Red Flag and the Silver Screen

The buyout of AMC Theatres, America’s second-largest movie theater chain, by the Chinese real estate conglomerate Dalian Wanda Group has fed into fears about Chinese influence in the United States. Valued at $2.6 billion, the deal is the third-largest investment by a Chinese firm in the United States and by far the largest in the cultural sphere. Some observers have worried about the implications of a U.S. media distributor like AMC being Chinese-owned and speculated that it could be used as a channel for the Chinese government to further its international soft-power ambitions. Is there legitimate cause for concern here? Is Wanda a profit-seeking private enterprise, a stalking horse for the Chinese Communist Party, or both?

AMC is a movie theater company, not a movie company. Even if Wanda wanted to be a conduit for Chinese soft power, its ability would be limited because AMC only distributes content — it does not create it, like Paramount or 20th Century Fox do. Unlike Huawei’s attempted purchase of the telecommunications company 3Com in 2008 or CNOOC’s attempted purchase of Unocal in 2005, AMC does not pose a threat to American strategic interests.

Chinese Communist Party concerns aside, it makes pure economic sense for Wanda to purchase AMC. In the United States the movie-going industry has been hit hard by weak consumer spending; in China it remains a booming business. The number of screens is set to triple, from 6,300 now to 20,000 by the end of 2015. Chinese consumers, who in the past preferred to simply buy readily available pirated DVDs and watch the latest releases in their homes, are increasingly going out to theaters with family, friends, and dates, particularly for big-budget "event" movies.

This has not escaped the attention of Hollywood studios. This summer’s first blockbuster, The Avengers, opened on Chinese screens ahead of its U.S. release and as of this weekend had grossed $70.1 million — the third-biggest country total for the film after the United States and Britain. As China’s largest cinema operator with 86 locations, Wanda/AMC is poised to capture a greater share of the Chinese domestic box office. Earlier this year, America’s film industry convinced China to increase its annual quota for foreign film releases from 20 to 34.Currently, only two companies are legally allowed to import films in China, and both are state-owned. Wanda is applying for a third license, which would help it serve as an additional entry point for American releases in China, and allow it to generate more profits by satisfying the increasing demand for Hollywood films by Chinese audiences.

Wanda is a property developer by nature, not a theater operator. It excels in securing locations, building facilities, and distribution — not branding, operating concessions stands, or creating a strong customer experience. With its acquisition of AMC, Wanda not only gains a foothold into the United States, but can learn Western management techniques about becoming a consumer-centric company.

Unlike Japanese companies in the 1980s, which believed in the superiority of their own management techniques and sought to replace senior teams at American firms they bought out, most Chinese companies are keenly aware that they lack international-standard best practices. They acquire companies primarily for brand equity and as a learning opportunity. When Lenovo bought IBM’s ThinkPad line, then the largest producer of laptops, there were few layoffs; Lenovo actually hired executives from Dell to run operations.

It does not appear Wanda wants to significantly change the way AMC is run in the United States — nor should it. AMC’s management team said the deal would not affect its 18,500 employees in the United States and Wanda’s management has said decisions on films to be shown at AMC theaters would continue to be made by AMC, with CEO Gerry Lopez remaining in charge. This makes sense and is typically what Chinese companies are looking to do when they make a major international acquisition. Many Chinese companies, Wanda included, grew at a time when Chinese consumers were dirt poor and more price-sensitive and thus excelled at cutting costs, and developing sales and distribution channels. But now, wealthy Chinese consumers are demanding service, comfort, and amenities, and Chinese companies are looking to acquire brands and know-how from the West.

And while the film industry in China looks rosy, real estate does not. Faced with a cooling market where home prices dropped in 46 of 70 cities tracked by the government, restrictions on new luxury developments, and a currency unlikely to appreciate as rapidly as it did over the past few years, Wanda and other major developers like Vanke and China Resources are looking at other ways to drive growth.

Wanda’s acquisition, like China Bright Food’s purchase of the British food brand Weetabix and the Chinese auto company Geely’s purchase of Volvo, shows Chinese brands want to acquire global brands rather than the painful, often multi-decade process of building them organically. Chinese companies have the cash and ambition to expand overseas, and are not afraid to do so through mergers and acquisitions. They are looking to become "truly global" — as Wanda chairman Wang Jianlin recently said the AMC deal would make his company. Americans need to be ready for more of these purchases and understand that Chinese companies are looking out for their own profit and loss column.