DreamWorks Animation (NASDAQ:DWA) has been under investor fire recently with shares hitting a two-year low in late January after the company announced a restructuring plan that includes downsizing its workforce by nearly 20%, letting 500 employees go. The issues that led to the company needing to take this drastic step is that its movies, though some have been successful, have overall not performed well in the last couple of years. This comes at a time when competitors, such as Disney (NYSE:DIS), have been thriving on their own film successes.
Part of this seems to be that the company tried to expand too quickly. To counter that, DreamWorks management is taking a step back, downsizing its production headcount, and cutting the expected number of movies down to just two a year, and only one in 2015.
China could be a new growth driver for DreamWorks
The Chinese film industry is already exploding, thanks to a rapidly growing middle class in the country that is proving to be a great market for new films. PricewaterhouseCoopers projects the total annual value for the film industry industry to reach of $6.49 billion in 2017, which would be twice its 2012 total value. By 2025, its expected to be double that of the U.S.
DreamWorks is making inroads into this Chinese film market, and doing so with the help of well established local players there. DreamWorks has partnered with Shanghai Media Group and three other local investment companies to create Oriental DreamWorks, a joint venture production studio headquartered in Shanghai, China, that DreamWorks Animation holds a 45% stake in.
Directors of the venture called it a "Chinese content company," not only in animated film production, but also in live-action films, TV, and mobile and Internet content. Other well known and connected companies that DreamWorks has partnered with include Dreams of Dragon Pictures, located both in Beijing and Los Angeles and which was one of the previous partners in producing the Warner Bros. Pictures film Cloud Atlas in 2012.
Oriental DreamWorks already has four feature projects in development that will include Kung Fu Panda 3, one other U.S.-Chinese co-produced animated feature, and two live-action Chinese-language projects. However, it's also entering the Chinese theme park scene with plans for "DreamPark" outside of Shanghai. Initial plans for this park set an expected 2017 opening.
But DreamWorks is not alone, or even in front
Disney is already making huge leaps into this market, and its own brand is already well known there. This is partially due to the work Disney has already done with other companies in China as well as the Chinese government itself, to create more resources for animation and film production in China. Additionally, Disneyland Hong Kong is already well known in Mainland China.
Disney is also working with Shanghai Media Group in a deal that includes linking U.S. screenwriters with writers and directors in China to work together on projects with both a classic Disney feel as well as Chinese elements, to make the brand further appeal to a local audience.
Most important of all is that Disney's new theme park, which will open outside of Shanghai in early 2016, is going to put Disney well ahead of the pack for being the biggest Hollywood company in China and the first to open a major theme park in mainland China. Other companies, such as Comcast's (NASDAQ:CMCSA) Universal Studios, which is starting construction on its own theme park near Beijing this year, are also fighting for this market.
Still, even in light of all of this competition in China, the sheer size of this market and its expected growth means that all of these companies can still be very profitable there. Having substantial growth in its film business in China could become a saving grace for increased overall profits in the medium to long term for Dreamworks, given its new streamlined and lowered production plans for the coming years. Once Kung Fu Panda 3 is released later this year, expect that Oriental DreamWorks will start be discussed much more as a new growth driver for DreamWorks Animation.
Bradley Seth McNew owns shares of Walt Disney. The Motley Fool recommends DreamWorks Animation and 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.
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