'Transformers' in China: The Hidden Costs of a $300 Million Hit

Paramount suffers "growing pains" over a mega movie plagued by legal threats and a culture of distrust.

A version of this story first appeared in the Aug. 8 issue of The Hollywood Reporter magazine.

The record $317 million that Paramount's Transformers: Age of Extinction grossed in China in 31 days is impressive, but the struggle the studio has endured to collect a mere 25 percent of that total shows that mining gold behind the Great Wall is a daunting task. "It was definitely all worth it," says studio vice chair Rob Moore. "There's growing pains for everybody, but certainly the result was spectacular."

In some ways — such as shutting down blocks of Hong Kong or an entire nature preserve to allow filming — China offered more cooperation than the studio might expect in the U.S. But China allows foreign distributors much less than the 40 to 50 percent split of box office common in other foreign markets. And Paramount dealt with everything from attempts to extort money from director Michael Bay while he filmed in Hong Kong to a last-minute panic when promotional partner Beijing Pangu Investment Co. threatened to block the opening of the movie, claiming the studio had not fulfilled its commitment to showcase the distinctive Pangu Plaza hotel. Another product-placement partner has gone to court, and a third is threatening the same.

Those close to the conflicts over product placements say some problems resulted because the companies are new to the idea and had expectations that couldn't be met. "And there is a practical issue where you have a lot of industry-specific English terms that don't necessarily translate into a [Chinese] character," says one insider.

But China, which favors homegrown production, also makes matters difficult for outsiders in ways not attributable simply to confused translation. "In China, there are often multiple parties involved [in film projects]," says one executive, citing as an example director Zhang Yimou's upcoming film Coming Home. "There must be 20 different companies involved in the movie, though it's all financed by one company," he adds. "It's incredibly labyrinthian and impossible to understand."

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Another insider says he asked Zhang to explain how a film could qualify as a Chinese co-production and receive favored treatment. This person says the director replied there were no rules: "Then he got this big smile and said, 'We like it that way. We have lots of flexibility.' "

The government-run China Film Group has reason to smile. China box-office revenue clocked in at $3.6 billion in 2013, up 27 percent from 2012 (North America revenue rose only 1 percent to $10.9 billion). At that growth rate, ticket sales in China could approach $5 billion this year. The territory is expected to eclipse North America by 2017 to become the world's largest movie market.

Transformers was packed with product placements, and with so many partners comes more potential for conflict, says another China veteran. Using litigation — once unthinkable — has become increasingly common. Pangu's deal, arranged by Paramount's Chinese partners, reportedly was valued at about $1 million. The company maintained that Paramount had committed to feature the hotel in the film for 20 seconds, host a VIP party there and allow the company to license Transformers merchandise and keep the profits. Paramount declines to offer details of what it promised, but a source says the studio believed it had fulfilled its end of the bargain. Nonetheless, Moore settled the matter quickly. At a press conference, Bay said working with Pangu was "fantastic," and Moore said, "It's unfortunate that we had these misunderstandings."

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Paramount's troubles didn't end with Pangu. On July 22, the Wulong Karst Tourism Association sued the studio and a Chinese company that handled product-placement deals for failing to position a nature preserve as expected in the movie. A Chinese go-between said about $1 million for the placement wasn't paid in a timely fashion. Duck-food manufacturer Hubei Zhou Heiya Food Co. also has said it is unhappy with its placement in the film and is consulting lawyers.

In addition, studios have concerns — in China and other foreign territories — about whether they are getting their full cut of grosses. Marc Ganis of Jiaflix, a company involved in arranging promo partnerships for Transformers, told The Wall Street Journal that Paramount and its partners hired 1,200 workers to check state-owned theaters to ensure tickets sold were credited to Transformers and not to a homegrown Chinese production.

Jerry Nickelsburg of UCLA's Anderson School of Management says these problems are not surprising given the vast differences between U.S. and Chinese business cultures. In Hollywood, a verbal commitment can be considered binding, he says, but in China, "saying yes means, 'I heard you, and I think I understand you.' It does not mean, 'I agree with you.' " There also is uncertainty, he adds, because a seemingly private Chinese entity might involve a government presence: "They can't always give a straight answer."

William Yu, a Taiwan-born economist who also teaches at UCLA, speaks in harsher terms. "Honesty is not highly valued in China," he says. "They can say one thing very clearly to you yesterday, and today they deny it." Will the Chinese approach move closer to Western standards? "In five years, 10 years, probably not," Yu says. "In a century, maybe."