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With most visual effects companies in Hollywood suffering financially, doing business in China would seem to be a natural route to expansion, driven by the rapid growth of the world's second-largest film market.
"We will increase the number of our artists by 20 percent because we expect there will be more projects to work on this year," said Wu Yan, general manager of Technicolor (Beijing) Visual Technology Co, a joint venture established by the France-based provider of solutions to media and entertainment industries Technicolor SA and a local digital company.
The joint venture's staffing level has increased to more than 80 artists from a dozen when it launched seven years ago. More than 90 percent of them are Chinese.
Established in 2006, the company has created visual effects for a number of Chinese and foreign films, including Curse of the Golden Flower, Aftershock and Pirates of the Caribbean: On Stranger Tides.
The gloom overtaking Hollywood's visual effects studios is largely due to them running out money instead of a lack of orders. That was the case for Rhythm & Hues Studios, which filed for bankruptcy despite winning the Oscar for Best Visual Effects at the 85th Academy Awards on Feb 25 for its contribution to director Ang Lee's Life of Pi.
Financial pressure in the visual effects industry exists both at home and abroad, Wu said.
Over the past few years, Technicolor (Beijing) has barely made a profit although it doesn't have to worry about getting orders from movie production companies.
Wu attributed the awkward situation to the high labor costs and innate uncertainty in the film industry.
"More than 60 percent of our operational costs go to artists, leaving the rest for technological upgrades, including the purchase of hardware and software," he said.
"The annual income of our top artist here is about $80,000, almost the same level as that in Hollywood," Wu said.
The monthly salaries of artists who only recently joined the company and who have been promoted to a middle-level position range between 2,000 yuan ($321) and 10,000 yuan.
Its annual revenue stands at tens of millions of yuan but even if it makes money in some years, it can also suffer losses on a much larger scale in other years.
The fickleness of the film industry intensifies the financial stress.
The progress of movie productions is influenced by many elements. Even if the film producer has promised you the date when shooting will be completed, or everything has been confirmed in documents, you cannot rely on it at all, Wu said.
"For instance, one of our projects was scheduled to be finished in the post-production stage in 2011 but shooting has yet to begin," he said.
Some directors have very high requirements for their work's post-production, which obliges us to form a temporary artist team tailored for the specific film. The members of such teams are always the top talents in some sub-field within the special effects realm.
However, the surging labor cost for these cutting-edge artists is not the only element that squeezes visual effects companies' profits.
"After you have assembled the temporary team you have to be responsible for it financially until the end of the project, which means you have to continue to pay them even if production is prolonged beyond the agreed time because you cannot afford the risk of dropping a specific artist from your team," Wu said.
Despite all the negative elements, Wu said he's quite optimistic and confident about his company's prospects because China's movie industry is fast approaching its best times.
The company began to work with the directors of a new generation on middle- and low-budget film productions in 2011 on productions including Shang Jing's Dinner Party in a move to diversify its portfolio as well as lower the risk of losing money.
"At present, in this country, visual effects companies' revenues largely depend on orders from films that have a high-budget for post-production. If they lose a deal of this kind they will suffer significant financial loss, said Shao Gang, consulting director of EntGroup Consulting, a Beijing-based entertainment industry consultancy.
"This is a product of the shortage of such movies in the domestic market, resulting in fierce competition for such orders among visual effects rivals," Shao added.
The cost of post-production takes up about 10 percent of the total investment of a big-budget film in the domestic market, far less than Hollywood counterparts, said Wu.
"In the past we mainly worked with A-list directors, such as Zhang Yimou and Feng Xiaogang. In the future we will expand and strengthen our partnerships with other young directors with potential," he added.
Shao said: "This could help them to balance their business and reduce cash-flow risk."
Price competition is another concern to Technicolor (Beijing) because its quotations are high in comparison with rivals.
"We are committed to delivering a Hollywood-standard service to our clients and they will know that it's worth the price, but that's built on the premise that clients demand high quality services," said Wu.
The high labor costs and price competition caused the collapse or acquisition of many visual effects companies in Hollywood. For example, James Cameron's visual effects and animation company Digital Domain was acquired by the US divisions of Beijing Galloping Horse Film & TV Production Co and an Indian company last year.
In order to survive in the market, more and more United States companies are transferring their production facilities to countries with cheaper labor such as Thailand, India and China.
"They choose to set up subsidiaries in China both on account of its promising market and cheap labor costs," said Shen Hongxiang, chief executive officer of Soulpower 3D films, which conducted the 2D to 3D conversion of Painted Skin: The Resurrection. "But they won't bring the core technologies here," he added.
The nation's box office receipts totaled $2.7 billion in 2012, accounting for 8 percent of the global market. Following $10.8 billion generated in the United States, it ranked in second place across the world and was $300 million more than third-placed market Japan, according to statistics released by The Motion Picture Association of America on March 21.
"The growth momentum of the industry in China will continue over the next five to 10 years and I think the film post-production business will also thrive on it," Wu said.
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