Michael Wolff on Hollywood's Disappearing Chinese Money

"They call it caution. We call it reneging," says one film executive as deals fall apart, Jeff Robinov's Fosun investment appears shaky, Wanda's intentions become clear and the fearful industry continues to line up (and ignore human rights).

This story first appeared in the Feb. 27 issue of The Hollywood Reporter magazine.

There are rumors of money; there is the logic of money ("this investment makes such sense"); there is the promise of money; there even is an agreement to provide money. And sometimes this is almost as good as actual money.

At present, the Chinese represent all of those things to the American movie business. The rumor, the logic and the promise of Chinese money, and many signed deals for it, have begun to remake the industry and suggest a future of almost unlimited expansion. The 2014 American Film Market might as well have taken place in China instead of Santa Monica for the high-profile presence of Chinese interests and dealmakers. And yet, in fact, there is very little actual Chinese money in Hollywood.

There are, with a cold eye, probably only two meaningful deals involving Chinese investment in the U.S. industry — and both are exceptions.

The first is the 2012 purchase of AMC Theatres by Dalian Wanda Group, China's largest film exhibitor. This often is grouped with the theoretical Chinese cash washing into Hollywood but probably should be understood more cautiously as real estate diversification. While Wanda has made media bets, including recent sports broadcast investments, it is overwhelmingly a commercial real estate company (all of its subsequent investments in the U.S. have been in property development).

The second deal involves STX Entertainment, a ministudio run by producer Robert Simonds, former Viacom COO Tom McGrath and former Universal Pictures chairman Adam Fogelson. STX is backed by U.S. private-equity firm TPG and Hony Capital, a Chinese private-equity firm rather than media company, which, in spring 2014, invested $65 million in the startup — money STX has banked. While this transaction is held up as an example of the Chinese Hollywood Spring, it is much less in the spirit of a deal that connects Hollywood to a vast new market and much more a one-off private-equity transaction, evaluated for its returns and not its synergies. It is not dissimilar to, say, Hony's recent investment in the London-based Pizza Express chain.

A better example of the pace and tenor of Chinese investment is former Warner Bros. president Jeff Robinov's launch of his production company Studio 8. At about the time of Hony's investment in STX, Robinov and Huayi Brothers, the big Chinese film and television group, announced a term sheet — accompanied by a press rollout more appropriate for the closing of a major deal — to provide Robinov with $120 million to $150 million. Alas, no deal finally was to be done.

Instead of giving cash to an American company, Huayi — which previously had pulled out of its announced backing of Legendary Pictures' plans to produce films in China — opened an office of its own, run by Donald Tang, former chair of Bear Stearns in Asia, that will evaluate movies for investment on a piecemeal basis. That's a far cry from underwriting major Chinese-American film endeavors.

Studio 8 then turned to Fosun, China's largest privately held conglomerate with significant media holdings, which similarly announced an investment, reportedly as much as $200 million — except, say sources familiar with the deal, not really. These sources claim a significant part of the investment is to be funded on a project-by-project basis — hence, if the early films don't work, Studio 8 might be exposed to a change of heart at Fosun. (In early 2014, Fosun announced it was near buying Forbes, but that deal fell through.) Similarly, the China-focused subsidiary Legendary East, after it lost Huayi funding, turned to the state-run China Film Co. But so far its big production, The Great Wall, has suffered long delays.

With even more publicity, Alibaba's Jack Ma came to Hollywood in late 2014 and, brimming with movie interest and ambitions, sat next to Ari Emanuel at a Lakers game (reminiscent of Michael Ovitz seducing Sony and Matsushita), met with Sony to discuss a co-financing deal, with Paramount and with Fox — all to no apparent conclusion — then appeared to make an offer to buy a controlling interest in Lionsgate. That transaction, too, drifted into the ether. Lionsgate instead announced a deal by which it and Hunan TV will co-invest "within three years," a time frame that provides lots of wiggle room.

In part, these deal disconnects reflect the cultural misunderstanding that can complicate international transactions. The Chinese approach often is to show up and say: "We'd like to buy your company. Show us your books." The native response is, "Make me an offer, and no, you can't see my books." The result often is a nondeal deal, a willingness to begin a relationship but a resistance to make the first move — producing a term sheet that hardly commits anyone to anything.

The Chinese, according to a film executive who has had significant dealings with Chinese investors, "like to have a meeting, take a picture, issue a press release. Then they think hard about the deal, quite often losing enthusiasm for it. They call it caution. We call it reneging." (Curiously, Hollywood, with its long history of now-you-see-it-now-you-don't financing, nonetheless has seemed perplexed by vaporizing Chinese money.) "Everything can look and feel like you're having a meeting and you're talking to CAA," adds the exec. "You forget it's a communist country, that these companies are not entirely free to do whatever they want — that money doesn't leave China without somebody up there saying so."

This also might reflect a canny business approach on the part of the Chinese. Why cough up actual dough when you can reap influence, intelligence and status for free?

Hollywood often has opened its arms to outside investors who must pay to enter the club. The Chinese, however, are in a significantly different position because Hollywood wants to enter China. The Chinese box office soon will rival the size of the U.S. box office. When an American movie works there, it works at a Transformers-like level. At the same time, much of this potential is out of reach for U.S. studios without a Chinese partner. Lots of movies can go into China for a flat fee, but if you want a better cut of the box office, you need government approval — that is, a nod from SAPPRFT, the state agency that sanctions Chinese co-productions. U.S. film executives have chosen to ignore China's dismal record on human and media rights (even as those same execs stand up for creative freedoms in the Sony hack and Charlie Hebdo tragedies), all chasing the promise of a financial savior.

To boot, Chinese money appears the only game in town.

Everyone needs to do financing deals, with studios cutting back on production and focusing resources on tentpole projects. If you want to get a film made, you have to bring money to the table. But the hedge-fund deals that used to be plentiful didn't work out so well; tax money from Germany and the U.K. is gone; and in Japan, where the box-office share for U.S. films has plummeted, investors have turned against American movies. There really is no other large source of capital, not even the illusion of a source, except China.

The Chinese seem to understand their advantages all too well. And yet there is the ongoing logic of the China deal, invariably expressed as, "China needs content." Like oil.

The expectation continues to be that China will enter the U.S. market not in a minority position but with a major buy. Lionsgate, along with MGM, seem all but ripe. Then there are the big kahunas: the ailing Sony or Paramount post-Sumner Redstone. Ultimately, inevitably, big, dumb money will begin to flow. Doesn't it always?

Or are the Chinese smarter than everyone else?