Region adapts co-prod'n models, looks to refine $ policies

HONG KONG — The robust Asian film biz and its talent may attract producers from outside the region, but the fact is that the Far East industry remains distinct from the U.S. and European businesses.

Large parts of the Asian industry are self-sufficient and can finance and recoup without involvement of international markets. This especially seems to apply to certain genres (Thai melodramas, Hong Kong comedies, Chinese propaganda pictures) and to the entire national outputs of countries including India, Indonesia and Malaysia. But as budgets climb, more financial sophistication is required.

The trend toward regional co-production was conspicuously kick-started at the Hong Kong-Asia Film Financing (HAF) event seven years ago when Peter Chan Ho-sun launched Applause Pictures, a company with a goal to develop and produce multinational Asian movies.

The co-production rationale is subtly different from the intra-European namesake. There is considerably less subsidy coin to be obtained in Asia by making pictures that qualify as domestic in multiple jurisdictions. Rather, Chan’s idea was to harness top talent from different territories and make movies that have pan-Asian appeal.

These still could be championed by local distribs and, in the case of Chan’s “Perhaps Love,” would be Chinese enough to qualify for mainland release without the import quota restrictions.

While some of the firm’s output was labeled as being the Asian equivalent of a “Europudding,” the model enjoyed genuine success in “One Fine Spring Day,” a Hong Kong/Korea/Japan co-production helmed by Hur Jin-ho, and Hong Kong/Singapore chiller “The Eye,” with Malaysian star Lee Sin-je and Thai/Hong Kong helmers Danny and Oxide Pang.

The model has sparked a host of imitators with multinational casting and finance, such as “Seven Swords” and “The Banquet.”

Co-production expansion has helped give rise to indie production firms, including Japan’s Twins and Korea’s Boram Entertainment, which would be instantly recognizable as a parallel to Europe’s many specialist co-production houses.

They don’t have large capital of their own, but instead of acting as work-for-hire contractors of richer studios, they access coin in their home territories and weave together a larger mesh with similar partners in other Asian territories.

The Asian co-production model is now being applied to pictures with ever larger budgets. This year sees production of the Chan-helmed “The Warriors,” made on a $40 million budget as a Hong Kong/Chin/ co-production; “Three Kingdoms,” ($30 million), a Hong Kong/China/Korea co-production; and the John Woo-directed “The Battle of Red Cliff,” a $70 million production with Japanese, Chinese and Taiwanese investors.

While financial sophistication tends to grow with the budget, progression is not uniform.

“Red Cliff” is repped by a major international sales house, the U.S.-based Summit Entertainment, and is by far the biggest investment to date of Avex Entertainment. This is an offshoot of a Japanese music conglom that deliberately chose to flag its pan-Asian movie ambitions by basing its film hub in Hong Kong rather than Tokyo.

“Three Kingdoms,” on the other hand, was launched without a sales house in place to represent non-Asian territories, and “Warriors” is handled by the upstart Applause Ruddy Morgan (ARM).

Mind the gap

Despite the co-productions, and the fact that financiers and producers have attended numerous finance seminars at Asian film markets and festivals, use of sophisticated gap finance and completion bonds are limited.

Reasons for this include a disproportionate burden of finance and legal costs on small pictures, the quintessentially Asian “my word is my bond” way of doing business and misunderstanding of the techniques involved.

More often than not, Asian production houses still largely turn to their own capital and cash flow, or that of well-heeled larger congloms, and combine that with some pre-sales arranged without recourse to a sales company.

In Japan, budgets generally tend to be tiny, but many larger movies are financed using complex ad hoc consortia bringing together distributors, exhibitors and equity financiers. Chinese producers these days are able to access “angel finance” from private corporations and wealthy individuals (see story, page A2).

To date, Asian filmmakers, other than those in Korea, have made little use of private equity and film funds. Although other parts of the media and entertainment sector in Asia have been served ever larger portions of hot money, the content end of the business and the private equity managers have largely kept each other at arm’s length.

But that may be changing. Half a dozen funds ranging in size from $75 million to $200 million are now actively courting movie and TV producers in the region while simultaneously trying to bring in money from U.S. and Asian sources.

Typical are the Magnet Media Fund, being put together by a combo of Hong Kong private equity firm Aquitaine and Los Angeles-based movie investor Regent MB, and Ambassador Media Partners, headed by former Miramax Intl. prexy Ian Jessel. Both get their coin from private equity and match it with bank finance. Both seek to divide their investments between stakes in corporations and equity stakes in movies — preferably in the form of slate funding.

Reason for the funds’ arrival is financiers’ growing perception that audience tastes are becoming more global and that Asian films can travel. But long-term industry insiders worry that there is more money than event movies capable of absorbing such capital.

“They are all targeting the same group of Hong Kong-mainland Chinese pictures,” says one insider. “There aren’t enough to go round. And there isn’t enough talent with global name recognition for that to change rapidly.”

End game

More likely to succeed are the wealthy end users of content, some of which are adding marketing power and financial sophistication.

In Japan, broadcast rivals Fuji TV and Tokyo Broadcasting Systems have made dramatic entries into movie funding. With films including “Bayside Shakedown” and “Dororo,” respectively, they have upped budgets and deployed familiar TV stars. Giant ad agency Dentsu has a highly developed, long-term content strategy that is far removed from anything as banal as product placement and instead runs from sports-rights brokering to production finance.

Taiwan’s CMC Entertainment, a subsidiary of CMC Magnetics Corp., is currently upping its film finance role as it seeks to provide content for its holdings in leading Taiwanese circuit Vie Show Cinemas and Deltamac home entertainment house, which has offshoots in Hong Kong, Taiwan and mainland China.

In Hong Kong, where free-to-air TVB was once a powerful force, the payboxes are now increasingly active.

I-Cable has given its Sundream Motion Picture subsid license to expand from production finance into production, Hong Kong distribution and international sales.

Buoyed by the success of its investment in the Andy Lau-produced “First Cuts” slate and a production deal with “Infernal Affairs” co-helmer Andrew Lau, News Corp.’s Hong Kong-based Fortune Star is now investing in low- to midbudget pictures in Chinese-speaking territories across the region.

It’s clear that the region’s most sophisticated producers soon will have a plentiful array of financial options — and may be eager to deploy them.

Asian film finance sophistication is growing:

  • Increasing number of co-productions
  • Growing number of co-prod-treaties with Europe, Canada, Australia
  • Use of Hong Kong by co-producers as financial and legal center
  • Rise in use of pic funds
  • Return of TV investors in Japan, Hong Kong
  • Film finance legalized in India
  • Growing use of co-prodction markets (HAF, PPP)
  • Involvement of sophisticated investors like Dentsu, Fortune Star, CMC o
  • the rise
  • HK companies making use of the Closer Economic Partnership Arrangement (CEPA)
  • Corporate flotations in India, Korea

Factors holding back Asian film finance sophistication:

  • Slow use of completion bonds
  • Slow use of bank gap finance
  • Little systematic about tax incentives
  • Chinese industry still puts production volume ahead of quality
  • Average budgets remain very low
  • Extensive use of “angel funding”
  • Less than systematic use of sales agents (Umrao, Postmodern)
  • Quotas in China, Korea
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