By Justin Chiu
Translation: Pierre Chabal
Passage au crible n°69
On 21 May 2012, the Chinese group Wanda bought AMC (American Multi-Cinema), the second largest operator of movie theaters in North America. Already owning 730 screens in China, the group acquired 5034 more with this new subsidiary. It thus became the world number one of the film industry.
This acquisition for $ 2.6 billion (2 billion Euros) caused a stir. Yet for many observers, it would not allow the Chinese group to benefit immediately. In effect, since the financial crisis broke out, the box office in the United States continues to fall and the AMC in 2011 experienced a net loss of $ 82 million. Moreover, the acquisition does not affect at all the operations of AMC. Convinced that this firm will soon meet with profits again, Wanda will help it reimburse its debts and modernize its equipment by providing $ 500 million. However, Wanda, not disposing of enough cash, took the risk of borrowing in order to invest. The question therefore arises as to what are the long-term objectives of the Chinese group.
Founded in 1988 in Dalian in Northeastern China by Wang Jianlin, the Wanda Group has initially developed in the real-estate sector. In 2011, its turnover amounted to 105.1 billion yuans (13 billion euros) of which 95.3 billion yuans (11.8 billion euros) only for the real estate sector of businesses and malls. The flagship of the group – Wanda Plaza, a mega-mall bringing together a shopping mall, a leisure center, luxury hotels and office buildings – is highly appreciated by local authorities. Indeed, Wanda Plazas could be built within a period of eighteen months, which would allow local officials to achieve the goal of urban development set by the state, especially since in recent years, construction sites the group have extended to the middle towns of the country. Moreover, being a member of the People’s Political Consultative Conference of China, manager Wang Jianlin undoubtedly has facilities for obtaining for building permits.
However, the development of the Chinese economy is slowing down while real estate prices fall. Wanda announced a projected 11% growth for 2012, ie, a much lower rate compared to the previous three years (40%). In 2011, the value of total assets of the group amounted to 203 billion yuans (25.2 billion euros), of which only 20.5 billion yuans (2.5 billion euros) in net assets. This means that the debt ratio of the Chinese group amounted to 89.9%.
In order to diversify its activities, Wanda has invested in the field of cultural industries since 2005. Let us recall that in China, this field has become a national priority as evidenced by the holding of many debates about soft power. Supported by the State with guaranteed low interest rates, since 2010, Wanda has signed partnership agreements with four major national banks – Bank of China, Agricultural Bank of China, China Exim Bank and China Construction Bank – so that these support its initiatives in the audiovisual industry and international tourism.
1. The financialization of the cultural industries. Globally, mergers and acquisitions have been part for two decades of an entrepreneurial strategy allowing to rapidly obtain market shares, technologies and optimal distribution networks. Marked by the concentration of supply and the financialization of trade, the globalization of communication has fostered the capitalistic development of the media sector. Backed by global finance, cultural capitalists embark at present in the conquest of these new market shares.
2. Building a global reputation. Robert Jervis’ analysis allows us to grasp the concept of reputation as a process of social construction. In fact, if an actor devotes much effort to perfect his image, it is because he is convinced that with this image, he will benefit from a more important resource in the future. In this perspective, the acquisition of AMC should not simply be analyzed as a mere financial decision. There is also a symbolic operation whereby Wanda can gain greater visibility and capitalize on an enhanced reputation internationally, even if it has to take risks in order to do so.
With its recent acquisition, Wanda intends to occupy the place of world number one, rather than to increase profits on the North American markets. Especially since its extremely high cost has created a surprise effect. The financial capacity of the Chinese group has not only increased its visibility worldwide but has also antagonized its competitors within the country. Nevertheless, it remains a risky bet because Wanda does not have sufficient cash and has to resort to credit. The key for this company remains to acquire the management style of AMC and appropriate its experiences in installing IMAX screens. This is actually to the Chinese market that the group will have to apply these valuable skills. By a symbolic act and international dimension, Wanda thus targets, paradoxically, the flourishing cinema industry in China.
In 2011, the film industry in the country increased by 28.93% to reach 13.12 billion yuans (1.63 billion euros). To support the growth of the sector, there is a need that the legal offer of films be sufficient and that the construction of movie theaters continue. On 17 February 2012, during his official visit to the United States, the Chinese Vice President Xi Jingpin signed an agreement authorizing the additional import of fourteen films in 3D or IMAX format, without raising the annual quota of twenty foreign films. In response, on 24 March 2012, Wanda signed a partnership pact with the Canadian firm IMAX so that IMAX intervenes exclusively in the construction of new movie theaters in China. After the acquisition of AMC, this event follows the IPO, in the Shanghai stock exchange, of Wanda Cinema Line. The outlook appears apparently increasingly favorable for the Chinese group. However, the reality is more complex and analysis must be qualified. Indeed, Wanda had to laboriously negotiate with various public and private partners, and negotiations with AMC, for example, lasted over two years. In fact, Wanda’s main asset lies in good relations with Chinese authorities and in the alliance and its various partners.
While the film market thrives in China, the future of the film industry in this country remains uncertain. Because even if it produced 558 long-feature films in 2011, the twenty American films alone have accumulated 46.39% of national income. Undeniably, Hollywood is a reference or even a safer bet for Chinese audiences. Finally, against all odds, the more the Chinese market grows, the more the dominance of Hollywood is increasing.
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Caixin – China Economics & Finance, « 万达50亿美元收购资金何来?», [D’où viennent les 50 milliards de dollars de Wanda pour les acquisitions ?], le 11 juin 2012, à l’adresse web : http://magazine.caixin.com/2012-06-08/100398578.html
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Le site officiel du groupe Wanda : http://www.wanda.cn
Thibault Harold, « Wang Jianlin fait du groupe chinois Wanda le numéro un mondial des cinémas », Le Monde, 23 mai 2012.