China Rising

Illustration by Shengchuang. Art Direction by S. D. Katz

The revenue potential of 1.3 billion prospective moviegoers gets any studio exec's pulse going — and Western entertainment companies have been trying to get into China's market ever since the country entered the World Trade Organization in December 2001. China's economy has an average annual growth of 10 percent, with close to 30-percent growth in the movie box office for the past few years, but the local film industry accepts only intermittent competition from Hollywood. U.S. media companies would like to repeat in China their success conquering local cinemas in many other countries around the world, but it's precisely that success that has made their entry into the Chinese market difficult.

While China has clearly embraced many aspects of capitalism, including private ownership and foreign investment, there are many state-run businesses and industries operating in a regulatory and judicial environment that tends to favor state-run enterprises or businesses with government connections. There's also the Chinese notion of guanxi, or relationships. Guanxi plays a large role in how business deals are struck — sometimes edging into cronyism and nepotism. Because most state businesses operate without transparency, personal connections are able to take precedence over normal decision review processes and due diligence. Handshakes and drinks over dinner can be as important as market-research reports and contracts.

Nowhere is the lack of transparency and the presence of market interference clearer than in China's movie business. Few things touch the government's sense of self-preservation more than the control of the media, so loss of box office is often less important than the goal of social harmony or having domestic films perform better in comparison to foreign movies. Ultimately, industry policies are directed from above and carried out by the distributors and exhibitors who are often unfairly blamed for market manipulation that they must implement. The biggest problem is that current policy is inconsistent and unpredictable. That's because it's not working. Movies that the government approved of have not done well; Hollywood movies have. Based on how China has operated in the past in other industries, the next likely strategy would be learning how to make Hollywood movies while simultaneously coaxing the system to favor local Chollywood product.

Complaining about China's manipulation of the market is fair game, but it's also disingenuous. Western distribution is far from an open market — and the major studios operate much like a government-sponsored cartel — so China's protectionist policies, while heavy-handed, are not entirely without provocation.

In 2003, Warner Bros. International Cinemas (WBIC) came to China with the understanding that it would be able to own up to 75 percent of its venture to build theaters in up to seven major cities. The company's Paradise Warner Cinema City in Shanghai became the most profitable movie venue in China, but toward the end of 2005, the State Administration of Radio, Film and Television (SARFT) released a new regulation requiring mainland Chinese investors to own at least 51 percent or play a leading role with foreign investors. After attempts to find a compromise failed, Warner decided to pull out of the Chinese theater business in 2006.

Unsettling as the government's policy reversal was, Warner is aggressively pursuing China ventures in an unlikely area: DVD marketing and distribution. This includes a common-sense initiative to sell DVDs at prices that, while not as low as those of pirated copies, are still low enough to potentially convert some customers to the real deal. At least that's the theory put into practice in a joint venture with Paramount (Fox is also adopting the low-price strategy). The verdict is out on this initiative, but this shows the tenacity of the major players who enter the Chinese market.

While owning theater chains is not in the cards for the moment, U.S. media companies are finding other ways to reach Chinese consumers. Steamboat Ventures — Disney's Burbank, Calif.-based venture-capital firm and a consortium of investors — invested $23.5 million in Chinese interactive-video firm UUSee in 2007, allowing the company a low-profile entry into content delivery in China. UUSee provides video-on-demand mobile downloads and services for Internet cafés. It also delivers close to 60 channels of live TV and 350 channels of commercial video content serving 36 million users. Steamboat has also invested in a video-sharing website, 56.com, and CTS Media, a Chinese firm that inserts ads into streaming video content online.

Another infrastructure player is ReachMedia, a U.S./Chinese company that is building out or acquiring second-tier infrastructures such as HD plasma screens featuring advertising and entertainment in 15,000 retail outlets, IPTV, mobile-phone TV, and out-of-home networks such as LCD screens in buses and cinema-size display screens in airports. It's clear that content-delivery systems are rapidly permeating China's cities, wall-papering everyone's peripheral vision with fast-moving eye candy. All this content has to come from somewhere, and China has been encouraging investment in production facilities for several years.

The most succinct assessment of China's postproduction capability is that China is more than a decade behind Western know-how and aesthetic sophistication, but it's improving faster than realtime. It could take China seven to eight years to break out as a world-class center for digital and finishing services comparable to what is available in Los Angeles, New York, London, and Paris. We're likely to see co-ventures with Western facilities — which has already begun to happen in Beijing, where Technicolor and Soundfirm, a well-known Australian sound-mixing studio, have opened satellite operations.

The recent history of China's digital-production industry charts an uneven course with more than a few false starts. Since 2002, China has seen considerable and sometimes lavish government investment in high-tech postproduction and animation facilities — for example, Shanghai Digital closed its doors in 2007, its less-than-5-year-old studio in shambles. In most other facilities around the country, digital editors, colorists, and engineers with limited training are unable to provide the kind of service international clients expect. Filmmakers from mainland China with much larger production budgets take their work to Korea, Australia, or New Zealand. While some Westerners were brought in to train local talent, Chinese managers had an enormous resistance to paying Western rates for production expertise — and invariably, vital training was cut short.

While much has been learned from early mistakes, the local post-production options in China remain very limited — and although Hong Kong has better services, prices are close to Western rates. As it turns out, China is not seeing a post-production revolution commensurate with the growth seen in other industries. To correct this imbalance, demand for high-end services must increase — and this means more theaters and better local movies to kick-start a world-class finishing environment.

Hundreds of 3D animation studios have opened in China, and there are now more than 300 schools offering courses in animation. But unlike the United States, China has no studio like Industrial Light & Magic (ILM), Pixar, or DreamWorks to take the best animators and provide the opportunity for them to hone their skills to the highest level by working on movies with animation and visual-effects budgets in the tens of millions. In the United States, the top studios have long been the only place to learn state-of-the art techniques — and often, they are responsible for some of the leading R&D in the field. There is no equivalent learning or development opportunity in Asia.

In China, most graduating animators have two choices: find work at one of the few large outsource studios or join one of the hundreds of tiny studios in China doing work for advertising agencies or television stations. While there are approximately 1,000 TV stations in China, the rate for a minute of animation is a fraction of rates in the West — even with the exchange rate factored in. The larger studios offer an opportunity to do reasonably challenging series work for the West, but local television is usually a dead end for talented artists.

To help jump-start the industry, the government has imposed restrictions on the number of minutes of foreign animation allowed on CCTV, state-run Chinese television. So far, the import quota has had little positive effect on the quality of local animation. Piracy of licensed products is another factor that continues to plague the animation industry because revenue streams from the toys and merchandise associated with any successful animated character are often copied illegally. This includes everything from books to stuffed animals. This was a factor with 3000 Whys of Blue Cat, China's most successful animated series and a local phenomenon that reaches millions of people. Blue Cat has struggled to leverage its tremendous brand recognition despite heavy marketing of toys and other merchandise because of the high rate of piracy.

The best hope for China's animation industry is the high-end outsource companies that have opened in the past six years — including the Institute of Digital Media Technology (IDMT) in Shenzhen, Xing Xing Digital in Beijing, and Imagi Animation Studios in Hong Kong. These private companies that have benefited from close collaboration and association with the West compete for the best local talent, which is in short supply. Although Chinese animation and CG artists graduating from local schools have solid technical skills, independent thinking and the creative impulse are underdeveloped. This is the effect of the Cultural Revolution and Chinese culture in general. Unlike the West, which encourages individual achievement, China emphasizes the family structure and — since 1949 — the State. Great works are the result of many hands, not a few free-thinking and innovative individuals. The Western myths of the artist as rebel, seer, mirror of society, or shaman were, until recently, in conflict with 50 years of socialism.

In China, meeting highly codified standards is more likely to be rewarded than independent thinking. Until recently, the school system promoted art training that emphasized narrowly defined technique rather than design. As a result, young animators, designers, and other artists tend to think of art as a matter of copying existing work — and doing that very well — but not breaking new ground. Obviously, there are exceptions, but as a rule, animation companies have great difficulty finding designers that bring a fresh look to a project. This is why most outsource companies do storyboarding, character design, and direction in the West. This is a continuation of the 2D outsourcing model that has worked for decades throughout the Pacific Rim.

While Chinese popular culture lacks strong stylistic voices today and is largely imitative, it won't be long before a generation of new artists begin to enter the post-post-modern era of design — which, in the West, is locked into its own cycle of imitation and pastiche. With sampling, digital manipulation of existing art, and a liberal translation of the fair-use doctrine and the meaning of homage, Western artists have been copying themselves to the point that — by comparison — China's problem is not imitation, but artless imitation.

China in 2008 is a confounding and exhilarating experiment in a hybrid economy and a culture unclear of where China ends and the West begins. As a force in the world entertainment industry, it is in the early stages of development but gaining momentum with the promise of gargantuan audience. The opportunity to enter a period of explosively independent and creative filmmaking — which is all but impossible in today's Hollywood — seems inevitable. Mix this with the energy released after the end of 50 years of artistic censorship, and you might find a good reason to go back to the cineplex.