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China raises eyebrows with Hollywood investments

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China raises eyebrows with Hollywood investments

Over the years, Hollywood has found a variety of sources for capital, but its most recent is causing some concern.

As the pace of economic growth slows in China and its middle class builds out, Chinese companies are increasingly making strategic, and often expensive, investments in the U.S. film business. For instance, Dalian Wanda Group in early November scooped up Dick Clark Productions for $1.0 billion, a price tag many believe is quite rich. The move was not isolated. In January, the same buyer paid $3.5 billion for Legendary Entertainment, adding it to its existing ownership of AMC Entertainment Holdings Inc.

Larry Namer, CEO of Metan Global Entertainment and founder of E! Entertainment, singled these two deals out.

"When you could take a company like Legendary and sell it for $3.5 billion, I could argue that’s worth a lot less. Dick Clark at $1 billion? Based on what? I don’t get it. … But if people are willing to pay substantial premiums for anything, why wouldn’t a business take it?" he said.

China's investors are just paying too much money to turn down, he argued. But the reasons why China is buying, and why companies like Dalian Wanda are willing to pay so much, are less clear.

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Incoming U.S. Senate minority leader Chuck Schumer expressed concern that the acquisitions reflect the Chinese government's "strategic goals." Schumer called for increased scrutiny on Chinese investors taking over U.S. companies to determine whether they are motivated by Chinese government interests.

Schumer could find a sympathetic ear from President-elect Donald Trump, who many times expressed criticism of the U.S.'s willingness to sell businesses and debt to China, as well as China's tendency to manipulate its currency. While the Chinese government directs its monetary policy toward making Chinese exports cheaper, U.S. policies could undo that work.

"A Trump administration protectionist stance with China would generally increase tariffs, making Chinese goods more expensive," said founder and managing director at Great Road Capital Chuck Bush. "However, with the Fed likely to increase interest rates this month in the short to medium term, U.S. investments will continue to look attractive to Chinese investors. So we have some uncertainty with all of these factors. Senator Chuck Schumer's recent call for investigations of Wanda and other Chinese players' massive investments in Hollywood create even more uncertainty as it relates to further Chinese investment in Hollywood."

China itself heavily restricts U.S. studios' access to its massive consumer base. The country only allows 34 movies per year into its borders from U.S. studios. That memorandum is set to expire in 2017, but proposed rules in a recent draft law include a requirement for domestic films to make up at least two-thirds of the total running time of China's movie screens.

The market is also heavily censored, and the country implements blackout dates for foreign films to make domestic titles more competitive. All of these measures are intended to protect the country's local film industry, according to the Chinese government.

But as more and more studios sell out to Chinese buyers, concerns are mounting about the Chinese government's influence and the possible dilution of U.S. cultural content and dampening of artistic freedoms.

But not all observers are as concerned.

"I'm skeptical of this notion that the main goal of Chinese investors and even government-owned film entities … is to control the message, to censor things to deliver a Chinese communist message to the world," Bush said in an interview.

He said the channels of influence likely go both ways. As much as Chinese investment in Hollywood is driving increasingly Chinese-styled ideals in film, the exposure to Hollywood could influence the Chinese film business.

Further, Bush said he expects the pace of Chinese investment in U.S. studios to taper off. A big reason Chinese companies are investing in Hollywood studios is to learn the business, many investors have argued, and Bush said in two to five years many of those lessons will be learned and China's film industry should be on its way to maturity. Further, Chinese companies are also subject to restrictions of direct foreign investments, so there is theoretically a limit to how much money can move into Hollywood.

For Namer, whose Metan Global Entertainment produces television and digital shows for the Chinese market, the country obviously wants to spread its culture through its entertainment investments, but that is not necessarily nefarious. Hollywood has played a massive role in spreading U.S. culture around the world, generally without a political agenda attached.

Looking forward, he said he believes that China's rules for production and distribution will moderate in response to market forces. It is important to remember that China is still young in the movie business and the consumer market, the executive said.

"Commercial film is relatively new there. There's a lot of naivety exhibited. … As the level of sophistication goes up, I think Chinese investors are beginning to really learn that it doesn't have to be this blend. You can have movies made for China. You can have movies made for the West. You can have movies made for both. There doesn't have to be this set formula,” Namer said.

As for the threat of suspicious regulators like Schumer or an isolationist administration, Namer shrugged those issues off also.

“I think there will be scrutiny, certainly, of the influx of Chinese money into key U.S. businesses and infrastructure, but overall I think it's fine," he said. "I don't see any significant changes coming."