Chinese studios are struggling to generate revenues at home while trying to expand their presence in the global marketplace. They face many hurdles, but signs point to success in the long term.
Mainland China's animation industry comprises 5,400 companies, according to official estimates, with many located in the animation centers of Beijing, Shanghai, Shenzhen and Hangzhou. These studios face many challenges in the short run, from censorship to a lack of viable financial models. But many are trying to position themselves to succeed internationally. "Basically, the Chinese animation industry is in an exhilaratingly chaotic state," says Isaac Wu, international account manager at BeTop Multimedia, a CG animation studio.
Studios vary widely in size and scope. They include large, well-established, government-financed studios such as Shanghai Animation Film Studio and the animation department of China Central Television (CCTV); a handful of privately financed companies specializing in contract work for the international market; many medium-to-small companies focusing on commercial and series work for the approximately 1,000 television stations in China; and numerous entrepreneurs specializing largely in Flash animation.
China has a long history in animation, with its heyday in the 1950s, but the Cultural Revolution in 1967 put a damper on creative expression. The country became a key provider of outsourced animation for the U.S., Europe and Japan in the 1980s and 1990s, at which time the government began relaxing some of its control over the industry. By this time, however, Chinese animation had fallen behind the rest of the world creatively, and foreign animation started to take over the domestic airwaves.
"The industry got kind of a kick in the gut from the Cultural Revolution," says Kevin Geiger, president and CEO of consulting firm Animation Options, who is working with a group of independent Chinese animators on a feature film project, The Road to Home. "Then, as they were getting back on their feet, anime conquered the market like Godzilla."
In the heyday of Chinese animation, the country was known for a pen-and-ink style reminiscent of traditional Chinese painting, but it doesn't have a signature style today. It remains recognized primarily for 2D animation, although more and more studios are starting to offer 3D (including 2D/3D combinations), vfx, gaming and Flash as well.
Xing-Xing Digital, founded in 2004, illustrates the diversification of the industry. Many of its key employees are from the West or have Western experience, and it does work-for-hire projects, coproductions and proprietary development in 3D animation, vfx and Flash. It currently is working with Disney China on a webisode pilot starring Mickey, Goofy and Donald for Chinese audiences, has produced vfx for live-action films including Vantage Point, Red Cliff, The Changeling and Forbidden Kingdom, and has done lighting and texturing for several CG feature films.
Dominance of Television
The bulk of animation work in China is for television. While TV revenue tends to be miniscule, revenue streams are predictable and consistent and costs are manageable. Some of the success stories include The Adventures of Little Carp, Journey to the West (The Monkey King), and 3,000 Whys of Blue Cat.
Many of the highest-profile properties come from the government-supported CCTV or Shanghai Animation, or are produced by one of the TV stations such as KAKU (owned by BTV), Toon Max TV or Aniworld TV. Blue Cat is among the independently produced programs that have performed well.
Although China has a vibrant industry for live-action movies, animated films are less frequent. A recent 2D film that did well domestically was Storm Rider: Clash of the Evils, based on a comic book. It took in 25 million yuan RMB ($8.62 million) at the box office, representing one of the highest-grossing Chinese animated films ever. (Kung Fu Panda generated 96 million yuan RMB, or $14 million.)
Other notable Chinese animated films include Thru the Moebius Strip, a 3D movie from Global Digital Creations (GDC), and Lotus Lantern, which generated box office of 20 million yuan RMB ($2.92 million) in 1999.
"Today's audience has lots of choices when it comes to films, and investors are well aware that the audience is getting used to seeing the Miyazaki/Pixar/Dreamworks quality," says Brian Ho of Sky Wonders Studios. "I would say doing animation films with our existing skills and know-how will be a very challenging venture, unless you are talking about hitting a fan-based, branded property like some comic titles."
A few Chinese film producers are trying to succeed on the international market. The producers of The Road to Home, for example, have hired Animation Options as a means to gain expertise, international know-how and creative consultation. The concept has been approved by The Ministry of Culture, a prerequisite to completing the film, and it has generated interest from international distribution partners.
Movement Toward IP Ownership
The bulk of studios are producing animation on a work-for-hire basis, both for domestic TV stations and foreign companies from the U.S., Europe, Asia, Australia/New Zealand and the Middle East.
Steven Ching, CEO of Agogo, which produces all styles of animation for international clients through its Animation Services division's facilities in Changzhou, Nanjing, Hangzhou and Shanghai, estimates that 60% of animation in China is done on a work-for-hire basis, with 40% of that done for Asian clients (including in China), 40% for Europe, and 20% for North America; the remaining 40% of work is proprietary, he estimates, primarily aimed at the Chinese market.
Jade Digital, formerly Jade Animation, was founded in Shenzhen in 1985 as one of the first foreign-funded and managed studios in China, according to Wallace Wong, CEO. For its first three years, it served as the animation production arm of Hong Kong broadcaster TVB. In 1989, it began to provide traditional cel ink-and-paint services for clients such as Disney, moving up to in-betweens, key animation and layout, and finally digital production, starting with Disney's Tarzan series.
Flame Node Studio, which specializes in 3D animation and vfx postproduction, is producing everything from 3D TV series for CCTV and BTV in China to a 2D series for a Syrian animation production house and a 3D short for a U.S. animation studio, reports Flame Node's Frank Lee. It also produced Fuwa's Olympic Stories, a series starring the Olympic mascots, for Beijing TV and Beijing KAKU Satellite TV, under authorization from the Beijing Olympic Organizing Committee. With 100 episodes of 11 minutes each, it is the largest single order for an animation series ever in China.
Work for hire on feature films is less common, but Xing-Xing is producing a 75-minute CG film for Exodus Film Group, for direct-to-video distribution. The studio's TV work includes the CG series Fireman Sam for HIT Ent. and a show for HuHu Ent. in New Zealand. "Work for hire is great for building a client base and also good for training," says Becky Bristow, chief creative officer. "I imagine we will always have a portion of our business in work for hire."
While Chinese houses can provide animation services at a fraction of the cost of Western studios, they face competition from lower-cost regions such as India, North Korea and Vietnam. That is one of the factors behind the move toward more proprietary development, with most of the activity to date targeted at the domestic audience. Ching estimates that roughly 90% of proprietary properties are created for the domestic market, 5% for Southeast Asia and 5% for other regions.
In part, the focus on China is due to the large amount of airtime that needs to be filled, as well as to the fact that Chinese productions have a difficult time gaining traction in the international market. "This is a let's-face-it, rather than a voluntary choice," explains Wu of BeTop, which is developing some original shows intended for the international market, including Kang Kang, the Panda.
Jade Digital has been developing shows for the Chinese market since the late 1990s, including Classic Wisdom and Legend of Condor Hero, and is currently developing several projects for China, as well as for international coproduction, while continuing to provide work-for-hire services for companies including Disney, Marvel and Nelvana. And Xing-Xing has recently launched a development arm to create international properties with a foundation in Chinese culture.
"Most of the original animated IP out of China has failed to sell into the U.S. and Europe, and even for Asia it has very limited success," says Xing-Xing president Lifeng Wang. "We are confident that we have got the right creative team and taste to create successful properties for the international market, which of course includes China."
Ho notes that the transition from pure OEM factories to IP holders will be a challenge. "We are seeing more studios transforming from sweatshops to creative houses," he says. "In a way this is a good trend because it forces the studios to stop and think seriously about why they are doing animation and what original content and creativity is. But there will have to be a learning curve and it will take a while before Chinese producers can master the ways of the international animation markets and thus create something that could really sell overseas." He adds, "It's a switch from straightforward revenue to high-risk investment, but it's a good thing for the local animation industry because the OEM margins are getting thinner than ever anyway."
A relatively new area of opportunity is coproduction, although some studios have been involved with these for some time. Agogo Ent., the company's production division, which focuses on project development, financing and distribution, has been involved with coproductions on Mona the Vampire with Moonscoop and Code Lyoko with Cinar (now Cookie Jar). Meanwhile, Jade Digital has participated in coproductions with U.K., Spanish, German, U.S. and Japanese companies since 1991, and has distributed and merchandised some Japanese programs in China since 1995.
Geiger points out that some foreign studios are under the impression that they'll get both manpower and money from Chinese studios, but, in fact, most are only in a position to contribute manpower. He also notes that coproductions are subject to the same government scrutiny as proprietary films and TV shows, which can reduce their global appeal.
The Chinese government plays a significant role in the animation industry. The State Administration of Radio, Film and Television (SARFT) has been increasingly restricting the amount of foreign animation on the airwaves throughout the 2000s in an effort to boost domestic production, culminating in the 2008 elimination of foreign cartoons entirely during prime time.
Domestic studios have not been able to keep up with demand; Chinese animators fill an estimated 13% of the total airtime available for animation, according to industry estimates, leading to dead air in some slots. Meanwhile, studies have shown that Chinese children prefer foreign over domestic animation. According to the Chinese Animation Association, Chinese consumers spend $2.5 billion a year on animation, but nearly 90% of that goes to foreign studios, especially in Japan. A mid-2000 survey in the magazine GoGo Top found that only one of Chinese children's top 20 favorite cartoon characters, The Monkey King, was Chinese. And other studies have indicated that only 11% of children favor Chinese TV cartoons, compared to 60% Japanese and 29% American cartoons.
To encourage the growth of the Chinese animation industry, the government has taken several steps during the 2000s, in addition to restricting foreign programming. They include building "animation industrial bases" (see below); giving tax breaks to companies producing the desired content; creating national, provincial and city TV stations dedicated to children's programming; and launching international animation festivals to promote domestic fare. More schools are offering animation courses as well.
Geiger describes the animation industrial bases as campuses with four to five buildings around a quad, about five floors each, full of domestic and international companies ranging from Chinese gaming firms, to studios making Chinese TV series, to outposts of foreign studios. He spoke to a French studio with a home in one of the bases and reports, "They were getting tax breaks that would make you cry."
All this building is not without its critics, however. "Nearly all the funding support from the government has been consumed by the infrastructure construction of too many animation industry parks," says Exzine Yangtze, digital asset supervisor at XDI, a CG outsourcing company with offices in Hollywood and the Greater Yangtze Delta. She notes that there is little funding left for projects or related research. "The funding always has a hard time reaching the right place where it is really needed," she continues, noting that good talent, as a result, tends to go abroad for a better future. "It's hard to keep talent in China."
The Ministry of Culture must approve all content shown domestically. Many productions are based on traditional Chinese stories, but Western stories can be approved if they have what the government considers a proper moral message. This usually means a didactic tale with morals outlined in black and white -- evil characters must look evil and good characters look good, for example -- all of which can reduce the entertainment value of the production.
"There are a lot of hoops you have to go through to get approved by the government to produce a film," says Geiger. "If the government doesn't approve it, it can't be done. But [the rules are] not articulated that clearly." He adds, "The government is very attracted to the commercial side of this, but that pesky little freedom-of-speech thing is a bugaboo for them."
Jan Nagel, a consultant known as the Entertainment Marketing Diva, who has worked with several studios in China, explains that SARFT has a two-times-per-year submission system. The producer must first get the script and concept approved, and then the finished production. In addition to having "proper" messages, the show or film must have Chinese producers and they must hold the IP for the Chinese market. In addition to the national approval system, each province has its own approval process that animators must go through if their properties are distributed in that region.
One significant challenge for Chinese studios is creating a viable business model. "Even the most 'generous' broadcaster, CCTV, pays an airing right that only covers a tenth of the average production cost," Wu explains.
There is some government funding available, as well as private money. "There's quite a bit of wealth in the mainland," says Nagel. "Private investors are investing."
On the other hand, it can be difficult to find investors, distributors or coproduction partners from outside China. The Road to Home is hoping to change that on the feature film side. In addition to government and private investment in China, Geiger expects an international distributor to fund up to 50% of the production, which will be costly by Chinese standards. (A typical animated film is produced for about $1 million to $5 million.)
Studios also have difficulty generating revenue beyond the cost of production. Ancillary products -- from publishing to licensed merchandise to VCD (China's DVD-like home entertainment format) -- are rarely profitable due to rampant piracy. "Additional earnings from repurposing the property in games, books and especially toys are an important offset to perhaps-insufficient earnings from government funding and television licensing alone," Ching explains. But with illegal distribution so prevalent that TV stations air pirated content and VCD stores carry pirated U.S. films while the movies are still in U.S. theaters, those earnings are hard to come by. "We think that achieving a multiple-revenue model for a property is one of the biggest challenges facing the Chinese animation studios currently," says Ching.
Cultural, translation and creative issues also abound, especially for properties with global intentions. Technically, Chinese animators are catching up with those in the West. "If our professional work [ranges from] four to 10 on a scale of one to 10, in China it [ranges from] about one to seven," Geiger says, adding that there is ongoing improvement.
But storytelling and characterization are weaknesses, with properties emphasizing education over entertainment. "It's like having a librarian make a film," Geiger says. He believes Kung Fu Panda, which has been popular in China, has shown people that a film can be fun while still demonstrating an understanding of Chinese culture. "It's caused a lot of soul-searching in the Chinese animation community," he explains. "They're asking, 'why can't we do that?'"
Wu believes the biggest challenge facing Chinese studios today is the need to attract good talent. "Not only excellent creatives. Not only experienced directors and producers. Highly skilled executives, marketing staff and translators are also in urgent need."
Although Chinese studios have many hurdles to clear, there are positive signs for the future. "The China market has not been a viable market, but it is showing signs of definitely becoming one," Bristow says.
"In the short term, I think the local competition for the domestic market will reveal some winners and losers," Ho says. "Logically, the winners will selectively absorb the talent from those who cannot afford to play on. So in the long term there will be a group of elite studios getting all the best people, who are geared up for the international markets, leaving behind the local markets for the middle tier to play on."
Karen Raugust is a Minneapolis-based freelance business writer specializing in animation, publishing, licensing and art. She is the author of The Licensing Business Handbook (EPM Communications).