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Exhibs’ Chinese puzzle

Foreign orgs want ownership in huge biz

After months of holding his peace, Warner Bros Intl. Cinemas chief Millard Ochs finally went public in December to express a growing sense of frustration over the difficulties facing foreign companies in accessing and developing China’s movie-theater sector.

Speaking at the CineAsia exhibitors’ conference in Beijing, Ochs said that far from easing up on foreign companies, China has made the rules of engagement tougher.

“We want to invest a lot of money in this market, but to do that we need 51%.” Ochs said.

That was tough talk from the man who has overseen the largest investment in Chinese theaters by any company.

And a tough call, too. For although the regulations are onerous, China’s theatrical market is beginning to demonstrate its growth potential.

After three years of growth exceeding 25%, B.O. has doubled to more than RMB2 billion ($250 million) last year. And yet the giant country remains desperately under-screened, with only one screen per 240,000 inhabitants.

So when WBIC announced earlier this month that it would shift its world cinema design and architectural outfit from London to Shanghai, it raised eyebrows. Was this a tactic to curry favor with the Chinese authorities, or an acknowledgement that a solution will eventually be found to today’s ticklish issues?

Ochs is bothered by two things: firstly, the 49% foreign ownership cap on a cinema venue; and, secondly, a hazier concept that gives the local partner a “leading role” in the project and, according to Ochs, ensures that the content the government wants gets on screen.

Other foreign operators and developers face the same hurdles. But none have committed to China as much as WBIC. Loews Cineplex, from the U.S., has an office in China but has not yet begun building or operating.

South Korea’s CJ Entertainment has yet to see its theater operation catch up with its distribution ambitions, which already involve it acquiring Chinese rights to certain titles, including some from DreamWorks.

WBIC entered the market in early 2002, in partnership with the Shanghai Film Group. They built the Paradise Warner Cinema City, the country’s first foreign-backed plex, which is still the busiest cinema in China. By the end of last year, it had theatrical joint ventures with four developer partners and operated 67 screens at eight sites. And, under an experiment, it had been given permission to take 75% stakes in complexes in seven cities that were earmarked for urgent cinema building.

Where Warner and others had hoped that trial loosening would become permanent, it now seems that the State Administration for Radio Film and Television (Sarft) has little intention of liberalizing the market simply to keep foreign developers happy. Chinese developers accounted for the majority of the 55 cinemas that opened in 2005.

The other foreign wannabes may be less hung up on majority ownership, but still have other concerns.

CJ’s VP Miky Lee says ownership is not essential in her business model, but that the Korean conglom expects to oversee day-to-day operations to apply her company’s management skills to its Chinese investments.

None of this is a problem for Hong Kong operators and developers, which do not have to be tied to a local partner and are rapidly building up a head of steam in the mainland.

Although in many respects China operates a “one country, two systems” approach, when it comes to theatrical exhibition Hong Kong firms are largely treated as locals.

Successive phases of the Closer Economic Partnership Agreement (CEPA) have allowed Hong Kong firms first to take a majority stake in a Chinese cinema, then to own one outright and, from this year, to own a network of hardtops.

Hong Kong exhibitors Golden Harvest and Edko (which operates under the Broadway and Palace brands) have opened cinemas in Beijing and Shenzhen, a large port city bordering Hong Kong. Intercontinental (branded as MCL and JP) is set to open its first, also in Shenzhen, in July this year, and UA Cinemas/Lark Intl. also operates two.

They are joined by Hong Kong investment groups. One of them, UME, has opened four plexes in Beijing, Shanghai, Hangzhou and Chongqing. Another, Sun Wah Media, owns one in the Liaoning province and is partnered with state film distribber Huaxia in a separate circuit. Even before its acquisition of Intercontinental in December, Japan’s Kadokawa group had teamed with Sun Wah to build and operate an ambitious 40-plus plexes.

“CEPA allows me to own 100% of a project. So a property developer or mall operator can deal directly with me,” says CK Phoon, CEO of Golden Harvest.

“CEPA is a help to us. And Hong Kong companies can better maneuver in that culture than others,” said Rigo Jesu, prexy of Hong Kong’s Intercontinental.

Having been given a head start, Hong Kong firms still have similar concerns to any other operator in the region, such as location, pricing and future competitiveness of sites.

“One thing any developer should be aware of is that whenever competition arrives in China, it comes in a huge wave. There are lots of me toos,” Phoon says.

While he is expanding Golden Harvest’s Shenzhen plex from seven to 12 screens, he says he knows of plans for eight rival multiplexes in the same city.

Competition or not, Phoon says he envisages having three 10-screen Golden Harvest plexes in each of the top five cities within the next five years.

All the developers — whether local, Hong Kongers or foreign — seem to agree on one sticking point: Growth in the film industry and the exhibition sector will remain stunted unless distribution is freed up.

“The Chinese don’t need us for the technology, they can buy that; nor the finance or business know-how. They have both of those locally. They need us for the marketing and services that China is not yet good at delivering to the cinemagoer,” an exec with a distribution-exhibition combine says.

“If we are going to have all these new screens, we need to have the product. Everyone is focused on the big local films and the big foreign films. What we really need are more of the smaller films that will dominate in the off-seasons and a hit from nowhere like ‘My Big Fat Greek Wedding,’ ” says Phoon.

But until the distribution and censorship systems are loosened up, one of the best tactics for the inbound exhibitors may be to ally themselves with one of the policies that are currently obsessing China Film, such as the expansion of digital cinema and moves to drive down the ticket price in big-city theaters.

For instance, building digital theaters attracts advantages that are not available to developers of other sites. According to official news agency Xinhua, WBIC has learned that lesson and in December committed to raising its digital theaters stock to 170 by the end of 2007.

Duly rewarded, WBIC this past week announced the establishment of a fifth JP. The latest is in the mid-South and South-Western parts of the country with the Sichuan Pacific Cinema Circuit. They will build four plexes and take over management of the Chongqing plex that opened Jan. 26.

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