China – Tech sector and Film industry moves

“China is at an end”. This lament was heard to echo through the auditorium of London’s Royal Opera House earlier this month, part of the libretto of Puccini’s Turandot. In it, a ruthless, hereditary ruler presides over the nation with a culture of fear, and everyone in the country appears to have a role affiliated with or subject to the state. A far cry from today then.

In this article, we will look at movements in China’s tech sector and film industry.

Tech: Much news is pouring out of China currently as it looks to accelerate its digital maturity and capabilities, prompting varying degrees of concern, particularly as state actors look to influence the strategy and restrict the processes of individual corporate entities. Apple’s concession of building data centres in China is disappointing. No less ominous is China’s continued investment in artificial intelligence. The opportunity is a potential wellspring of innovation, but one likely to be geared toward autocratic ends (e.g. the identification, if not ‘prediction’, of those not towing the party line). Having relaxed the market only in recent years to allow videogames consoles, China’s regulators are now terrified of the impact of such things on children. Tencent saw >$15bn in market value lost in one day earlier this month when they restricted playing hours on their number one game to two hours a day for 12-18 year olds. This move was anticipatory, after much government and media speculation over the game’s addictive nature. As the Financial Times reports,

“Two weeks ago a 17-year-old boy in Guangzhou suffered a stroke after playing nonstop for 40 hours. Last week state media reported a 13-year-old boy in Hangzhou had broken his legs jumping from a third-floor window after his parents stopped him from playing.”

Surely if Tencent is under pressure, no one is safe? So it seems; Weibo became the victim of over-eager government chin-wagging recently, with shares dropping 6% on the revelation that it was banned from showing user videos without the appropriate licence. As with many other social platforms, video is a key revenue medium. According to the FT, 20% of Weibo’s $170m advertising revenue in the first quarter was from video; Chinese social users dedicate 25% of their time on mobile devices to watching video.

Film: 2017 seems to be a year of reckoning for the motion picture industry in China. The market has spent over a decade providing increasingly huge amounts of revenue to Hollywood studios, gradually relaxing its annual quota of releases further as allegations over nefarious dealings had been largely ignored. At one time, China’s box office was predicted to become the biggest in the world at some point this year. That talk has now ceased. PwC recently made a more sober prediction of 2021. The last twelve months have seen:

• A dramatic slowdown in overall box office in China
• Domestic product reaching new lows of box office takings
• Increased visibility of what appears to be widespread fraud at the box office, allocating ticket sales from one film to another
• A higher share of revenue for Hollywood fare

These four things are, unsurprisingly, connected! There have long been anecdotal stories about how local exhibitors will give cinema-goers the “wrong” ticket for a movie – especially when it is a foreign film – giving the audience receipts for a local domestic film instead, in order to inflate its box office performance. Also known as fraud. There are non-illegal reasons for relatively poor performance too. Local product still tends to be technically and narratively inferior to Hollywood films, as well as often being extremely derivative. Of the top 10 selling films in the second quarter, only two were made at home; in previous years the balance between revenues from domestic and foreign films has been closer to 50-50. The addition of 9,000 screens has not budged the needle. As a result, Variety points out, “Many Chinese movies have opened strongly, but then faded fast”. The Financial Times writes that “China may still see its first drop in ticket sales in more than 20 years in 2017”. Regulators have added salt to the wound (aka opened up the market), scrapping the annual ‘domestic film industry protection month’, where only Chinese films are allowed to be shown in theatres. Hollywood studios should not celebrate their relative success too much; its tactic of vast amounts of Chinese product placement was commercially successful in the fourth iteration of Transformers; less so with the fifth (and hopefully last) iteration.

M&A in the industry has been affected by a wider clampdown on capital outflow, which has put the kibosh on large deals by companies like Wanda, which recently sought to purchase Dick Clark productions. Political tension means associations with Wanda and AMC Entertainment are under scrutiny, in an effort to de-risk opaque dealings, and explains the absence of any South Korean films at the Shanghai International Film Festival earlier this summer. Signs continue of US/China co-productions (such as Marvel’s planned creation of a Chinese superhero). But further international cooperation could be hit by the factors mentioned above, especially when mixed with economic realities. You may have noticed Alibaba Pictures gracing the opening credits of the last Mission: Impossible film. The company’s $141m loss last year may give pause before further such outings.

All this is happening while Xi Jinping is in the midst of important domestic machinations to reorder his Politburo, on the macro level, while also, at the industry-level, seeking to re-negotiate the existing film important agreement. The MPAA has brought in PwC (the dudes that screwed up the Oscars’ Best Picture result) to audit Chinese box office takings for the first time, in order to presumably provide increased leverage in negotiations. Currently, according to Variety, studios get 25% of gross ticket receipts, “half of what theaters usually cough up in other major territories”. Stanley Rosen, a political science professor at USC who specializes in China, is downbeat regarding the potential scope of the audit, “It would be interesting to see what is allowed and what is off limits. My guess is the most egregious forms of box office manipulation will not be investigated.”

 

Imitation & Innovation in China

It is said that imitation is the sincerest form of flattery. If true, it should follow then that China are huge fans of most consumer electronics brands. We’ve written before about threats to intellectual property. The impact of such imitators is most keenly felt by the end user, and can be mixed. In India, back in 2011, counterfeit DVDs of The Dark Knight sold for over $600 a pop. In China, where a limited embargo on foreign films exists, scarcity has spurred innovation, leading to grey-market DVDs with more special features for viewers to enjoy.

Such innovation still flouts the law, however, and is nothing new. In his book A History of Future Cities, Daniel Brook writes in detail of the Westernisation of Shanghai at the end of the 19th century:

“As early as 1863, the British food company, Lea & Perrins, was taking out ads in the North China Herald to warn Shanghai consumers of ‘spurious imitations of their celebrated Worcestershire sauce [with] labels closely resembling those of the genuine Sauce’ and threatening lawsuits against anyone who dared to manufacture or sell the knockoff product”

Today, China still struggles to build powerful brands that work outside the country as well as they perform domestically. An editorial earlier this week in the Financial Times confirmed this status, with a focus on handset manufacturer Xiaomi. The editorial rightly points out Xiaomi have made good attempts at brand cultivation, including a strong social media following that cultivates a sense of belonging that results in people attending new product releases in the same uniform and plush toys (see header photo). More could be done though. Ultimately the brand can be as glitzy as you want, but without an exciting business beneath, generating excitement will be hard: “It is a sound business, but not an innovative one”. Its product specs borrow from Samsung, its product design and launch motif from Apple, albeit with some mildly diverting software additions of there own, such as a way to navigate automated phone systems.

The risk of failure in markets outside of China has potentially been heightened by the centrally planned market environment present there, which rewards and protects national incumbents while doing its best to hinder new, foreign entrants. A domestic market with over a billion people is not a bad starting place, but as the FT concludes, “If Chinese brands are going to take on their rivals around the world, they need to dazzle us with something we have never seen before, much like Sony did with its life-altering Walkman“. Sony though will feel keenly that such dazzlers do not a sustainable competitive advantage make.

Christian Dior in China Derided

Contention, Controversy and Criticism, the three Cs that no brand wants to hear (unless they’ve intentionally brought it upon themselves in an incredibly well-orchestrated way). The Gap recently tried this, in an effort that Brandchannel called a “Gapocalypse”, i.e. not well-orchestrated. Mea culpas followed hard upon.

Last month, the Daily Mail reported that Dior was being similarly torn apart; “slammed” for its apparently racist imagery. The images in question, shot by Quentin Shih as part of the ‘Shanghai Dreamers’ campaign commissioned for the new store opening in the eponymous city, show a woman draped in Dior finery, surrounded by Chinese people who all look exactly alike. The campaign has been called racist, but Mr. Shih says, “I wanted to show the power of Chinese people standing together and a kind of socialism in Chinese history (only in Chinese history not China now)… The Chinese models are not people. They are symbols of Chinese history between the 1960s and 1980s.” According to the article, The Guardian’s Jenny Zhang wrote “[They] should have sent Chinese models for Shih to shoot, and should understand that the modern Chinese Dior customer will not recognise herself or himself in these photographs.” Dior could be forgiven though for playing on the well-known admiration that the Chinese have for luxury, exotic Western brands. Actress Marion Cotillard was similarly used in an international campaign for Dior recently, highlighting China’s rising prominence.

The ‘Shanghai Dreamers’ photos, intentionally glazed to give the appearance of those family photos from bygone days, remind Zeitgeist of old school photos… just not theirs. As always, your thoughts and raging tirades are always welcome on what you think of this campaign, and how well it treads the line of being at the cutting edge – which is what haute couture fashion is all about; pushing boundaries – while maintaining cultural sensitivity.