In a scant ten years, China’s movie market has grown from a tiny handful of theaters scattered across the country into the second-largest consumer of movies in the world. China’s theaters are full andits appetite for movies shows no sign of slowing. For Hollywood, accessing the Chinese market promises a boost in ticket sales no other market can match. Getting into China, however, can be difficult. 

In the past few years, Hollywood studios have been pioneering new routes into the Chinese market. Some, like DreamWorks, are establishing a presence on the ground; others are developing individual films as co-productions with Chinese film studios, an arrangement that promises better access to the Chinese market. These strategies aren’t fool-proof — China’s censors and regulators continue to present obstacles to foreign films — but they demonstrate the growing ties between Hollywood and China.

“China now has the largest foreign box office market in the world,” says Mathew Alderson, a Beijing-based partner at Harris Moure Attorneys. “But in China there are effectively no sources of ancillary income, such as income from Internet downloads and home rentals. So, Hollywood studios want a piece of the box office action.” 

In 2011, China’s State Administration of Radio, Film and Television (SARFT) reported that revenues from ticket sales in 2011 were 13.1 billion yuan (about $2.08 billion), a 28.9% increase over 2010. The box office sales in the U.S. and Canada, by comparison, were $10.2 billion for 2011, down 4% from the previous year. Although China’s market is markedly smaller and the country’s movie-goers see fewer films, it offers the potential for enormous growth at a time when ticket sales are shrinking elsewhere in the world.

Since China reformed its movie industry in 2002, the country has allowed foreign films onto its screens on a quota basis. For a decade, the country allowed 20 foreign films a year to enter their market. This year, authorities increased that number to 34. Even as it opens up, China is protective of its domestic movie industry, and censors are careful about the tone of the content they allow on Chinese screens. Entrance to China’s market requires political finesse, cultural understanding and compromise. 

“It's very important that we figure out how to collaborate as much as possible,” says Chris Fenton, president of DMG Entertainment Motion Picture Group, a China-based company that has led the charge of films co-produced between Hollywood and China. “If we can't get that done…we may lose them as consumers the way we lost India to Bollywood.”

Co-productions Offer a Window 

DMG’s most recent success story is Looper, a time-travel film that was co-produced by DMG in China and Endgame Entertainment in the U.S. Other co-productions include the 2010 movie Karate Kid and The Mummy 3. DMG is currently pursuing approval to co-produce the movie Iron Man 3

The attraction of co-produced movies is twofold. A co-production bypasses the quota system that governs other Hollywood films, and it gives producers a bigger chunk of the box office. “The reason for the interest in co-productions is that they are regarded by the Chinese as domestic films and are therefore not subject to the quota,” says Alderson. “The Chinese authorities also require that around 55% of total box office is taken by domestic films, so a certain return on domestic films is guaranteed.” 

Foreign films that enter the Chinese market through the quota system can command anywhere from 13% to 25% of the box office profits in China. A co-production can command up to 45%. For comparison, 48% to 55% of box office profits in the U.S. go to movie studios.

Co-productions, however, are not as simple as just pairing up with a Chinese studio. The films are required to do a percentage of filming in China and feature at least one prominent Chinese star. “If you follow the guidelines that they have, they are actually pretty straightforward,” says DMG’s Fenton. “The majority of the cast are Chinese nationals, and the majority of the money is spent on the ground in China.”

According to Stanley Rosen, director of the East Asian Studies Center at the University of Southern California, most co-productions have been filmed almost entirely in China. Co-productions like Red Cliff, which tells the story of a famous battle in ancient China, and The Forbidden Kingdom, which stars Jet Li and Jackie Chan, are examples of films that feature Chinese stories and Chinese actors. “From the Chinese perspective,” says Rosen, “you want more than just a superficial mention of China—you want something substantial.” 

To understand the difficulties of the Chinese market, according toRosen, it is best to consider the aims and conflicts of China’s regulators. China is working to build its domestic creative industries and hopes to someday export its cultural products to the world. “The Chinese are at the beginning of a great revival,” he says. “They are trying to encourage their creative industries; they're putting a lot of money into it.” 

Exporting Chinese film, however, is tricky. Movies like Red Cliff tell a story unfamiliar to Western audiences. Dubbing and subtitles also pose challenges. “The old Bruce Lee movies, for example, when they were first shown in the U.S., were dubbed terribly. That was part of the charm of it in those days.” Today, however, audiences in the West are less likely to sit down for a subtitled or dubbed movie.  

From the perspective of the Chinese movie industry, Rosen says, co-productionscan help to build the profile of Chinese actors and directors abroad. They offer an opportunity to make films that are sensitive to both Western and Chinese sensibilities, ultimately promoting Chinese culture abroad. A film like Kung Fu Panda, for example, succeeded in appealing to both audiences. 

Not every foreign production, says Fenton, can convince regulators that it will promote Chinese culture and Chinese film abroad. “[Co-production approval] is not something that is easy to get,” he notes. 

Negotiating China’s Regulators 

Fenton emphasizes the fact that not every Hollywood film is suited for a co-production. “The goal is to work with film makers to try and find ways to enhance the plot by putting China into the film,” he says. “And then you use that relevancy to get approvals for a Chinese co-production.” 

In the case of Looper, the script initially did not call for any scenes in China. When DMG began considering a co-production,it pinpointed a sequence that took place in Paris that could be shifted to a Chinese city. “The majority of the film takes place in the U.S., not in China,” says Fenton. “But, a major driver of Bruce Willis’ character is that his wife is killed in the future, and that takes place in Shanghai. There are several lines referring to the future being in China.” 

One of the important aspects of the movie is how China is portrayed — a prosperous place that is important in the future — which is pleasing to Chinese authorities and believable to audiences across the world. China’s regulators are looking to portray China in a positive light, says Fenton, but “we're not looking to make it an infomercial for China.” The changes to Looper, he argues, actually enhanced the quality of the movie.

“You don't want someone in Iowa to feel like China was forced down their throats,” Fenton says. “It is important that you find the right type of film that can [accommodate] the sort of relevant plot in there.” 

Even once a film gets approval, there are dangers remaining in the Chinese market. In the past, Chinese regulators have changed the opening dates of a movie so that a number of big blockbusters compete with each other on opening day, dampening ticket sales. They have also imposed blackout dates on foreign films that look like they will be popular to give certain Chinese films an edge. 

“Blackout dates are hurtful, because if a movie is released around the world, you will get black market DVDs released before the movie makes it to the Chinese market,” says Fenton. “The goal is to [have openings in China coincide] with the global release of the movie.” 

To do that, he says, DMG employs lobbyists. “In the United States, companies have strong forces to work inside the beltway. That same sort of lobbying effort works in China. We have a very large lobbying group that works very hard to make sure we're in the know, and to let regulatorsknow what we would love to have happen.”

Movies looking to enter into co-productions should also be aware of the impact that China’s box-office reporting practices can have on the profitability of the production. “Box office accounting is an issue because of under-reporting and other practices engaged in by the movie theatres here,” says Alderson. Foreign studios should also take note that their films will be taxed in China — typically at a rate of 25%. 

Continuing Uncertainty 

Even as more films are finding avenues into the China market, Chinese regulators are pushing back. In August, regulators warned that they would be tougher on Chinese/American co-productions in the future. "Some so-called co-production movies just do superficial changes, with little investment from China and use very few Chinese elements, and call it a co-production. These co-productions get around the quota system and take domestic investment away and threaten Chinese movies," said Zhang Peiming, deputy bureau chief of the State Administration of Radio, Film and Television, in a press conference. 

“One of the problems with China is the contradictions,” says Rosen. “While they definitely want to promote the Chinese creative industries, they also have onerous requirements on what can and cannot be produced.”This can put limitations in place that filmmakers may be unwilling to accept. In addition, the United State’s Security and Exchange Commission recently announced that it would be investigating the behavior of Hollywood studios in China, sending a message that they are on the lookout for bribery or misbehavior in China. 

In spite of the challenges, Rosen believes a number of the collaborations between the West and China hold promise. Holding Kung Fu Panda as an example, Rosen says that animation offers great opportunities for collaboration. Instead of applying for co-production status movie-by-movie, DreamWorks has set up a joint venture in Shanghai with three local partners — China Media Capital, Shanghai Media Group and Shanghai Alliance Investment. “Assuming they're allowed to do what they want to do, I think there is a possibility to be successful making a film that will appeal to both audiences,” says Rosen. “Animated films are the best opportunity because they can be shown in Chinese in China, and in English in the United States.” 

Oriental DreamWorks, the name of the Shanghai joint venture, plans to release Kung Fu Panda 3 as a co-production in 2016, followed by a full Chinese production to be released in 2017. If DreamWorks is successful, Rosen predicts other studios will quickly try to follow suit.

lderson says many Hollywood studios are feeling optimistic about the opening of the Chinese market. He urges caution, however, as studios move to establish themselves more firmly in China. “I don’t think there can ever be any guarantees about access to the China market,” he says.