Investors in China are looking to earn their fame on the big screen. China's richest man is taking to the stage, backed by China's most successful and well-funded entertainment and real estate firm. Should Hollywood companies like Disney (NYSE:DIS) and Lions Gate (NYSE:LGF) be concerned about this new threat? Probably not. In fact, they should be excited.
Creating the next Chinawood: Wandawood
Small, coastal Qingdao, China, may seem like an odd place for the next entertainment production mecca, but that is just where China's wealthiest man, Wang Jianlin, with his company Dalian Wanda Group, plan to build their entertainment metropolis. Wanda Group is currently the largest land development company in China, developing and running shopping malls, department stores, hotels, and over 500 cinemas.
The USD $8.2 billion (about RMB 50 billion) investment will include a 10,000 square foot (929 square meters) main studio, 19 smaller studios, a full theme park, seven separate hotels, an IMAX (NYSE: IMAX) research center, a film museum, a waxworks center, and even a year round automobile and yacht trading center.
This "Oriental Movie Metropolis" is set to open in 2016. The ground-breaking ceremony held in September was attended by Hollywood movie stars such as Leonardo DiCaprio, Nicole Kidman, John Travolta, and many more.
Wang has said that China will have the world's largest film industry by 2018. He predicts that China will surpass the U.S. in box-office revenues by 2018, and double U.S. box office sales by 2023.
Entertainment is one of the industries most positively affected by growing national incomes. Given the forecasted rise of 75% of China's urban population into the middle class by that date, Wang's statement seems believable.
What does this mean for American entertainment companies?
As happens when industries see new, large players entering with such bravado, things will get shaken up. Companies will be kept on their toes in the coming years and further pressed to produce quality work. Yet, in the long run, a vastly larger consumer base, better cost management, and more diversification will only benefit the American entertainment industry.
"Do not be fooled by its commonplace appearance. Like so many things, it is not what is outside, but what is inside that counts." -- Quote from Disney's Aladdin
Disney is the market leader in diversified media networks, producing hit after hit of animated films such as the recent blockbuster Frozen, and continues to win with television avenues such as ESPN.
However, this is only one part of Disney's revenue. The company is also made up of parks and resorts, live studio entertainment, consumer products (along with a slew of licensing agreements), and an interactive division. In all of these diverse categories, Disney gains from the years of hard won consumer loyalty and brand recognition. That is not something that can be quickly purchased by large investment companies.
Much like Disney, Comcast (NASDAQ: CMCSA) also benefits from diversification. The company is known for its cable TV network and production operations. But it's also the parent company of Universal, which includes world-renowned theme parks, merchandising, and movie production. While the new Qingdao complex plans to have many of these same specialties, the global brand recognition and partnerships that Universal benefits from make barriers to entry that will keep Comcast and Universal Studios top performers.
Conclusion: Reasons U.S. entertainment investors should be excited
The market is growing, making every slice of the pie bigger. Much in the same way that commodity companies have benefited from the rising purchasing power of the Chinese market, entertainment companies will also benefit from a larger consumer base as hundreds of millions of Chinese consumers suddenly have the financial means to be regular audiences.
A megaproduction center in China could be a huge boost to the American industry thanks to outsourcing operations and partnering for more cost-effective production. Lions Gate's recent box office blockbuster Hunger Games: Catching Fire has been a huge success for the company. And the great music scoring? Part of that was outsourced and produced offshore. More cost-efficient production tactics will be a major advantage to entertainment studios in the coming years. Considering the cost of producing a movie in the U.S. is generally around $250 million, reducing costs could mean needed increases to operating profits.
One way to take advantage of the growing Chinese entertainment industry is to look for partnerships and production deals. Two companies that are already making the most of the growing Chinese industry are IMAX and Dreamworks (NASDAQ:DWA). IMAX, which will have a research center built into the new Qingdao production center, will likely see huge benefits from the increased production and technological advancements of these new facilities. Additionally, IMAX has already benefited from the Wanda group with an inked deal that promises to build at least 40, and as many as 120, new IMAX theaters in China by 2021.
Making movies that appeal to the Chinese audience is only part of the battle for entertainment companies. Legal restraints and government intervention can be another barrier for American companies. The Chinese government limits the number of foreign films allowed in the country each year, and often requires edits before doing so. Dreamworks has partnered with Shanghai Media Group and two other local entertainment investment companies to build Oriental Dreamworks, a joint venture including studios and attractions in Shanghai, China. This partnership will help the company to steer the choppy government waters in China, especially considering the chairman of one of the companies in the venture happens to be the son of China's former president, Jiang Zemin.
Fool contributor Bradley Seth McNew has no position in any stocks mentioned. The Motley Fool recommends Walt Disney. The Motley Fool owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.