In the closing scene of last year’s Hollywood blockbuster Alice in Wonderland, a grown-up Alice, emboldened by her latest adventures down the rabbit hole, sets off on a Victorian sailing ship to look for trading opportunities in China. 

The scene, like the film, owes more to the quirky imagination of director Tim Burton than to the books of Lewis Carroll. But it might just as well have been inspired by a look at contemporary Hollywood. Because for the past year or so studio executives have been heading to China in droves – usually by company jet, rather than boat – looking for ways to work with the booming and itself somewhat quirky Chinese film and TV industry.

“Everyone wants in because it’s pretty clear there’s a real business to be built there,” says American producer and former studio chief Mike Medavoy, who spent part of his childhood in Shanghai and is currently working on a film and a mini series with China’s state-owned Shanghai Film Group. “But it’s got to fit both sides and that’s where the difficulty is.” 

It is easy to see what has aroused Hollywood’s interest. Box-office revenue in China soared 64% to RMB10bn (€1.2bn) in 2010, according to a recent think tank report. The government is projecting slower though still impressive growth of 30% this year, for a total take of about RMB13bn (€1.5bn). The number of cinema screens in China has risen from 3,500 to more than 6,500 over the past three years. However, that still only amounts to one screen for every 200,000 people (the US has one for every 9,000) and with four new ones being built every day the country’s screen count could reach between 25,000 and 60,000 by 2016 (the US has around 39,000).

With Beijing reportedly making the sector a priority, and with extra investment coming in as growth in some other industries slows, it’s expected that by 2015 China will be the world’s second-biggest film market after the US, where total box office revenue for 2010 was $10.6bn. 

American films, particularly the broad appeal ‘tentpoles’ in which the Hollywood studios specialise, are already playing their part in the Chinese boom. In 2010, the 3D sci-fiepic Avatar took $214.4m to become China's highest-earning film. Four others – including Alice in Wonderland – made the 2010 top 10, according to Shanghai-based international film consultants Artisan Gateway, and seven US films, led by the third Transformers movie, are in the top 10 for the first eight months of 2011.

Yet, like all foreign companies, the Hollywood studios still face restrictions on getting their films into China and on getting their earnings out of the country.

For one thing, since China has no ratings system, films must be approved by the country’s cinema authorities for all age groups. And the censors, say producers, are on the lookout not just for sex, violence and drug use but also for references to sensitive political events and issues such as Tiananmen Square and Tibet. (Richard Gere and Sharon Stone are among the Hollywood Buddhists who have irked Chinese authorities in recent years.)

“There are more cultural sensitivities for Chinese-themed movies, especially those being made by non-Chinese filmmakers” says David U Lee, who worked his way up in Hollywood before launching his Los Angeles and Beijing-based production outfit Leeding Media in 2008. 

In addition, only around 20 foreign films can be distributed in China on a revenue sharing basis each year and only two state owned companies, China Film Group and Huaxia Film Distribution, can distribute them. (Other approved foreign films can be brought in, but only on a flat-fee basis.)

The terms of the revenue-sharing deals mean that a US company gets only 13%-17% of a film’s Chinese box-office take compared with around half of the take in other countries. Factor in online and DVD piracy, and restrictions on foreign ownership of local businesses, and the Chinese film industry begins to look as if it’s protected by its own Great Wall, one that Chinese authorities appear reluctant to dismantle, even in the face of complaints from the international community.

The flurry of new Sino-US film-industry deals that has resulted from Hollywood’s recent treks to China represents an attempt to get round the wall, by one route or another. Co-production has always been one way into the country since qualifying films, which have to have some Chinese content, are guaranteed distribution in China and give US companies a bigger share of Chinese box-office revenue.

But such projects aren’t always easy to pull off. The most recent release, Sony Pictures and China Film Group’s 2010 remake of The Karate Kid, took a total of $359.1m at cinemas worldwide but, even with a story set mostly in Beijing and Hong Kong icon Jackie Chan co-starring, it took only $7.7m in China itself.

Recent deals are taking a more systematic approach to co-production. Upstart Hollywood financier-producer Relativity Media, for example, has teamed up with Asian private-equity firm SAIF Partners, venture-capital operation IDG China Media and Huaxia on a production and distribution operation designed to bring international films into China and Chinese films to the global market.

Similarly, Legendary Entertainment, the US backer of films such as The Dark Knight and The Hangover, has joined forces with publicly traded Chinese conglomerate Huayi Brothers Media in a Hong Kong-based company that has secured $220m (€160m) to make films which have global appeal. The company’s first film, appropriately enough, will be The Great Wall, an adventure story about the origins of the Chinese landmark.

Working from within China, meanwhile, Beijing-based marketing company and entertainment studio DMG has set up a fund of a reported $300m that will cover up to 15% of the budgets of Hollywood tentpole movies in return for their Chinese box-office revenues.

Dan Mintz, founder and CEO of DMG, which also helps import US films into China and co-produced sci-fifilm Looper with Hollywood’s Endgame Entertainment, says the fund will back projects that “meet criteria that will allow us to monetise the China market in ways that the studios have not done before. Hollywood films do very well in China, but Hollywood does not monetise that very well.” 

Other recent Sino-US deals have focused on China’s pay television and online video markets and its booming cinema infrastructure. The Chinese pay-TV market is this year set to become Asia’s biggest, with revenues of $7.5bn, according to research company SNL Kagan. By 2014 that figure should rise to $12.6bn. 

Though local drama and entertainment remain the most popular programme offerings, Hollywood studios see Chinese pay-TV as a promising outlet for new and library films and as a way of fighting piracy. In June, Warner Bros signed a deal to make at least 600 state-approved films available via YOU On Demand, the country’s first national pay-per-view and video-on demand platform.

Warner is also providing hundreds of new and library movies to the pay service of top Chinese internet video operation Youku. The service, which has also signed a deal for rights to DreamWorks Animation’s Chinese-themed Kung Fu Panda films, charges less to stream a movie than Chinese pirates do for an illegal DVD.   

Getting directly into the Chinese cinema-building business has been tricky for US companies because of the country’s bar on majority foreign ownership of enterprises. Warner Bros made a foray a decade ago but pulled out in 2006 when the foreign-ownership rule was tightened. But American companies that provide equipment and technology for cinemas rather than building and owning them have been able to find a way in.

RealD, which licenses technology for 3D film projection, has in the past year signed deals that will boost its Chinese presence to 1,000 screens in 400 locations. And IMAX Corp, which licenses equipment for giant-screen film projection and already counts China as its second-largest and fastest-growing market, has secured agreements that will see 181 Chinese IMAX theatres in operation by 2015.

IMAX CEO Rich Gelfond puts the success down to an appetite among China’s growing middle and upper-middle class “for the latest and greatest, something really special.”

The new round of deals seems to promise a bright future for Sino-US film-industry relations. Yet all that eastern promise could still come to nothing if the cultural divide between Hollywood and its Chinese counterpart cannot be bridged.   

US film-industry players with extensive experience in China suggest that patience, staying power and flexibility will be key.

Gelfond points out that IMAX has actually been active in China for more than a dozen years and says that the time he spent building relationships is now paying off. “We didn’t jump in and start doing business,” he explains. “We really wanted to understand the market and we tried to create win-win situations.”

IMAX, he says, asked government and business officials for advice about working in China and “followed that advice to a large extent. And that’s how we built mutual trust over time. That mutual trust is what led to a longer-term success for us.”

American producers, says David U Lee, will have to learn to be “culturally sensitive” and to design films that have a better chance of getting into China. Elements like Alice’s trip to China and the country’s role in Columbia Pictures’ eco-apocalypse epic 2012 (where the Chinese are called upon to build the arks that will save the human race) “certainly helped those films”, he adds.

Ultimately, for trade between Hollywood and China to really take off, there will need to be “a conceptual shift”, says DMG’s Mintz – but in Hollywood rather than in China. “A lot of the studios have been talking to us about how they can make themselves more relevant to China,” he reports. China, on the other hand, is “kind of in the driving seat,” he says. “They don’t really need to change.”

RESTRICTIVE PRACTICES

Hollywood is wondering if the promised removal of trade barriers will ever really happen.

On 19 March – in response to a World Trade Organisation (WTO) ruling – China was due to open up its market at least partially to foreign distributors and importers, giving US studios in particular the chance to grab a much bigger chunk of a $2bn and-growing business. But 19 March came and went.

The WTO ruling was the result of a complaint first filed by the US in April 2007 regarding Chinese restrictions on the import of foreign films, DVDs, music recordings, books and magazines. Currently, only two state-owned Chinese companies can import films and just 20 films can be brought in on a revenue sharing basis each year.

After a drawn-out series of appeals, a WTO body in December 2009 ruled in favour of the US on some, though not all, counts of the complaint. China said it intended to implement the WTO recommendations by March 2011 but its only action so far has been the issuing of a 25 March ‘status report' asking the WTO, according to the organisation's website, to "understand the diffculty [China] was facing in the implementation process".

Though it's believed that talks are continuing between US and Chinese trade off cials, the process is a hot topic at various industry events in America and China.

At a Las Vegas convention of cinema owners in late March, Millard Ochs, the president of Warner Bros International Cinemas, alluded to the issue in a speech, saying that the speed with which China becomes the world's number-two film market "and eventually the number-one market is up to the government".

And at June's Shanghai Film Festival, Rupert Murdoch, who controls 20th Century Fox, said China's potential "has not been fully realised because the market remains so restricted".

Movie executives who shuttle between the US and Chinese film industries predict that China will not expand its foreign film quota or allow easier access to foreign distributors in a hurry or without getting some concessions.

Even if the quota is eventually expanded, says US-China film bridge-builder David U Lee, "I don't think anything will happen overnight and I certainly don't think that [US] studios will be self-distributing movies in China any time soon."

China won't drop the quota "unless it's to their advantage", says producer Mike Medavoy. "They're not about to give that away without some price."