Huayi Brothers Media is China’s biggest entertainment company and the first listed stock from its sector. The firm was initially focused on the signage business and quickly diversified into film production. Today, it accounts for one-fifth of China’s total box-office collections of 21.8 billion yuan ($3.6 billion). Huayi registered a growth of 27% in 2013.
In the past few years, Huayi has expanded into the areas of mobile games and theme parks. It has invested 148.5 million yuan and 672 million yuan, respectively, to acquire mobile game companies Ourpalm and Yinhan Technology, and spent 252 million yuan and 390 million yuan to acquire the controlling share in TV production companies Zhejiang Changsheng and Yongle TV. The company’s movie-themed entertainment park has an initial budget of 110 million yuan. Founder Wang Zhongjun says that he wants Huayi to be a player in all areas of the entertainment sector, with Disney as his model.
Huayi filed for an initial public offering (IPO) in 2009. Wang’s 26% share in the company has put him on the Forbes China Rich List; he was ranked 142 in 2013, with an estimated wealth of $1.1 billion.
Wang spoke to Knowledge at Wharton about the strategy behind the company’s diversification and what he has learned from the process.
An edited transcript of the conversation follows.
Knowledge at Wharton: Huayi Brothers has grown rapidly in recent years. What are the core elements of your success?
Wang Zhongjun: Huayi Brothers stepped into China’s entertainment business quite early. We explored many things before our peers did and this gave us a first-mover advantage. We have also been lucky that our decisions have always been in line with China’s macro policy changes and industry dynamics, such as the timing of the IPO.
Our success has three elements. First, leverage the power of capital. We are the first in China’s entertainment industry to explore and leverage capital to grow our business. We are the first company to use bank loans to produce movies. We had two rounds of crucial financing before we went public. We attracted capital from Jack Ma [chairman of Alibaba, the biggest e-commerce company in China] and other well-known entrepreneurs. We successfully launched our IPO in 2009 and became China’s first “movie stock.”
The second element is institutional innovation. We have explored new models in every level of business. Third, we have actively moved into new businesses including mobile games and location-based entertainment (LBE). This is in line with our strategic vision for the next three to five years. Observers may think our overall growth was quite smooth. However, there were some projects that did not go as planned.
Knowledge at Wharton: What experiments didn’t work out?
Wang: TV entertainment shows are currently very hot in China. Huayi organized professional teams to work with Shenzhen Satellite TV and Heilongjiang Satellite TV to broadcast such programs. But some did not progress too well. We also tried to build a franchise around If You Are the One and Personal Tailor (two popular movies produced by Huayi). It did not work. I think the reason is lack of talent. The entertainment business has to find the right person to do the right things. Finding the right person depends to some extent on luck.
In 2010, we invested several hundred million yuan and a lot of energy on TV programs. We spent much more than we did on mobile games. But, till today, the profit from TV has been less than 100 million yuan annually. Last year, we invested in TV production companies Zhejiang Changsheng and Yongle TV to improve our performance in this segment.
Our investment on cinemas is expected to give positive returns this year. Overall, the profit of Huayi Brothers has grown from 60 million yuan before listing to 660 million yuan last year. This is enough to finance our strategic businesses.
“There are a lot of uncertainties in China’s entertainment industry. You can’t think five years ahead as there may be transformative changes.”
Knowledge at Wharton: Why did Huayi invest so much in mobile games?
Wang: The game business is part of our cross-culture strategy. This has great potential. In 2010, when we first entered the business, we did not expect to amass revenue of several million yuan from a single game. Now, the revenue from a game has crossed 100 million yuan.
In 2010, we invested nearly 150 million yuan in Ourpalm, a mobile game company, and became its second largest shareholder. We cashed out for several hundred million yuan and still hold three billion yuan of its stock by market value. In 2013, we became controlling shareholder of Yinhan Technology, widely recognized as one of the top companies with high growth. Our corporate cultures match; we have coordinated on celebrity endorsement, movie marketing and other business. Yinhan’s 200 million yuan profit last year has already exceeded our expectations and we think it will continue to grow strongly. I am very confident that our game business will stride ahead in the next two-three years.
Knowledge at Wharton: Some critics feel that Huayi is deviating from its main business — what is your response to that?
Wang: They will continue to say that over the next couple of years. We are now actively expanding our location-based entertainment (LBE) business. I told our executive team years ago that, based on the movie brands, we will need to tap the full industry chain to maximize returns from our copyrights. Our business model will be similar to Disney. If Disney had concentrated on animation films only, it would not have become the Disney of today. If we had only made films, we would not have become the Huayi of today. Our main business is to create entertainment content — to align movie production, games and LBE.
Knowledge at Wharton: How is your LBE business doing?
Wang: It was started in 2011 and now it’s time to see some harvest. One of our LBE projects is the movie theme park, internally called Huayi Brothers Movie World. This has been developed by a Sino-U.S. team. We have recreated some familiar scenes from Detective Dee and Assembly [two popular movies in China] and highlighted the entertainment elements. The construction work is over for a park in Hainan province named Feng Xiaogang’s Movie Commune, after our famous director. It opened to visitors from the Spring Festival this year. Some 20,000 visit the park daily though the related services — restaurants and hotels — have not opened yet. I have taken some famous entrepreneurs including Liu Chuanzhi (chairman of Lenovo) to visit the park. They have all been very appreciative and say its quality is on par with foreign parks. LBE is easy to duplicate and I believe it has strong commercial potential. Right now, all big cities in China look very much alike. But if we can build a movie commune near Beijing, or if we can restore a small town of 100 years ago, young people will love it.
Knowledge at Wharton: How do you plan your strategies?
Wang: The decisions we took in earlier times were quite casual. After we went public, pressure from investors forced me to consider the company’s future growth strategy. There are a lot of uncertainties in China’s entertainment industry. You can’t think five years ahead as there may be transformative changes. My job is to consider what the company will be doing in the next three years.
“The core resources of entertainment are directors, actors and the ability to tell good stories.”
The most important capability for a leader of an enterprise is his learning capacity. We can grow only if we have a strong appetite to learn.
Knowledge at Wharton: Who and where do you learn from?
Wang: I have three categories of people I learn from. The first is friends, especially well-known entrepreneurs. My biggest asset is that I have a lot of friends. We could use bank loans to make movies mainly because of support from friends in the financial services industry. I am simple and easy-going; that may explain why I have so many friends. Many of my friends are our pre-IPO investors. By the way, the return on investment on Huayi is also impressive.
The second category is financial media people. Huayi is the first stock in entertainment, and media people like to ask questions on the industry, growth strategies, etc. I did not think about these issues in the early days. But if you are being asked about them every day, you are forced to get ideas into shape.
The third channel is to take part in forums. I love to join forums and interact with others, especially on Internet-related forums which bring a lot of fresh ideas. I learned about the B2C concept from an Internet forum. It started me thinking about who the consumers of our products ultimately are. There is ample scope for imagination here.
Knowledge at Wharton: What changes has Internet brought to your business?
Wang: I am personally not involved in the daily operations of our new media business. But I have full faith in our young team and give them strong support with both people and money. We have started copyright cooperation with the Tencent video business and have co-developed an entertainment product called Star Alliance. Tencent [China’s biggest online communication company] offered the platform and it is operated by our team. The product has gained more than 20 million users in two months. I am confident that Huayi will be able to explore its own online model through cooperation with Alibaba and Tencent.
The impact of the Internet is not only on business operations. Many ideas from the Internet have inspired us. For example, Internet companies like to say “platform” all the time. In the future, Huayi might become a platform company instead of being a production company. Another example is our LBE business model. Huayi will not invest huge amounts of money on property development; properties will be planned and constructed by developers and we will share the profits.
Knowledge at Wharton: In terms of movie production, will Huayi go international?
Wang: Yes, definitely. I am personally responsible for this project. I visited Los Angeles five times last year. China’s movie market has been expanding rapidly in recent years. One big production might get more than $100 million in revenue. Two movies from Hollywood collected more box-office revenue in the China market than in the North American market. Most of the famous directors and producers in Hollywood are watching the dynamics of China. Some even predict that China’s market volume will exceed the American market by 2018-2019. In terms of capital investment, Chinese movie companies can put in millions of dollars to finance Hollywood productions.
“If Disney had concentrated on animation films only, it would not have become the Disney of today. If we had only made films, we would not have become the Huayi of today.”
I have started discussions with Warner Brothers and Lionsgate Entertainment on potential cooperation. We have just announced an investment of $120 million to $150 million in Studio 8 [a production house headed by former Warner chief Jeff Robinov]. Future cooperation will include joint production, joint ventures and M&A.
I believe that the internationalization of Huayi will make progress in the next two years. One day we will see reports that a Huayi movie earned three billion yuan ($476 million) in China and $800 million in the global markets.
Knowledge at Wharton: Talent is especially important in your business. How does Huayi attract talent, especially international talent?
Wang: You must have different methods to attract talent at different stages of your development. In the early days, it’s mainly motivation — the boss talking about dreams. At our current stage, there are more approaches to attract talent [such as] stock options [or] M&A…. For example, the founders of Yinhan Technology are very professional but simple people. How do you attract them? Through investment. The core resources of entertainment are directors, actors and the ability to tell good stories. We will not be able to create a monopoly in these resources. But we now have some long-term partners including outstanding directors like Feng Xiaogang and Xu Ke.
In the U.S., if you find a good CEO, what else do you offer him beyond material incentives? Does Chinese culture work? Can you talk to him about dreams? Yes, you can. Many dreams of Americans have inspired me. I once had coffee with an executive from DreamWorks. He talked passionately about how many places he had flown to and how many people he had met in one week. He was so excited with what he was doing. He lives for his dreams. It impressed me very much.
Knowledge at Wharton: Will there be any change in the role director Feng Xiaogang will take in Huayi in the future?
Wang: We are friends. He will continue to work for Huayi; there are still three production contracts with him at the moment. However, he is now adjusting the tempo of his life and may not be at the frontlines. He will focus on supervising and coaching young directors. He has so much experience; we believe he will be an excellent mentor.
Knowledge at Wharton: Huayi has made many movies. Which do you like the most?
Wang: Among Feng Xiaogang’s movies, I like Assembly the most. It has a nice story structure, strong characters and outstanding visual effects. Zhou Xingchi’s Kung Fu Hustle is very interesting because of its artistic presentation. I also like Xu Ke’s Detective Dee series, especially Young Detective Dee: Rise of the Sea Dragon. The cost for making this sequel was only around $20million, but its visual effects can rival Hollywood blockbusters.
Knowledge at Wharton: Will Huayi’s “big brother” status in the industry continue?
Wang: The Wanda group, Enlight Media, LeTV and others have entered the entertainment market at their own pace. This is a very open industry with no resource monopoly. We were the leading player in both 2012 and 2013 in terms of box-office revenue with 20% of total market. It will be very hard to sustain this rate in the future. China will be like the U.S. market with several top-class producers and no one leader. Leadership may change from year to year.
However, we cannot stay here. We have to move ahead and explore new models. That is why we are talking about straddling the entire entertainment value chain. If our strategy in games and LBE goes smoothly, we will be better placed than our competitors. Disney has been the biggest in the American entertainment market for many years. But it is not necessarily the biggest in movie production. The ultimate question for us is whether we can become big brother in the entire entertainment market and how long we can stay there.
Right now, some critics are obsessed with box-office revenue alone. Chinese entertainment companies have to look beyond the box office. They must learn from Disney and Warner Brothers to become pan-cultural.