Hollywood warms to China’s new openness

Disney to produce part of ‘Iron Man 3’ in partnership with Chinese company


LOS ANGELES (AP) ― There’s a new breach in China’s great cultural wall and Hollywood is cautiously moving in.

Disney’s announcement Monday that it will make “Iron Man 3’’ in partnership with a Chinese company is the latest sign that movie studios are warming to China’s new openness.

For decades, China has capped the number of foreign films it allows into the country. Until recently, the limit was 20, but in February Chinese officials announced that they are increasing the quota to 34.

China said it will also allow foreign studios to garner a greater share of box office revenue. Foreign companies can now expect to earn 25 percent of their movies’ ticket sales in China, up from between 13.5 and 17.5 percent.

The changes are a significant move for a bureaucracy that is leery of outside cultural influences and competition from foreign films. The change could affect everyone from action movie fans in Guangzhou to Hollywood’s most powerful filmmakers.

The relaxing of China’s strict rules comes at a price for U.S. studios. The world’s most populous nation wants foreign studios to bring their moviemaking know-how to China by forming joint ventures with Chinese studios.

Still, Hollywood isn’t gushing. In recent years, U.S. movie studios have developed a rocky romance with China. Chinese people adore foreign movies, especially 3-D adventures like “Avatar,’’ or more recently “Journey 2: The Mysterious Island.’’ But studios have been jilted when Beijing has promised new openness only to reverse course. In Disney’s case, many of its movies have made it into the country, but recent hit “Tangled,’’ for instance, was stopped at the border.

In a recent interview, DreamWorks Animation SKG Inc. CEO Jeffrey Katzenberg summed up the industry’s attitude: “The goal lines are moving all the time,’’ he said. “Everyone is wondering how it plays out.’’

China has long kept up a barrier against foreign films ― wary of insidious cultural influences while sheltering its own filmmakers. Officials last raised the annual cap on foreign movie imports as a condition of joining the WTO in 2001. The recent increased foreign movie quota is a belated response to a trade dispute the U.S. won nearly three years ago.

Studios are patiently trying to make the relationship work, because of China’s enormous potential. Box office revenue in China rose more than a third last year to $2 billion, putting the country on pace to become the world’s second largest movie market after the combined U.S. and Canadian region this year. It is expected to top $5 billion by 2015. The U.S. and Canadian theatrical market, meanwhile, shrank two years in a row to about $10 billion in 2011. So far this year, however, revenue at U.S. and Canadian theaters is up about 19 percent.

It’s only a matter of time before China’s movie-going market is the world’s biggest, according to some industry-watchers. Whether it is the most profitable for outsiders is another question. In 2006, Warner Bros. pulled out of a two-year-old theater chain joint venture when Beijing changed the rules, suddenly disallowing the studio’s majority stake. Late last year, production company Legendary Pictures’ joint venture, which is set to make the movie “The Great Wall,’’ hit a stumbling block when its Hong Kong-based partner failed to raise enough capital.

Entertainment lawyer Schuyler Moore says he has warned clients not to be overly optimistic in dealing with the country, and says it will take a year to see how China implements its new movie policy. Moore believes China’s new openness is aimed mainly at boosting its own cultural industries.

“In the long term, it’s no different than China trying to make aircraft and cars and everything else. Their goal is to have the expertise so they can displace Hollywood,’’ he says.

Against that backdrop, companies like The Walt Disney Co. and Katzenberg’s DreamWorks are entering a delicate dance.

Katzenberg traveled to China in mid-March to meet with Chinese officials about how the expanded quota rules would be applied. He also sought to work out details regarding the company’s new joint venture in China, Oriental DreamWorks.

“(China) is big, it is the fastest growing and that’s what makes it challenging,’’ Katzenberg told The Associated Press prior to his trip.

Disney and its new partner, Beijing-based DMG Entertainment, didn’t offer many details about their “Iron Man 3’’ project, although the companies say the movie will incorporate Chinese elements and be partly funded by DMG.

The DreamWorks’ deal, announced in February, is for a joint venture studio based in Shanghai that is 45 percent owned by DreamWorks and 55 percent owned by its Chinese partners, capitalized at $330 million.

Some analysts questioned whether it was worth it for DreamWorks to give up a 55 percent stake in the venture.

“It is not clear how well DreamWorks will do when it has to relinquish creative controls,’’ said Janney analyst Tony Wible. “This just adds to some of the uncertainty with the deal. However, there is a good long-term potential, so the risk goes with the return.’’

China isn’t just waiting for Hollywood to come running.

Last month, a key official in China’s movie infrastructure, Yang Buting, appealed to Hollywood’s finance community to enter new joint ventures in the country.

He once led the nation’s primary distributor of foreign films, China Film Group, and now chairs a co-financing arm of the government, China Mainstream Media National Film Capital Hollywood Group Inc., which set up an office in Beverly Hills, Calif., this year.