MEDIA: DreamWorks Crashes Out of China Animation JV

Bottom line: DreamWorks Animation’s withdrawal from its China joint venture marks the end of an explosive phase in China-Hollywood tie-ups, with one-off co-production deals the most likely form of cooperation going forward. 

In what could herald a wave of the future, a highly-touted joint venture between DreamWorks Animation and Shanghai’s China Media Capital (CMC) has come unglued, with the official departure of DreamWorks from the tie-up. This particular exit appears quite symbolic, as Oriental DreamWorks was the first of what ended up becoming a huge wave of similar tie-ups between China and Hollywood. Thus the big question becomes if this abandonment of the venture could signal more unraveling of similar tie-ups ahead.

I suspect the answer to that question is yes, but perhaps not for the reasons you might expect. It appears that DreamWorks Animation’s decision to quit the joint venture owed to disappointing results, and I suspect the company’s acquisition by Comcast two years ago was also a factor. The fact of the matter is that China’s movie market still has huge potential. But Beijing has shown less appetite for these China-Hollywood tie-ups these days, less for political reasons and more because it is trying to stem the outflow of money for foreign acquisitions.

According to the latest headlines, DreamWorks Animation has officially given over full control of Oriental DreamWorks to CMC, which will relaunch the company with the name Pearl. (English article) The US partner had previously owned a minority 45 percent of the company. The partners said they will continue to collaborate for the an upcoming release called “Everest”, which was in the works already and is a China-themed film about a girl who tries to bring a yeti back from the Himalayas to Shanghai.

Other than that, the venture appears to have been a relative disappointment. It was first announced six years ago to much fanfare, right around the time that President Xi Jinping was ascending to his current role. But since then it has only put out a single large-scale film, “Kung Fu Panda 3”, which was a relative disappointment compared with previous films from the franchise.

This particular development wasn’t a surprise, as word had begun circulating last year that DreamWorks Animation wanted out of the venture. Last year reports also emerged that the company laid off 40 animators and was aiming to restructure. Another report said that Warner Bros. was apparently interested in buying the stake, though that doesn’t seem to have come to fruition.

Bogged Down by Bureaucracy?

There’s no word on why the venture was so unproductive despite the early high hopes. My guess is that it probably became the victim of Chinese bureaucracy, since Chinese companies are famous for this kind of internal ideological battles that can sometimes bring everything to a crawl. CMC, which is linked to Shanghai Media Group (SMG), China’s second largest state-owned media company, is also somewhat famous for forming tie-ups with big-name foreign companies, and then failing to deliver strong results.

That brings us to the next questions of whether this disappointing end could auger the collapse of more China-Hollywood tie-ups. I would say the answer probably lies somewhere in the middle. This kind of joint venture seems pretty much doomed to failure, since Beijing usually requires that all such ventures be controlled by Chinese partners who are slow-moving and political. But tie-ups on individual films seem to work much better, as evidenced by the big success of the last “Transformers” film, which was a co-production.

Then there are all the Chinese tie-ups in Hollywood itself, which aren’t subject to China’s ownership rules. But those tie-ups are subject to commercial forces, which was on prominent display with the disappointing performance in 2016 of a big-budget China-focused production of Legendary Entertainment, the Hollywood studio purchased by Wanda Group. I suspect that Legendary may already be on the block for sale, since Wanda has begun unloading assets at a rapid pace as it tries to pay down debt.

Some of the other Hollywood deals could also collapse, especially ones involving Wanda, which has been particularly active. Those could include sales of some or all of its stake in theater operator AMC Entertainment (NYSE: AMC), and also a film financing tie-up with Sony Pictures. The even more struggling LeEco (Shenzhen: 300104) is also likely to abandon its Hollywood aspirations, if it hasn’t already. Beijing’s disapproval of such deals is also likely to put a major damper on new tie-ups. That means we’re most likely to see much less activity going forward, though I do expect we will continue to see a steady stream of one-off co-production deals.