The US and China are trying to tie the knot with new film deals, but will politics and culture intervene?

Would Die Hard still be a classic hit if Jet Li had played the lead role? Would it have made a difference if Spiderman had been set against the backdrop of the Great Wall? And could Zhang Ziyi have played Keira Knightley’s role in Pirates of the Caribbean. If everything goes according to plan, we’ll find out soon.

In mid-April, Walt Disney Co. announced that the third installment of its wildly-successful Iron Man movie series will be a co-production with Beijing-based DMG Entertainment. The percentage breakdown of investment has not yet been released, but Iron Man 3 is sure to have enough Chinese money in it to get it past the government’s stringent imported film quota.

Less than a week after that, director James Cameron arrived in Beijing. He is said to have met the state-owned China Film Group to discuss the potential of making sequels of his blockbuster movie Avatar as Chinese co-productions. Cameron, whose films have scorched box office charts in China, is unlikely to ignore the power to circumvent China’s film quota policy.

That quota, originally set up to protect the local film industry, has become less stringent in recent months. In February, China’s Vice President Xi Jinping signed an agreement in Los Angeles to raise the number of foreign films allowed in to the country from 20 to 34 each year. It also raised the foreign filmmakers’ share of mainland China’s box office takings from 13% to 25%.

Last year, China’s box office set records at RMB 13 billion ($2.1 billion), up 28.9% from 2010. Of that, foreign releases took roughly RMB 6 billion, according to data from the State Administration of Radio, Film and Television. Across the Pacific, things didn’t look as rosy – a report released by the Motion Picture Association of America showed that ticket sales from US and Canadian theaters had slipped by 4% to $10.2 billion.

With declining audiences in the West, it’s no surprise that Hollywood directors are turning the spotlight on the East for new opportunities. “Every executive in America’s film studios is fascinated by the growth and potential of the Chinese market,” says Jason Squire, who teaches courses on the movie business at the School of Cinematic Arts at the University of Southern California. “I am convinced that in the next five years, the amount of money made on movies in this market will make China the number one market in the world.”

China has a booming box office and Hollywood has the knowhow and the means to make great movies. It seems like a match made in heaven. What is not clear yet is whether the two will live happily ever after or end up heartbroken.

Cashing in on Culture

China’s film industry is getting tremendous support from the government’s 12th Five-Year Plan (2011-2015), which aims to increase the share of culture in the GDP by at least 5% by 2015. The goal is to increase the added value of cultural industries by 20% a year. Currently China’s cultural industries account for less than 2.5%. This is a stark contrast to countries like the US where they account for more than 20% of the total GDP.

From the get-go, Beijing’s plan to boost culture had striking effects on the capital market. Cultural enterprises, which are usually slow-moving, began to gain momentum in 2011, mergers and acquisitions took place among film companies and media outlets, and many listed on the stock exchange. Fourteen cultural industry-orientated equity funds were launched, with a collective plan to raise RMB 45 billion.

By October 2011, China’s commercial banks held a total balance of RMB 230 billion loans for the cultural industry, according to a report issued by the China Center for Information Industry Development, a Beijing-based consulting firm.

The Five-Year-Plan also offered tax breaks to cinema builders, and last year alone, 800 new cinemas popped up. Many started offering high-definition and 3D capabilities and according to Entgroup, a Beijing-based firm that researches the Chinese entertainment industry. China’s famously fast pace of construction meant that around 8.3 new screens were set up every day. For companies like IMAX, business started prospering; and overnight China became the second-largest market for the picture format after the US with roughly 25 IMAX theaters located throughout the country.

However, this thriving market is dominated by Hollywood blockbusters instead of local films. Last year two of the top-grossing films were imported. Transformers: Dark of the Moon took RMB 1.1 billion at the Chinese box office, while the second-highest grossing film–Kung Fu Panda 2–raked in RMB 610 million.

One of China’s most internationally recognized directors, Zhang Yimou, and his film The Flowers of Warmanaged to take third place on the rankings with RMB 590 million, according to Entgroup. The lackluster performance of what was the most expensive Chinese film ever made came as a surprise to the film industry, which had seen Zhang make a bigger splash with blockbusters like Hero and House of Flying Daggers.

“The important thing for a powerful film-producing country is that local language films have the absolute advantage in the local market, and a competitive advantage in the overseas market,” says Yu Dong, the president of Bona Film Group Limited. He pointed to India’s Bollywood model as an example.

Yu suggests that India has fulfilled the first criterion at home, making it a force to reckon with in the film world. But China can’t even claim dominance of its own market. The commercial reform of the Chinese film industry only started a decade ago, Yu adds, after it had spent 50 years fulfilling a state-mandated public service and propaganda role.

“Chinese language movies need first to appeal to the local market and garner both profit and popularity in the culture of their origin. It’s very difficult for any local language movie to be exported outside the culture of origin,” added USC’s Squire.

Two-Way Street

Beijing’s newfound openness to the foreign film market has immediately boosted traffic in both directions. In addition to Disney, other major Hollywood studios have announced joint ventures with Chinese media conglomerates while both private and state-backed film funds from China have visited the US in pursuit of investment opportunities.

At the end of last year, Beijing-based Galloping Horse partnered with Hollywood visual effects and animation giant Digital Domain Media Group to establish a studio in Beijing. “We are seeing a strong need among Chinese audiences for blockbusters with heavy visual effects elements in them,” Ivy Zhong, the CFO of Galloping Horse, told the press in an announcement.

She may have been on to something. Jeffrey Katzenberg, CEO of DreamWorks Animation, told Caijing Magazine that Oriental DreamWorks, the largest joint venture in the cultural industry in China, was about to start work on new projects. Backed by cash and intellectual property valued at $330 million, the company has chosen to work on seven stories based on classical Chinese cultural and historical topics, but declined to go into specific details.

Some Chinese heavy hitters like Yang Buting, chairman of the China Mainstream National Film Capital Hollywood Group, backed by both state and private funding, are also busy searching for projects in Hollywood that combine American talent with Chinese stories.

Squire praises Chinese entrepreneurs for having the courage and confidence to make a global foray, but warns of the high risk of investment in the industry. “Hollywood is always looking for investment, and because it is so risky, the numbers [regarding the cost of film production] are so high,” he says.

Global Ambitions

In 1999, Yu established his own company, Bona Communication Co., the first private firm ever to receive a film distribution license. His business later branched into film production and cinema construction, expanding to attain the second-largest share of the distribution market by the end of 2011. In order to boost competitiveness at home, it merged with the state-owned conglomerate China Poly Group in 2003.

However, Yu’s ambitions extend way beyond the domestic market. In November 2010, Bona became the first Chinese film company to get listed overseas. Its NASDAQ debut was not a pretty one. It tumbled 22.59% from the issuing price at $8.50 and its share performance has continued to underwhelm ever since.

“It is not the best financial sense for a Chinese film company to get listed on the American stock market. I might have had much higher returns if I had listed on China’s A-Share Market,” says Yu. “I chose the most difficult path, because I want to compete with the best film companies in the world.”

Bona is not the only Chinese film company to display less than astute financial sense. Last year, Huayi Brothers planned a joint venture with Legendary Entertainment, but the deal fell through when the investor, Hong Kong-based civil engineering firm Paul Y. Engineering backed out. The construction company was hoping to diversify its portfolio, even though it had no experience or understanding of the film industry.

Despite the lower returns, Yu believes that his vision will pay off, if and when China decides to open the film market further to Hollywood. “Bona will be in a prime spot for a partnership with Hollywood film companies when they want to enter the Chinese market. This is because we are a Chinese company listed in the US, and can offer a complete chain of industry from production to distribution and release,” he says.

Domestic Barrier

There are many complex reasons that might deter a potential investor from dealing with a Chinese film company, the most notable of which is a possible over-involvement by the Chinese government in the industry.

There fears are not unfounded. The Beginning of the Great Revival, released in June 2011 to celebrate the 90th anniversary of the founding of the Chinese Communist Party, was widely panned by audiences. That was because the government pushed back the release of the popular Transformers: Dark of the Moon and Harry Potter and the Deathly Hallows Part 2, and made Revival mandatory viewing for schoolchildren and the many employees of huge state-owned companies. In the end it raked in RMB 400 million, taking it to number seven on the box office charts, and signaling that quality is not the only determinant of box office success.

Further, China’s top directors routinely run afoul of the censors. Jiang Wen, director of the successful 2010 cowboy movie, Let the Bullets Fly, languished in creative exile for seven years after making a film that touched on sensitivities surrounding the Japanese occupation of China. Jiang Wen is not alone, which means many of China’s greatest directors are out of the talent pool for years at a time, further retarding Chinese cinema’s development.

Even before companies reach the negotiating table and encounter language or cultural barriers, the image of China as the world’s factory and a counterfeiter looms large. Matthew Bakal, CFO of Mandate Pictures, a subsidiary of Lions Gate Entertainment, feels that these fears of plagiarism and counterfeits in the film industry are unfounded.

“The difference with film and TV [rather than clothing and electronics] is that each product is unique. The product has to make something commercially successful, artistic and be interesting to millions of people,” says Bakal. “Each time you are doing it brand new and each one is a little bit of a gamble.”

Bakal believes that once more co-productions have been successfully completed, opportunities for bigger, longer-term deals will arise. “It’s not that Warner Bros, Sony or News Corp have 25% of these projects that meet everybody’s requirements sitting on their desks waiting to go. So it’s a matter of finding those projects and doing one or two movies together to learn about the process,” he adds.

Clashing Ideologies

Karin Chien, an independent film producer based in New York City works on the frontier of co-production. With experience of co-production on two documentaries and two on-going narrative films, she understands that when it comes to actual cooperation, cultural differences are more likely to create problems than ideological ones.

“Almost every producer who wants to start a production in China faces the same questions: Can I trust this person? Can I trust this company? Do they really have the relationships and experience they say they have?” says Chien. “For people who do not know the culture or the language, it’s even harder.”

The administrative climes are also different. Chien points out that the US has a strong infrastructure for film production: unions, vendors, a supply chain, a distribution chain and laws that govern investments and labor. But, like the Chinese film industry itself, all of these are still in their infancy in the country.

The nature of the production can also be a problem. China puts strict regulations on the content of films. A script has to be reviewed and approved by the China Film Co-Production Corporation, a subsidiary of the China Film Group Corporation, to comply with Beijing’s restrictions. The restrictions include, but are not limited to: sex, religion, time travel, and the vague “anything that threatens social stability or public morality”. The film has to be reviewed again after it’s completed.

According to Australian screenwriter and producer Mac Harwood, the filming permit for the Chinese version of High School Musical was withheld because the film was seen as encouraging disrespect between students and teachers. He blogged that the production needed a total script rewrite before shooting could begin. The Chinese version was a flop, although critics attributed the bleak box office reception to bad timing, poor distribution and a failure to understand and adapt to the tastes of the target audience.

“The audiences’ expectations are very different. In general, Americans like to watch a film with a happy ending, but sad films do really well in China,” says Chien.

One American screenwriter based in Beijing admitted that cultural differences can destroy a quality artistic endeavor. The long running joke, he says, is that the role of supporting actress is always reserved for the Chinese investor’s girlfriend. He declined to be named as he is negotiating between his American company and the Chinese investors.

Chien says that cultural differences also shape production style. In the US, a producer is the one in charge of keeping the director on budget, on schedule and in control. Without such a Chinese counterpart, she adds, the management of the project becomes more challenging.

She recounted the story of an American producer giving money to a Chinese film company, only to have the money change hands through outsourcing to other directors until the film’s budget was next to nothing. The rest of the money was pocketed by the original director.

It’s difficult to judge how China and Hollywood will get along in the future. The last few months seem to have been a honeymoon period of pulling together finances and testing the waters. Ultimately, the acid test will be how they cope with cultural differences across the Pacific. If they can deal with that, there’s only one question that lingers.

“How can you bridge that gap and make films for both audiences?” says Chien. “Right now that is the billion dollar question and anybody who can figure out the answer will be very rich.”