Film Industry in China Great Challenge & Great Opportunity How to produce and distribute foreign films in China?
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Outline: Section 1. Past and Present Section 2. Film Distribution in China Section 3. Film productions in China Section 4. Key Takeaways
Section 1 Past and Present
China s Middle Class is growing and shifting Source: Article McKinsey Quarterly Mapping China's middle class
China Cinema US$ (Million) 2011 2012 2015 2016 2017 Box office 2,096 2,685 6,305 8,381 10,296 Cinema Advertising Total Cinema in China 55 63 93 105 117 2,150 2,748 6,398 8,486 10,413 Cinema Screens China The U.S. 2009 1,500 38,605 2011 6,300 38,974 2012 10,000 39,056 2017 29,000 39,798 Source: ENT group and PwC Media and Entertainment Outlook 2016-2020
Box Offices Revenues in China and the U.S. Source: https://www.eastwestbank.com/reachfurther/news/article/lights-camera-approval-chinas-new-film-law
Fun Facts for Foreign Movies in China - cuts Logan Government censors cut down Hugh Jackman's final Wolverine film by a whopping ahead of its China release, 14 minutes citing violence and 'brief nudity' as unsuitable for our sensitive dispositions. With the total film running to just under 140 minutes, that was 10 percent of action and intrigue that cinema-goers in China missed out on.
Fun Facts: Adds - Ironman 3 Chinese version of Iron Man 3 has an extra four minutes of footage containing Chinese locations and actors to appeal to local audiences;
Fun Facts - Changes 21 & over It was a party movie - But Chinese edition, a different message
Chinese movies enjoy the same censorship Youth was originally set to premier on September 29 2017, but was suddenly delayed a few days before its debut, which many speculated was because it touched upon sensitive topics including the Sino-Vietnamese war. Some scenes were also reported to have been deleted from the original film.
Censorship in China How did that happen? Censorship, Censorship, Censorship Due to China s censorship demand, often asks for substantial cuts/edits/even adds in those it does allow in
Powerful Censorship No Film Rating System In China All films, whether produced in China or abroad, must be approved by Chinese censors for all audiences. A group of censors between 19 and 36 people at any given time, whose job it is to grant or deny each film entry into the market. These censors review scripts or finished films for content that they perceive as undermining Chinese social stability, social ethics, or government; Removing certain scenes or editing out before a movie can be screened in China; The purpose Film censorship demonstrates the Chinese government s interest in maintaining a positive portrayal of China - the state in particular.
What China censors? Violations of the basic principles of the Constitution of China, incitement of resistance to or undermining of implementation of the Constitution, laws, or administrative regulations; Endangerment of the national unity, sovereignty or territorial integrity; leaking state secrets; endangering national security; harming national dignity, honor or interests; advocating terrorism or extremism; Belittling exceptional ethnic cultural traditions, incitement of ethnic hatred or ethnic discrimination, violations of ethnic customs, distortion of ethnic history or ethnic historical figures, injuring ethnic sentiments or undermining ethnic unity; Inciting the undermining of national religious policy, advocating cults or superstitions; Endangerment of social morality, disturbing social order, undermining social stability; promoting pornography, gambling, drug use, violence, or terror; instigation of crimes or imparting criminal methods; Violations of the lawful rights and interests of minors, or harming the physical and psychological health of minors; Insults of defamation of others, or spreading others' private information and infringement of others' lawful rights and interests; Other content prohibited by laws or administrative regulations.
Section 2 Distribution
Traditional Distribution
Import Quotas for Foreign movies For years, China has systematically and formally constrained the ability of foreign movies to enter the Chinese film market through: Quota System: 34 foreign films (largely US studio films) each year on a revenue-sharing basis Revenue Sharing Basis: The low percentage of receipts allotted to the foreign studio (currently 25%) for such revenue-sharing films; (about half the norm for other parts of the world); The foreign studio s inability to control the release date. Unofficial blackouts: summer holidays, Chinese New Year etc.
1 st Foreign Movie in China: The Fugitive (1994) The Chinese began importing more American films and today allows an annual quota of 34 a year
Methods for Distributing Foreign Films in China Import Quota Flat fee (buy-out) 2016, a record 34 films were allowed into the China as revenue sharing films; Rights holders of revenue sharing imports receive 25% of the net box office revenue without any additional withholding for taxes or marketing expense; Applies to all countries films but almost exclusively by Hollywood s six big studios Since 1994 distributed on a revenue sharing basis Applies for films not chosen from the Import Quota; For non-import films, Chinese distribution companies can negotiate a fixed price for local rights, and Chinese distributor can keep all Chinese revenue; Rarely high, but better than nothing; Also limited number: 2016 record with 51 films.
Foreign films on screen in 2017 89 foreign films were imported and released in China this year, providing 47.3% of China s total box office. Top 10 on the list are: 1. The Fate of the Furious; 2. Transformers: The Last Knight; 3. Dangal; 4. Pirates of the Caribbean: Dead Men Tell No Tales; 5. Kong: Skull Island; 6. xxx: Return of Xander Cage; 7. Resident Evil: The Final Chapter; 8. Coco; 9. Despicable Me 3; 10. Spider-Man: Homecoming. Among the 89 foreign films: 40 are imported on a revenue sharing basis 49 buy-out films at fixed price grossed over 6.66 billion yuan ($1.02 billion).
A new domestic film incentive program (Issued on December 13 th 2017) China incentivizes theaters to show more domestic films, fewer from Hollywood (foreign movies) - The rewards are based on a theater s total box office receipts for the year and kick in if at least 55% of those receipts are for domestic films. (before 66% - weren t able to achieve); However, Chinese movie theater owners act in their own economic best interests if showing Chinese movies results in lower attendance who filling seats?
Thoughts? Is Chinese movie good enough to draw audiences? Can Chinese movie theaters affect what Chinese moviegoers decide to see? Does it sound like an explicit bias against foreign films? the Chinese government wants fewer foreign films in its marketplace, not more.
Digital Distribution
How Internet Impacts Film Industry In China s subway, commuters glued to their cell phone and tables, watching The Walking Dead Theater is no longer the only channel, paid video mode is on the rise. Online video platforms generate revenue through advertisements that runs prior to online content; Foreign studio/tv content providers make money via licensing fees. For example: Tencent entered a three-year pact to make Tencent Sports the exclusive digital streaming media partner of the NFL. The main online video space in China: Youku, Sohu, Tencent and iqiyi have all invested in video content another potential gold mine for foreign movies/tvs etc.
Most Popular Chinese Video Websites
Section 3 Film productions in China
A legal entity
Foreign Invested Enterprises (FIE) Common Types Representative Offices (RO) Wholly Foreign- Owned Enterprises (WFOE) Joint Ventures (JV)
Chinese Partner Required An updated version of China s Catalogue of Industries for Guiding Foreign Investment ( Foreign Investment Catalogue, or Catalogue ) went into effect on July 28, 2017 - China opened up more sectors into relaxation ; However, the film production sector is still in the restriction category under the new Catalogue. By Law, not allowed to operate independently.
Cooperative Joint Venture (JV) for filmmaking activities Special Legal Requirements Chinese participants: holding a Movie Production Permit or have obtained a a Movie Production Permit (Per Movie) twice; Registered capital: no less than RMB 5 million; and the proportion of foreign investment in registered capital cannot exceed 49%; Chinese participants is responsible for submitting the application to SAFRT; Once receiving the approval from SAFRT, the Chinese participant shall submit the required documents to Ministry of Commerce (MoC); MoC will issue an Approval Certificate for Foreign Investment Enterprises to successful applicants; Note: Two approvals issued by the SAFRT & MoC Administration of Industry and Commerce (AIC). Again, since it is in the restriction catalogue, in practice, it is very difficult to obtain the approvals.
Movie Production Permit 摄制电影许可证 Company Name Registered Address Legal Representative Business Scope operational location Domestic or overseas Term of Validity 2 years
Pre-licensing 2-3 months JV Establishment Process Basic information collection from client (7 working days) Name pre-approval (5-7 working days) 12-month office lease agreement (depends on client/landlord) Incorporation documents prepared by client (several weeks) Incorporation documents prepared by DSA Administration of Industry and Commerce (AIC) issues Business License Includes: Enterprise Code, Tax Bureau, Statistics Bureau Registration (10-14 working days) Carve company chop, financial chop, invoice ( fapiao ) chop, and legal representative chop (1-2 working days) Foreign exchange registration certificate (5-10 working days) Foreign capital account (5-7 working days) Capital Injection (in accordance with articles of association) Capital Verification Report (9 working days) RMB basic account (2 weeks) Foreign Trade operator filing with MOFCOM (5-8 working days) Customs Registration Certificate (5-8 working days) Inspection and Quarantine License with AQSIQ (5-8 working days) Customs IC Card Application (21-28 working days) Post-licensing 2-3+ months A record filing from the Ministry of Commerce (3 working days) Company now legally exists Preliminary Foreign Trader filing with SAFE (2-3 working days) General VAT taxpayer Filing (1-2 working days) General VAT taxpayer invoice quota (30-60 working days)
Sino & Foreign Film Co-Production
Two Types of Co-Production Joint-Production Commission Production invest together (including capital investment, labour services, etc.) in the production of a film; share the associated profits and risks; All copyright and intellectual property is co-owned by both parties. the Foreign party commissions the Chinese party to produce a film in China on their behalf; All copyright and intellectual property is owned by the foreign Party.
From a Bypass to Win-Win Outcomes Co-productions are considered domestic films and are thus not subject to annual import quotas (34 films) and may be directly released in China; The country s State Administration of Radio, Film, and Television (SARFT) recently highlighted that its rules for co-prods require at least one third of production funding coming from China, along with one third of the main cast, while scenes must also be shot in China; Co-prods help boost China s image overseas while benefitting from learning expertise; The Chinese government are sensitive to the idea that Hollywood might be cynically taking advantage of its booming film market.
Co-production Permit Approval Procedure SARFT: the State Administration of Radio Film & Television CFCC: China Film Co-Production Corporation CFGC: China Film Group Company (a subsidiary of CFCC) Approach Chinese Partner File application with CFCC CFCC conducts preliminary review SARFT approves and issues Coproduction Permit Production commences
Dragon Logo Submit outline of the film into record (must be submitted in Chinese) Shoot the film Upon completion of the film, must submit to the SAFRT Receive the License for Film Screening Certificate (Dragon Logo) Distribute Film to the Public
Challenges of Co-pro Many challenges that co-productions are still faced with, such as copyright ownership, cultural differences, and different work styles.
Section 4 Key Takeaways
New Film Promotion Law (took effect on March 1, 2017) Socialist core value & protect domestic movies Panel of expert Streamlining process Reasonable arrangement Confirm the Co-prod. Anti-Piracy NOTE: 1) No fundamental changes to the existing regulatory framework as it affects foreigners: Foreigners will still be prevented from engaging independently in film production in China; Foreigners will still be prevented from engaging in film distribution in China; No mention is made of any lifting of the quota on importing foreign films on a revenuesharing basis.
Ines Liu Senior Associate, International Business Advisory ines.liu@dezshira.com