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Does Chinese Investment Pose a Threat to Hollywood?

A ChinaFile Conversation

The Wanda Group, China’s leading real estate developer, on Monday paid $3.5 billion for a controlling stake in Hollywood studio Legendary Entertainment, maker of Jurassic World, among other global blockbusters. At a time when Hollywood is increasingly reliant on Chinese moviegoers for ticket sales, should we be concerned that Chinese investment will reshape the creative cradle of the American Dream into a platform for spreading the Chinese Dream as promoted by President Xi Jinping? —The Editors

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Wanda’s chairman and China’s richest man, Wang Jianlin, has put multiplexes into malls all across China’s interior—where consumers are at last treating themselves to a night out and a bit of shopping, many for the first time. He already owns the AMC Entertainment movie theater chain in the U.S. and it stands to reason that Wang should want to pay $3.5 billion to buy Legendary Entertainment to learn how to make the movies that will help a core business stay afloat in the face of a potential real estate bubble.

It’s perfectly natural that Thomas Tull, Legendary’s CEO and the man behind films such as The Dark Knight and The Hangover, and veteran Beijing-based producer Peter Loehr, who heads Legendary East and has been in China since the dawn of the current movie biz boom, should be Wang’s go-to guys. Tull has carved his own deal-making path in cutthroat Hollywood, and Loehr, who speaks fluent Chinese, helped engineer Legendary’s 2013 tie-up with the state-run China Film Group, the sole licensed importer of Hollywood films into China. That deal paved the way for Legendary’s co-production of The Great Wall, the $150 million English-language action adventure due in theaters worldwide this November from veteran director Zhang Yimou. Starring Hollywood A-lister Matt Damon, the film is sure to get a solid release in AMC theaters across the U.S., where, unlike in China, there are no government-imposed import restrictions, only the forces of supply and demand.

It also makes sense that Wanda should want to back movies that at once celebrate China and project an image of the nation approved by its leaders—and then send those movies into America, where, for now anyway, more movie tickets sell each year than anywhere else.

The great challenge for anybody spending millions to make movies is to ensure that they appeal to the widest possible audience. Wanda, however, is used to operating in a country where what’s right, the messaging of a thing, often is not open to public debate and is molded by a few men at the top. Though there’s already talk of a Wanda-Legendary IPO, signaling accountability to the market, Tull told the press in Beijing that there was “no road map” for the new company, a “wait-and-see” message all too familiar to China-watchers forever asked to be patient with Beijing as it talks about reform.

I hope that in its embrace of Legendary, Wanda checks its natural impulse to check in with the Party in Beijing and doesn’t smother the very creativity at the core of the value of the Hollywood studio. Let’s not forget the men at the vanguard of the business of U.S.-China cultural exchange (which also happens to have produced a commercial bonanza) are the people most responsible for the images that we citizens of the two largest economies on Earth see of one another. And let’s not forget that these men are operating under the looming encouragement of Chinese President Xi Jinping—without whose approval I don’t imagine this deal could have been possible.

A 2014 speech Xi gave on arts and culture bears some examination. In it, the unelected leader of the world’s largest country called on Chinese moviemakers to eschew the foreign and get into the business of making movies that, as he put it, should “take patriotism as a theme leading the people to establish and maintain correct views of history, nationality, statehood, and culture while and [sic] firmly building up the integrity and confidence of the Chinese people.”

Wanda and its chairman are beholden to the Chinese Communist Party, whose leaders’ ideas of entertainment have yet to produce a blockbuster success and certainly aren’t motivated by profit nor accountable to the market. While Wanda invests in Hollywood to make money, the deal sees Legendary unwittingly becoming one of the most powerful channels for Beijing’s worldview, a worldview that bars open discussion of the jailing of dissidents and the disappearing of booksellers.

If Legendary succumbs to pressure from Wanda and the Party behind it to make movies that adhere to the Party’s vision of the world, I expect that American moviegoers used to a free press would reject any ham-fisted silver screen propaganda. The result? Wanda and Legendary would lose money on their movies here in the U.S.

But maybe Wanda’s acquisition of a Hollywood studio will end up proving a loss-leader. The payoff? A gained ability to make better movies to the satisfaction of the Party back home—movies that employ Hollywood craftsmanship to feed the growing ranks of China’s moviegoers. After all, what better way to divert attention from societal unrest than an action adventure blockbuster or a madcap comedy?

Dalian Wanda's purchase of Legendary Entertainment, telegraphed well in advance and widely covered in the Western media, makes a lot of sense for both companies since their interests and strengths are complementary; both should gain from the purchase.

Among other benefits, Legendary will have a cash infusion and more access to the China market, including new opportunities in Wanda’s theater chain and online. Since Legendary has had a mixed record with some recent successes as well as failures, having Wanda’s deep pockets should allow the company to absorb losses, even when several big films fail, without threatening the future viability of the company.

At the same time, following the model set up when Wang Jianlin purchased AMC theaters, Legendary should be able to keep much of their current management team. Indeed, Thomas Tull, Legendary’s CEO, who has been intimately involved in the deal as it progressed, would never have agreed if he and his team were to be deposed. Having Peter Loehr, who runs Legendary East, as part of the team is another reason to be optimistic that, despite Jonathan Landreth’s concerns, one should perhaps take Wang at his word that his purchase of the company represented a business investment, not a political statement.

At the same time, to be sure, Wang is doing precisely what the Chinese leadership wants its innovative private enterprises to do as part of their strategy to promote Chinese soft power by “going out to the world” (zou chuqu), building international brand names, and planting the nation’s flag. Wang, who is clearly very ambitious and is far from finished in his overseas investments, is well aware that the company will be closely scrutinized for any evidence that he will use this acquisition in any overt manner to promote China’s political interests, for example by interfering directly in film content.

For Wanda, they gain access to a production company that has produced major hits with a strong track record in the China and international markets, including Inception, Godzilla, Jurassic World, and Pacific Rim, with more tentpole hits to come. Wanda should learn and benefit from the production, marketing, and distribution expertise of Legendary, and this is just one plank of Wanda’s Hollywood strategy, including their donation to the Academy of Motion Pictures museum, the building of their new offices in Los Angeles, the AMC purchase, and the credibility that comes with investing real money at a time when many of the proposed China-Hollywood deals have fallen through.

Many Chinese investors have spoken about big investments, but Wanda has delivered, and therefore every major American media publication—for example The New York Times, Wall Street Journal, Los Angeles Times, Hollywood Reporter, Variety, and so forth—has been giving prominence to this deal for over a week. It also gives Wang a leg up over a major rival in Jack Ma and Alibaba, which has also been in talks to buy a studio, including most recently Paramount.

Legendary may also be able to take advantage of Wanda’s complex in Qingdao to shoot future films, including some that may have more of a China component. I see little reason for additional worry. Hollywood is already inserting content into films that will allow blockbusters to succeed both in China and on the international market, and that means that inserting “socialist core values” into such films will be a non-starter. Moreover, the problems that have limited China’s strategy to market its films overseas have not changed, including language, story, lack of international stars, and so forth.

Dalian Wanda Group’s $3.5 billion acquisition of Legendary Entertainment is at the vanguard of a new global model of Sino-U.S. film production, for better or worse. The Chinese theatrical market is rapidly overtaking the U.S. in size. Thus the key business question for film studios is how to make content China-ready. Wang is making a big play as the first Chinese studio with deep connections in Hollywood to be at the forefront of this trend.

Being a content producer in China is difficult. As Jonathan Landreth rightly points out, the Wanda Group and now Legendary Entertainment are beholden to China’s regulators to produce content. And it is true that despite strong central government support and domestic blockbusters, China has yet to produce its own global blockbusters on the scale of Hollywood.

Is this because of still-developing technical expertise in China or strictly because of the regulatory climate? I argue that it is both. Chinese filmmakers lack deep experience making films with the same box office numbers as the biggest Hollywood blockbusters. Upcoming cases will show if increased expertise drives successful China-based production of blockbusters. While Stanley Rosen expresses justifiable skepticism about the viability of Chinese-language blockbusters, Sino-U.S. production models are improving. Wanda’s acquisition of Legendary may be the final piece. Wang is betting $3.5 billion on the business.

Even before the November release of The Great Wall will come an earlier test case of the China-made blockbuster Kungfu Panda 3, helmed by Alessandro Carloni and Jennifer Yuh, which comes out in January 2016 from Oriental DreamWorks. The Oriental DreamWorks model represents another pathway taken by a Hollywood studio to integrate into the Chinese market. Based in Shanghai, the firm is a joint venture between DreamWorks Animation, China Media Capital, and the Shanghai Media Group. The ownership structure affords more control to the foreign partner. Yet the regulatory hurdles are similar.

Strategically, studios are anticipating China becoming the world’s largest film market. As such, they are doing everything they can to set up strong China bases. In addition to DreamWorks, Warner Bros. recently announced Flagship Entertainment, its new Hong Kong joint venture for China production. Wanda and Legendary are simply ahead of the curve. The limitations on content that can be distributed in China are real.

But those limitations are not limited strictly to the Wanda Group and Legendary Entertainment. All of the Hollywood studios are trying to release more content into China. This requires working closely with the government and Chinese partners. Legendary will be able to leverage the Wanda Group’s relationships with regulators. By contrast, many Hollywood competitors will have to make content for China without that advantage. Indeed, Legendary may have more flexibility with regulators because of its parent company’s relationships. Peter Loehr also has deep experience making meaningful films that fit within Chinese government requirements. How Wanda’s Legendary will balance content production with propaganda is indeed an important question. The broader issue now is how other studios will try to compete with Legendary’s new access to the Chinese market. Wanda’s acquisition may prove to have a chilling effect globally.

Wang Jianlin’s grand ambition to tap into a variety of industries overseas is a curious phenomenon among China’s business elites today. Just last month, according to London newspapers, Wang bought one of the city’s most expensive mansions, with a price tag of more than £80 million.

Wang’s inroads into entertainment makes business sense. As Jonathan pointed out, China is en route to becoming the world’s largest movie market. If you travel often to China, you might be surprised how many entertainment programs there are out there on Chinese TV and film screens. The demand from Chinese consumers for these products is vast.

Meanwhile, against the backdrop of China’s economic slow-down and recent market fluctuations, Wang's overseas investments suggest a wider trend of Chinese investors increasingly seeking returns on their capital outside the country. We will surely see more such deals make the headlines this year.

Many worry that with Wang’s deep-rooted business and political connections within China, he might be acting as a conduit to export China’s cultural influence around the world. This is a sensible argument, and it might well be on Wang’s to-do list. But we cannot prove that until it happens.

At the same time we should bear in mind that English-language entertainment is a very competitive business. If Wanda-owned Legendary Entertainment starts to produce propaganda movies, American consumers are unlikely to be impressed; many will simply take their business elsewhere. Think how many people in the United States go to see alleged propaganda films from China these days, despite the state’s massive cash injection over the years?

It’s hard to infer Wang’s motives behind this headline-making deal. But if Wanda's takeover is about introducing more American films to China, it might help push the Chinese culture regulators to reform such policies as foreign film quotas and movie film classification. Ultimately, this might prove to be a positive thing; it could lead to a more varied offering in movies in China’s domestic market.