Country's evolving movie biz shows an increasing sophistication and diversity that challenges U.S. studios to rethink their approach

In the past few years, Westerners have exulted in the country’s box office boom, which included hefty grosses for major-studio films such as “Iron Man 3,” “Pacific Rim” and “The Croods.” With the liberalization of access to the market and a greater share of distribution money, Hollywood began to see China as the land of opportunity after decades of feeling thwarted by tight quotas for imported movies.

Yes, the China box ofice is growing, but not for everyone. In the current year, ticket sales for local films increased 144% to $1.12 billion, while imported films saw a 21% slump to $670 million — despite the relaxing of quotas.

Is Hollywood doing something wrong, or are Chinese filmmakers doing something right? Both, which is why American studios need to quickly rethink their roles and goals.

Some already are.

The company that’s made its local partnerships pay off best recently is Village Roadshow, whose Asia offshoot was an investor in the class of 2013’s biggest local Chinese hit, Stephen Chow’s February release “Journey to the West: Conquering the Demons,” which debuted to a staggering $92.5 million (roughly the equivalent of a $300 million opening frame in North America). To compare, “Iron Man 3” saw a $64.5 million opening weekend in China.

The growth of indigenous film is due to three key elements: content, exhibition and marketing. China’s filmmakers are shunning such national staples as historical epics, and instead taking a page from the Hollywood script, offering genre films, including horror, thrillers and romantic comedies, all told in a slick and fast-paced style.

And local film companies are looking beyond mega-cities like Shanghai and Beijing, which embrace international movies, instead catering to the nearly 300 third-and fourth-tier cities that accounted for 34% of ticket sales last year and are expected to hit 42% by the end of 2015.

Certainly a degree of the local success is due to China’s control of all distribution, including blackout periods in which new Hollywood films cannot be released, and weeks in which studio blockbusters are stacked against each other, limiting their playability. But those who think the surge in the local Chinese film industry is due mainly to such practices are too focused on the increasing scale of the business in China rather than its growing sophistication and diversity.

While Shanghai is home to 27 million people, these “small” cities boast populations in the 1 million to 4 million range. A report this year by EntGroup Consulting cited Panjin as one such fourth-tier; the city, with a population of 1.3 million, generated $4.17 million at the box office, a jump of 867% from a year earlier. These cities are not especially enamored of Hollywood movies; their citizens’ tastes lean toward films that feature China TV stars, for example.

SEE ALSO: China: Hollywood Studios Still Face Headaches

In addition, China’s marketing is tapping into the country’s digital growth, which some in Hollywood have underestimated.

“The U.S. studios are too big and slow. They have not yet understood that the Internet in China is bigger than the film industry,” says producer Zhang Zhao, whose Le Vision Pictures scored two of the year’s big hits with “Tiny Times” and its sequel. “Maybe China can now make a meaningful contribution to world cinema (in offering) a new business model.”

When pictures like “Tiny Times” and “Lost in Thailand” can earn their backers 500% returns on investment, Chinese studios and filmmakers are well incentivized to continue their focus on their domestic market.

And foreign backers are perhaps well advised to join them.

Though Hollywood’s business model in China is relatively new, it may be behind the times. In a market as big, fast-changing and idiosyncratic as China’s, studios may find it difficult to remain as outsiders who export products and rely on third-party companies to handle their marketing and distribution.

Some are already becoming local players in the Chinese film industry, establishing production-distribution footholds of various kinds. Fox Intl. Prods. is producing with Bona Film Group, while 21st Century Fox has a stake in Bona; Marvel/Disney and Alcon Entertainment are in partnership with local firm DMG; Legendary Pictures has venture Legendary East; and DreamWorks Animation is invested in Oriental DreamWorks, which announced last week a bigger commitment to China beyond feature animation: It intends to be involved in animated TV production, live action films and live action TV — including reality formats — as well as mobile and Internet content.

The watershed moment in Chinese film history appears to be December 2012. That’s when local comedy “Lost in Thailand” easily trounced local film “1942,” a big-budget ($35 million) traditional drama from box office champion Feng Xiaogang and Huayi Brothers Media.

Distributed by Enlight Media, “Lost in Thailand” was a smart example of counterprogramming during blockbuster season. Amid all its slapstick and pratfalls, the film delivers pithy commentary on contemporary Chinese society and its hang-ups over money, gadgetry and social climbing.

SEE ALSO: Chinese Hit ‘Tiny Times’ Taps Internet Generation Via Audience Research

“Lost in Thailand” cost less than $4 million to produce and grossed $200 million. It marked the directing debut of actor Xu Zheng. Since that December success, Chinese filmmakers have delivered local megahit movies at the rate of roughly one per month — and roughly half those have been by first-time or little-known directors.

“So Young” was made by actress Vicky Zhao Wei, directing her first picture; “Finding Mr. Right” was the sophomore outing for Xue Xiaolu, who previously directed drama “Ocean Heaven”; while “Switch” was the debut helming effort of producer Jay Sun.

Both “So Young” and “American Dreams in China” are light dramas whose stories jump forward a decade and gently reflect on how contemporary China got modern so quickly.

A similar swift change can be seen in movie demographics. The new generation of Chinese movies is skewed younger, more suburban, more female and much more contemporary.

Film critic Raymond Zhou says this is partly due to storytelling and partly to exhibition.

“These young filmmakers have more solid techniques in film narrative,” Zhou says. “In the old times, filmmakers tended to look down upon those techniques and said that this is something that belongs to Hollywood. But the new and young directors don’t see it that way.”

Hong Kong-based director Peter Chan Ho-sun observes that the Chinese are very good students of Hollywood. He conducted half a dozen test screenings and re-edited his “American Dreams in China” in response to pre-release audience feedback. The practice is becoming more common. “Now all of this year’s films are edited so precisely, they look like they have been edited by a studio; there’s nothing auteur about them,” Chan says.

Zhou points out that the box office boom over the past decade was due to new theaters in the main cities like Beijing and Shanghai. But now, he says, “the expansion of cinema circuits in the second-and-third-tier cities is having an impact. As a consequence tastes also have changed.”

The expansion of cinemas away from the big metropolises into smaller cities also has reduced the average age of cinema audiences — from 25.7 years in 2009 to 21.7 years in 2013, according to a June report published by Chinese consumer film info and booking website Mtime.com.

As the number of screens has increased, so has production. Young filmmakers are no longer forced to work underground and have chipped away at the regulators’ hard lines (and their own cautionary self-censorship) to produce genre films in formats from horror to thriller to romantic comedy.

There were a few signs of this even before the December sea change, such as Li Shaohong’s 2004 romantic comedy “Baober in Love,” Feng Xiaogang’s 2009 megahit “If You Are the One,” romancers such as “Go Lala Goff and Zhang Ziyi starrer “Sophie’s Revenge,” the 2009 espionage pic “The Message,” and horror titles “Mysterious Island” and “Million Dollar Crocodile.”

But these were exceptions to the rule.

In the first decade of Chinese cinema after its 2000-01 liberalization, the dominant commercial themes were often history and martial arts. Examples include Ang Lee’s “Crouching Tiger Hidden Dragon,” Zhang Yimou’s “Hero,” Chan’s “The Warlords” and John Woo’s “Red Cliff.” But it became increasingly difficult to distinguish one picture from another.

In large measure, the clustering around these topics was shaped by censors who have long frowned upon police and espionage themes, sci-fi, erotica, religion, drugs, politics and horror, as well as anything to do with Tibet. Technical limitations, notably poor special effects and lack of animation story skills also narrowed the options.

Some state-owned studios still quietly manufacture propaganda films, as they did a decade ago. But otherwise, there has been a tectonic shift. In a recent study, regional trade publication Film Business Asia found that horror accounted for 12% of Chinese film productions last year, compared with 6% in 2003, and that romantic comedies had quadrupled from 2% to 8% over the same period.

The publication suggested that the genre shift has been in motion for most of the post-liberalization decade, and it concluded that China now delivers a diverse slate thanks to a powerful commercial sector.

“Audiences in China no longer care about the director; they just want to know what the story is about,” says Chan, whose “American Dreams” was this summer’s only big hit from a long-established filmmaker. “This is a revolution (away from) the big-name directors that China has always had and that audiences have traditionally followed. Is the golden age of the big-name director over?”

Chan says he learned his lesson with the costly failure of his big-budget martial arts pic “Wu Xia” (aka “Dragon” in North America) in 2011, and the so-so performance of “The Guillotines,” an Andrew Lau-directed period actioner Chan produced in 2012.

So he approached “American Dreams” as if he were a new mainland Chinese director, and worked with a smaller budget than normal and a local cast.

This breakthrough for Chinese productions and access to changing local markets seems to be good news for the film industry there. But where does this leave the studios? Curiously, it could be good news for them as well.

Not only would it benefi t those that, like Village Roadshow, have invested in hit local hits like “Say Yes” and “Journey to the West,” but in the long run, if local Chinese films are seen to be doing better, there may be less pressure from government regulators to intervene in the releasing calendar for Hollywood pics. The blackout periods instituted by Sarft (predecessor of current regulatory org China’s State General Administration of Press, Publication, Radio, Film & Television) and the Film Bureau have often lasted a month or two at peak times of year (July and August last year), in order to give local films a better chance to fi nd their audience.

Studios report that already this year, three Hollywood films were released in August: “Jurassic Park 3D,” “Monsters University” and “The Great Gatsby.” And this month could see as many as five Hollywood releases in China, with “Elysium,” “Smurfs 2,” “The Lone Ranger,” “Turbo” and “Jobs.”

So while Western media loves to trumpet its successes in China, with the strong showing of Hollywood blockbusters, it’s clear that China audiences aren’t just sitting and waiting for the next Hollywood blockbuster.

And Fox Intl., Marvel/Disney, DreamWorks and the others might have the right idea: If you can’t beat ’em, join ’em.

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