming to become the next Lionsgate.

Even big companies have ended up in Chinese hands. In 2012 Pegasus Motion Pictures bought a 70% stake in Digital Domain, a large visual effects company. The same year, Wanda bought AMC, the second-largest theater chain in the United States. "Wanda is everywhere," said Ruben Igielko-Herrlich, CEO of the entertainment marketing company Propaganda GEM, pointing out that several arenas in Los Angeles carry Wanda's name.

And of course there is Alibaba. Every Angeleno knows that Jack Ma has said many times that he is determined to win Hollywood. Sometimes the ambition is framed as "the next Amazon," sometimes as "the next Netflix." But people often can't say what Alibaba has actually achieved in recent years. This capital upstart, a giant even by the standards of America's capital markets, is still looking for the right opening.

Only in June this year did Alibaba finally announce an investment in Paramount's Mission: Impossible — Rogue Nation. It was Alibaba's first investment in Hollywood, but in its statement Alibaba said it would only help market the film in China. How much it invested remains a mystery.

Remember what Todd Hoffman said at the start: "Everyone in Hollywood says they want to do business with China." One point needs to be clear: when everyone in Hollywood says they love China, they mean the Chinese market, not the money of big Chinese companies.

Ruben's firm, Propaganda GEM, placed TCL in Mission: Impossible — Rogue Nation. This is how he reads the enthusiasm of Chinese companies, TCL included, for Hollywood films: "Chinese brands are still in a hurry to be known by more foreigners." Action and superhero films are their usual choice. These films have the best chance of being imported into China, which lets a brand come home in glory, and audiences nearly everywhere will happily watch them.

The Chinese market Hollywood has its eye on is overtaking North America as the most important film market in the world. PwC data show that a $4 billion box-office gap between China and the US will remain until 2019, but China's box office is growing faster. In 2010 it was still under $2 billion; by 2019 it may reach $8 billion.

Bennett Pozil is a banker who runs the entertainment business at East West Bank, headquartered in Pasadena, Los Angeles. The bank has lent to Hunan TV & Broadcast Intermediary and to Huayi Brothers to help them close distribution deals with two up-and-coming Los Angeles studios, Lionsgate and STX. In an article he wrote for the Producers Guild of America (PGA) earlier this year, Pozil said: "The greatest compliment to China's entertainment industry today is a competitive international standing."

Franklin Leonard thinks the rise will be steeper than forecast and that China could become the world's largest market within five years. Leonard founded the Black List, a screenwriting site. The weekend before we met him in Los Angeles, China's weekend box office beat America's for the first time. "In the US, everyone is talking about this," Leonard said. "And every month China adds a few hundred new cinemas, or more?"

China's market is expanding because the number of screens is growing fast. By the end of 2014 China had more than 23,600 screens. They are no longer clustered only in first- and second-tier cities; they are spreading to third- and fourth-tier cities. A forecast by Maoyan Movies puts China's 2015 box office at 40 billion yuan, with 24.4 billion from first- and second-tier cities and 15.6 billion from third- and fourth-tier cities. The populations of these cities give the market huge potential. Measured by population, China has only 18 screens per million people; the United States has 125.

This market is big enough to make the six major studios go all out, for example by having the Transformers drink Shuhua milk. Chinese companies are willing to pay more for product placement, and American producers also believe it raises a film's profile in China and that Chinese companies will market the film in more local ways.

For much the same reason, you see more Chinese faces in films now, though most are women in minor roles. Bill McGlashan, head of TPG Capital, a shareholder in STX, which signed the deal with Huayi Brothers, mentioned this practice when commenting on the deal: "We need global content, no question. We can find top Chinese talent and add them to the content."

The studios have also found Chinese partners such as Oriental DreamWorks, which will design lip movements for Mandarin pronunciation especially for Chinese audiences in the next Kung Fu Panda. Jeffrey Katzenberg said in Shanghai this June: "The Chinese market will surely have the highest box office."

In entertainment, one of China's great hopes for Hollywood is a way into the American market. But it may get more than that, because the six major studios it works with (Warner Bros., Paramount, 20th Century Fox, Sony, Disney and Universal) make films for the whole world.

For all the talk of joining hands, this contest between Hollywood and Chinese capital is lopsided. Hollywood does not lack money, least of all the six majors; if anyone is short of money, it is the independent producers, who always have been. Hollywood is happy to export American values and ways of life and to shape young people around the world. All it needs is more markets like this one.

Among Hollywood people who want to make their name in China, few think of winning audiences by co-producing "a story with both Chinese elements and an international background." Vera Yu, who founded the entertainment services company KL Communication in Los Angeles, calls most ties between Chinese companies and Hollywood Fosun-style "passive investment." "They have little involvement on the creative side, and the big Hollywood studios would rather Chinese companies stayed out of the way there," she said.

Xiao Peihuan, who has run a China-US film forum in Los Angeles for several years, told us the big studios will not lead the way in working with China. "That's how they operate. They have their own way of doing things, and the control they demand and their internal procedures are fairly complicated. And they've already been making money their own way," Xiao said. "Why give away opportunities for no reason?"

In fact, Hollywood makes films for the world and takes the world's money. That includes a trick the studios know well: "moving shoots outside California to collect tax rebates of up to 40% from local governments." Europe used to be a major source of such rebates. In the mid-1990s, three-quarters of what European media groups spent on film production went into Hollywood, and only a quarter into European films.

In 2000, 20% of Hollywood's $15 billion annual production budget came from German tax-subsidy money. Today these sources include, but are not limited to, Canada, the United Kingdom, Australia and Brazil.

Hollywood is not so much relying on China as growing ever more global. Richard Maltby made this argument in Hollywood Cinema, a history of the film industry since 1891, in which he names three sides of internationalization: sources of funding, creative talent, and overall revenue.

"Hollywood always welcomes capital. In the past this money came from Japan, Germany, Wall Street and India," Vera said. Note, though, that none of that capital made money in the end; the money all went into the studios' pockets. When it comes to China, Hollywood now wants its huge market far more than its capital, which means giants like Alibaba will have very limited financial influence there.

The result is two giants, each eyeing the other's market and each full of ambition: one side has everything, the other has only money and the market behind it.

If, as our first installment suggested, Hollywood is an ecosystem, this money may end up having very different effects. Vera hopes Chinese companies will stop beating their heads against the big six and try working with companies like Illumination. Almost every day, she introduces a Chinese film or TV company, or a filmmaker, to someone in Hollywood at some restaurant in Los Angeles.

If Chinese companies need one piece of advice, it is this: don't fixate on "a Chinese story with an international background," and don't fixate blindly on big companies. Knowing who TCL is may not matter. Everyone knows Chinese companies have arrived, and plenty of people know Alibaba and Jack Ma, but so what? Facing a Hollywood that does not lack money, every company confronts the question Jack Ma himself is still puzzling over: what exactly should Alibaba invest in?

Hollywood has never lacked money. It makes films for audiences worldwide, which puts it at the top of the global entertainment industry's pecking order. In the next installment we will explain why globalization has hurt Hollywood.

Cover image: Business Insider