Delivery workers sort parcels for their customers in Beijing, China on “Singles Day,” a holiday that has grown into the world’s busiest day for e-commerce, Nov. 11, 2016. (AP Photo/Andy Wong)Delivery workers sort parcels for their customers in Beijing, China on “Singles Day,” a holiday that has grown into the world’s busiest day for e-commerce, Nov. 11, 2016. (AP Photo/Andy Wong)

NEWS ANALYSIS

China, the world’s largest e-commerce market, counts more than 400 million online shoppers even as half the country remains offline, but eager Canadian businesses face significant hurdles to gain market share.

Chinese e-commerce giants Alibaba and JD.com are making a big push in Canada trying to get more Canadian businesses to join their platforms and sell to the Chinese.

Alibaba’s billionaire chairman Jack Ma will be making his pitch to Canadian business—alongside Canadian Prime Minister Justin Trudeau—at an event in Toronto called “Gateway 17” on Sept. 25. 

The Toronto Region Board of Trade hosted JD.com in July for a business roundtable with more than 50 Canadian companies.

Canadian products have an excellent reputation in China. The growing Chinese middle class is leery of cheap Chinese goods and values the quality of Canada’s manufacturing and pristine environment for agro-food products.

More broadly, China is undergoing a lengthy transformation from an investment-oriented economy to a consumption-based one—away from heavy industry and toward the service sector. E-commerce has a vital role to play in the Chinese government’s strategy.

“E-commerce platforms are really helping to standardize market access in China to people of all income groups, which is an important priority in China,” said Jan De Silva, president and CEO of the Toronto Region Board of Trade, in a phone interview.

Reasons for Concern

E-commerce might simplify certain aspects of doing business in China, but pervasive challenges like lack of rule of law and intellectual property (IP) violations are but a couple of the difficulties foreign businesses face.

U.S. President Donald Trump initiated a probe into China’s IP theft, which is estimated to be responsible for between 50 and 80 percent of all IP violations that harm the U.S. economy, according to the IP Commission Report. The U.S. Chamber of Commerce estimates 86 percent of all counterfeit goods come from China and Hong Kong.

Bottles of wine from Clear Lake Wineries, an export operation of Ontario wines to China. (Courtesy Mary Whittle)

Bottles of wine from Clear Lake Wineries, an export operation of Ontario wines to China. (Courtesy Mary Whittle)

“A lot of product on Alibaba is counterfeit. Consumers know that too,” said Mary Whittle in a phone interview. She is the CEO of Clear Lake Wineries, a family-run business that exports Ontario wines to China. 

However, China is cracking down on IP violations for good reason. It realizes that some of its companies can be global champions provided other companies don’t plunder their IP. So they must be protected. The number of settlements in the last few years is up roughly fourfold under the stronger judicial framework, says De Silva. 

IP violations aren’t limited to fake goods. They can derail a business when an unscrupulous company learns of the legal name of a legitimate business and becomes the first to register or use that name in China. It then files a claim against the genuine business when it tries to register or use the name in China. 

The Canadian Trade Commissioner Service (CTCS) warns that patents and trademarks registered in Canada or other countries are not usually protected in China and that regulatory enforcement can still be unsatisfactory. The CTCS website even has an extensive section on business risks related to corruption in China.

A lot of product on Alibaba is counterfeit. Consumers know that too.

— Mary Whittle, CEO, Clear Lake Wineries

Another warning from the CTCS, in a section titled “An Introduction to E-Commerce in China,” states: “Government policies regulating the marketplace are dense, complicated, and prone to changes without notice.” 

An extreme example of China’s opaque regulatory enforcement is the case of John Chang and Allison Lu, owners of Lulu Island Winery based in B.C., who are facing a minimum of 10 years—and possibly life—in prison for alleged wine smuggling into China. The winery said it believed it had followed all the applicable laws, yet Chang has already been serving jail time.

“The arrest of Mr. Chang and Ms. Lu for a fabricated customs violation is an assault on their basic rights, a breach of China’s international trade obligations, and China’s own customs laws,” Conservative international trade critic Gerry Ritz said, as reported by the CBC in May.

In an email to The Epoch Times, Brianne Maxwell, spokesperson for Global Affairs Canada said: “We are following the case of Mr. Chang and Ms. Lu closelyCanadian officials are in contact with the relevant Chinese authorities and are providing consular assistance to Mr. Chang, Ms. Lu and their familyCanadian representatives have raised the case with Chinese authorities at high levelsTo protect the privacy of the individuals concerned, further details on this case cannot be released.

Rule of law is necessary for business to thrive in a legitimate manner. Clearly it still has a long way to go in China.

The Chinese e-commerce giants are basically facilitation and delivery mechanisms. But doing business in China is much more than filling an order. The Chinese consumer is bombarded with options and a variety of marketing schemes. The reality is that many countries are trying to sell to the Chinese, which makes marketing efforts to distinguish products costly. Competition is intense.

Whittle says she was told by JD.com that a business could spend $400,000 on a marketing campaign for a month and there’s no guarantee the message would register with consumers.

“It is a very difficult market to penetrate and you can do a lot of things right and it’s still hard, very difficult to break through the noise, competing against every other country and every other product,” Whittle said.

The e-commerce giants may be trying to put dollar signs in the heads of Canadian businesses, but there are many factors for success that are beyond their control. 

Follow Rahul on Twitter @RV_ETBiz

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A driver uses Alipay on his smartphone to pay a highway toll, on the Hangzhou-Ningbo Expressway in Hangzhou, Zhejiang province Sept. 21. (STR/AFP/Getty Images)A driver uses Alipay on his smartphone to pay a highway toll, on the Hangzhou-Ningbo Expressway in Hangzhou, Zhejiang province Sept. 21. (STR/AFP/Getty Images)

China is the world’s largest and fastest-growing market for mobile payments, and its most popular service is planning to parlay its success abroad.

Alipay, China’s biggest mobile payment service, unveiled several new partnerships to accept payments in the U.S. last week. Alipay is a service of Ant Financial Services, a spin-off of Chinese internet giant Alibaba.com.

Its foray into the United States commenced with deals struck with Verifone Holdings and credit card processor First Data Corp. Alipay has aggressively expanded into foreign markets in recent months, signing up local merchants in the U.K., Germany, Thailand, and Australia.

Western media has explained the move as a desire to service China’s 150 million tourists who travel abroad each year. Alipay looks to join the ranks of Visa, MasterCard, and China UnionPay as their preferred payment methods.

But the company’s ambitions clearly extend beyond Chinese tourists. “We are targeting 2 billion users in the next 10 years,” Alipay’s international president Sabrina Peng recently told Reuters. The company expects 60 percent of its transactions to come from outside of China by then, and that kind of volume can only be achieved by mainstream global adoption.

China’s Mobile Wallet

Last year, China overtook the United States as the world’s largest mobile payments market by total value spent.

China has around 200 million people using their smartphones as wallets, according to eMarketer estimates. That’s an almost 40 percent adoption ratio of mobile payment users to total smartphone users. Together, more than $1 trillion worth of mobile transactions were made in 2015 on mobile, according to iResearch data.

Alipay, with 450 million accounts, is the largest mobile payment platform in China with a 68 percent market share. Together with WeChat Pay (Tenpay), operated by rival Tencent Holdings, the two platforms have an 89 percent market share. The most recent entrant into the Chinese market is Apple Inc.’s Apple Pay, which recently signed a deal with China UnionPay in hopes of a quick market capture.

Payment via mobile is fairly straightforward. After pushing a “pay” button in the Alipay or WeChat app, the app generates a QR code which can be scanned by merchants and keeps a copy of the digital receipt. NFC (near field communication) compatible hardware also allows making payments without opening the app.

Mobile payments—and the broader internet banking market—has always been a two-horse race between Alibaba and Tencent, which operates WeChat, China’s biggest social-networking and instant messaging app.

Two years ago, Alibaba and Tencent were locked in bitter competition on multiple fronts, including internet banking, mobile payments, and even taxi services. Their competition in mobile banking intensified during the 2015 lunar new year period when both services used “red envelop” cash promotions and other subsidies to attract new users.

Since mid-2015, Tencent has scaled back its competition with Alibaba after a few minor setbacks. The Tencent-backed taxi service Didi was acquired by Alibaba-backed taxi service Kuaidi to form Didi Kuaidi. The company is known today as Didi Chuxing, the largest ride-sharing company in China which recently agreed to acquire Uber’s China business.

Tencent’s online bank—WeBank—also got off to a slower start compared to Alibaba affiliate Ant Financial in loan origination activity. Ant is also better funded; its Series B funding round earlier this year pegged the company at a $60 billion valuation, making it one of the most valuable startups in the world. Alipay and Ant’s recent wins drove Tencent’s decision earlier this year to eliminate fee subsidies when customers transfer cash from their bank to WeChat, in an effort to stem losses. The action further ceded market share to Alipay. 

No Quick Global Adoption

Alipay will face stiff challenges it never encountered in China.

The biggest concern for Alipay is fragmentation of global payment infrastructure. Developed markets in the United States and Europe have entrenched ways of securely making purchases online, something China lacks.

The World Bank estimated that only 16 percent of Chinese consumers have a credit card. Many smaller businesses, especially those outside the more advanced cities, do not accept credit or debit cards.

This made the transition from cash to cashless payments a far more open competition, one which mobile payment services have captured handily due to the penetration of smartphone usage in China. In other words, Chinese consumers were happy to sign up for mobile payments due to a lack of reliable alternatives.

Nielsen-payments

Digital payment systems are the number one online payment method in China (Source: Nielsen Media)

In developed markets, the prevalence of credit and debit cards presents a stiff challenge to mobile payment solutions. Alipay only needs to look at the slow adoption of Apple Pay, almost two years after its introduction, for evidence. Apple has run into a slew of issues, both technical and environmental—where banking giants and rivals such as Samsung have invested huge sums into their own mobile payment solutions. Until mobile payments can demonstrate clear advantages over credit cards, adoption will be slow.

The other challenge facing Alipay—if it wants to gain international trust—is concerns over data security.

Only 16 percent of Chinese consumers have a credit card.

Earlier this year Apple and its CEO Tim Cook sparred with U.S. Department of Justice over government access to private customer data stored on Apple’s devices. This month, Alibaba founder Jack Ma did the complete opposite by essentially pitching customer data to the Chinese communist regime.

In an October presentation to the Chinese Central Political and Legal Affairs Commission, which runs the Party’s security forces, Ma suggested to authorities and police officers present on using digital data for rooting out illicit activities. “Police used to follow a pickpocket thief day by day,” Ma told the group, according to a transcript obtained by Sohu.com. “In the future, if the man uses electronic payment, and the police finds him riding 50 different buses in one day, this person may be very suspicious.”

“I believe that public security, courts, the People’s Procuratorate [the Chinese agency responsible for investigation and prosecution], security departments, including anti-terrorism departments, should use this data,” Ma said.

The technology industry’s relationship with law enforcement will be a hot topic as the digital economy expands. And that’s especially true for the Chinese market where “illicit activity” can carry any definition ascribed by the Chinese communist regime leadership. 

For now, the foreign partnerships should give Alipay more business from traveling Chinese nationals. But it remains to be seen whether global consumers will entrust their financial data to a company affiliated with Ma—China’s second-richest man, a proponent of China’s internet censorship policies, and a defender of counterfeit goods.

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NEWS ANALYSIS

Money continues to flow out of China and into foreign assets unabated, despite Beijing’s tightening capital controls. But Beijing has no qualms about providing funding to one particular region—Hollywood.

Chinese companies are developing a keen interest in entertainment, as several Hollywood studios and production companies announced recent tie-ups with Chinese investors.

For China, the film industry’s lure is evident. China hopes to tap into Hollywood’s expertise as it builds up its own nascent entertainment industry. It also understands popular culture’s potential as a PR platform for the Chinese Communist Party on the global stage.

Tang Media Partners, an investment firm founded by businessman Donald Tang and backed by Chinese internet giant Tencent Holdings, last week acquired a controlling stake in IM Global, a film sales and distribution firm in Los Angeles.

In April, Chinese film producer Huayi Bros. Media Corp. formed a partnership with Burbank, Calif.-based STX Entertainment, to collaborate on a slate of new films. The deal gives Huayi—one of the biggest in China—a foothold in Hollywood from which it can launch films with a bigger international audience.

Earlier this year, property developer Wanda Group purchased a controlling stake in Legendary Entertainment for $3.5 billion. The Burbank, Calif.-based Legendary is the production company behind many hit films including “Interstellar” and “Jurassic World.”

Tencent and Chinese online retailer Alibaba have been interested in film distribution for years. Alibaba Pictures Group invested directly in last year’s “Mission Impossible—Rogue Nation,” and obtained distribution rights in China. The film generated more than $680 million in total global box office receipts.

Marketing Potential

Middle class consumers in China have a growing appetite for entertainment. Oriental DreamWorks James Fong predicted at the Milken Global Conference last month in Los Angeles that Chinese movie box office receipts would soon exceed revenues in the United States.

The box office in China—the world’s second-largest market—grew 49 percent in 2015 to reach $6.8 billion in receipts. Since 2011, China’s annual box office receipts have grown at 35 percent CAGR. During the same time span, the number of cinemas in China also increased four-fold.

Last Wednesday’s release of video-game adaptation “Warcraft” in China offers an example. The movie brought in more than $91 million for Legendary and Universal Pictures in two days, the fastest film ever to cross the $90 million-mark in China.

But there’s a problem. Beijing caps the number of imported movies per year and tightly controls how foreign movies are released. The state-run China Film Group must approve and license each foreign import. Hollywood movies accounted for 38.4 percent of last year’s box office receipts, down from a market share of 45.5 percent in 2014, according to data from China’s state news agency Xinhua.

So for both foreign film studios and Chinese distributors of foreign firms, connections are crucial, and could determine if a film gets a wider release—such as “Warcraft”—or a limited release.

Hollywood movies accounted for 38.4 percent of last year’s box office receipts.

The Censorship Issue

China’s Legendary acquisition has been years in the making. Legendary East’s Beijing-based director Peter Loehr is a China veteran and helped broker a multi-year deal in 2013 with China Film Group to produce numerous Chinese movies intended for an international audience.

That deal gave birth to English-language historical drama “The Great Wall,” which Legendary co-produced. Starring Matt Damon and directed by Zhang Yimou, the movie is set for worldwide release in November.

But the Legendary-Wanda tie-up will be scrutinized both financially and social-politically.

China’s “Great Firewall” censors free speech and open discussion. Foreign movies are frequently barred from screening, and even approved films must edit out references and clips which Chinese censors deem politically sensitive. For example, Beijing instructed producers of the 2006 James Bond film “Casino Royale” to remove a reference to the Cold War. In 2014, Beijing authorities shut down the annual Beijing Independent Film Festival on its opening day for fear that the festival would be used as a forum for political dissent.

Producers of 2016’s “Kung Fu Panda 3” consulted with Beijing prior to working on the film, which resulted in preferential treatment for the movie’s release in China, including a bigger cut of box-office revenues.

Having a Chinese partner grants foreign studios the ability to bypass Beijing’s foreign film quota. But it also means that any film created by the venture would naturally kowtow to China’s censorship.

Wanda has an intimate relationship with the Chinese Communist Party. How much creative freedom Legendary retains will be closely watched.

China is keenly aware of the power of arts and culture.

In 2014, Chinese leader Xi Jinping said at the Beijing Forum on Literature and Art, “Contemporary arts must also take patriotism as a theme, leading the people to establish and maintain correct views of history, nationality, statehood, and culture while and firmly building up the integrity and confidence of the Chinese people.”

China is keenly aware of the power of arts and culture—specifically motion pictures’ ability to influence contemporary ideas and values. The accumulation of such “soft power” can help mollify China’s image as it annexes islands in the South China Sea and threatens foreign journalists.

As more Hollywood properties receive funding from China, would their creations unwittingly become a channel for marketing Beijing’s worldview? It’s a worldview that includes blocking display of classical Chinese dance in Korea and ostracizing a Chinese human rights lawyer.

Historical Flops

Previous waves of international investments into Hollywood have mostly failed to produce financial windfall.

In 1989, Japan’s Sony Corp. paid $4.8 billion to acquire Columbia Pictures and TriStar Pictures, creating Sony Pictures Entertainment. Several management missteps, box-office flops, and ongoing economic issues in the United States and Japan turned the historical acquisition into a costly mistake. By 1994, the studio was loss-making and Sony took a $2.7 billion write-down of its investment.

More recently, in 2008 Indian billionaire Anil Ambani’s Reliance Entertainment acquired a stake in Steven Spielberg’s DreamWorks. The partnership was supposed to put Bollywood on the international stage, but in the several years since the tie-up, Reliance and DreamWorks failed to consistently produce blockbuster hits.

But perhaps China’s goals are entirely different. China’s foreign film cap will eventually end in 2017 due to World Trade Organization’s rules, which should open up the entertainment market and increase competition from foreign films.

Similar to its strategy in the high-tech and automotive industries, China likely is looking to acquire Hollywood know-how to fast-track the growth of domestic film companies.

After all, if you can’t beat them, buy them.

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WASHINGTON— Chinese e-commerce giant Alibaba says it is under investigation by U.S. regulators in connection with its accounting practices.
The company is the world’s biggest e-commerce platform, with more than 420 million people buying $485 billion worth of goods last year on its sites. Its digital platforms, including Taobao and Tmall, make up 80 percent of Chinese e-commerce.
Alibaba said in a regulatory filing Tuesday that the U.S. Securities and Exchange Commission has requested documents and information related to its policies and practices for consolidating earnings and for related party transactions, among other things.
The company said it is cooperating with the investigation. Alibaba said it was told by the SEC that the request for information shouldn’t be interpreted as an indication by the agency that the company has violated securities laws.
Alibaba Group Holding Ltd. went public in the U.S. in September 2014. Investors, seeking to tap into the rapidly growing Chinese middle-class, scrambled to buy shares. The offering raised $25 billion, making it the largest in the history of the New York Stock Exchange.
Alibaba’s e-commerce platforms cater to both Chinese and global consumers. At its heart is Taobao, a Chinese consumer-to-consumer website similar to eBay. Tmall offers merchants official storefronts to consumers in China.
As sales growth has slowed in China with a weakening economy, Alibaba has reached abroad to spur sales, both from U.S. companies selling goods on its platforms in China and Chinese sellers catering to international customers.
U.S. investors, worried about the state of the Chinese economy, have been wary of any possible signs of weakness in Alibaba’s performance. The company in January reported better-than-expected results for its third quarter, as mobile shopping continued to grow and Chinese customers snapped up goods during the holidays.
Alibaba said the SEC’s request also included information on accounting for its Cainiao Network and its reporting of operating data from Singles Day, the popular Chinese shopping holiday on Nov. 11.
SEC spokesman Kevin Callahan declined to comment Wednesday.

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For most people of the internet generation in China, conversations with friends involve pinging them via WeChat, the messaging platform by Tencent Holdings.
Need to pay for a latte at the coffee shop? It’s as easy as firing up WeChat Payments on the smartphone, and it’s done.
And when it’s time to apply for a loan for your small business idea, naturally, there’s a Tencent app for that.
The service is called WeBank. Approved by regulators in early 2015, it was the first online-only bank approved by Chinese regulators.
Small Loans for Small Businesses
In 2015, online banking has become the new battleground for Chinese internet giants.
WeBank and Alibaba Group Holding Ltd.-backed MYbank are competing to offer loans and investment products online.
Beijing is approving online-only private banks in an effort to diversify the banking industry and spur business growth. In the past, Chinese banks were all state-owned. They primarily catered to larger, state-owned enterprises (SOEs) or governments. Small, privately owned companies and individuals with limited collateral have long struggled to obtain credit from large banks.
Economists say small and medium-sized businesses generate three out of every four new jobs in China. With SOEs contracting or consolidating, Beijing desperately needs private and smaller businesses to help deliver on its economic and jobs growth targets.
Uniquely Equipped
Online-banking platforms are uniquely equipped to offer loans to consumers and smaller businesses.
Alibaba’s Alipay online-payment platform has more than 400 million active users. WeChat boasts 549 million active users. These consumers already use internet and their mobile devices on a daily basis.
Online banks affiliated with the “Big Three” internet giants Baidu, Alibaba, and Tencent hope to mine the troves of behavioral, geographical and financial data they already collect from existing services to screen borrowers for credit worthiness.
With social platforms, online stores, and web portals catering to hundreds of millions of existing daily users, online banks affiliated with these internet giants have access to marketing and advertising platforms that few brick-and-mortar banks could hope for.
WeBank received its banking license in January 2015. MYbank, the online-only arm of Ant Financial, the financial services arm of Alibaba, launched soon thereafter.
Last month, Baidu and Citic Bank announced plans to set up a joint venture bank to offer loan and investment products online. As of early December the application has not yet been approved by regulators.
Tencent is the largest shareholder in WeBank at 30 percent. Other major shareholders in WeBank include Shenzhen Baiyeyuan Investment and Shenzhen Liye, each with a 20 percent stake, according to data from Bloomberg.
These online banks offer consumers financial services products such as money-market funds, investment products, and loans. Without storefronts and overhead, online-only banks compete by having a lower cost base to brick-and-mortar banks.
“At a traditional bank, business has to go through several departments, resulting in additional costs,” Zheng Xinlin, a WeBank vice president, told Caixin Media. “Ours is a low-cost, one-stop service.”
As of September, WeBank had underwritten more than 1 billion yuan ($156 million) worth of consumer loans, 40 percent of which were for employees of Tencent, according to sources who spoke to Caixin.
Big Hurdles Remain
While internet firms believe online banks can provide much-needed capital for consumers and small businesses, regulators could be dampening those hopes.
Beijing has moved to rein in the lightly regulated market of online payments—an area that can affect the ability to transfer money into and out of online banks.
Draft rules issued in August by the People’s Bank of China put restrictions on online payment services such as Alipay and WeChat Payments. New guidelines would limit fund transfers, cap the amount of total daily transactions, and increase the requirements to provide identification when opening accounts.
The last rule would require applicants to give documentation such as educational background, tax bureaus, and bank accounts in order to open online accounts offering more than the most basic services.
Some critics warn these regulations could stifle development in one of the most innovative corners of the Internet.
Outside of government hurdles, competitive pressures have kept Internet-only banks from fully taking off.
WeBank’s first year in operation has been a rocky one. Under current Chinese banking rules, customers must physically provide identification at a real bank branch in order to make deposits. At launch, WeBank partnered with China Merchants Bank, the nation’s sixth-largest lender, to accept bank applications.
But in September, China Merchants Bank ended its relationship with WeBank and has refused to let its customers link accounts to WeBank’s online platform. Some of China’s biggest state banks have also declined to partner with WeBank, according to Caixin sources. Later in the month WeBank’s president, Cao Tong, resigned after only ten months on the job.
WeBank and Mybank hope facial-recognition technology will allow the firms to remotely verify identities without the need to visit a physical bank branch. But so far, regulators have not approved such technologies.

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Beijing and Shanghai may lie almost 1,000 miles apart, but their metro riders share one thing in common. Each morning, commuters hunch over smartphones or tablets to watch the latest Chinese or Korean TV drama or Hollywood movies downloaded from the internet.
Chances are, those videos are downloaded or streamed for free—via legal means or pirated.
But that may be set to change. Internet and media giants are making massive bets in content and technologies, aiming to disrupt China’s longstanding culture of free web entertainment.
Their goal: encourage people to pay for content.
Appetite for Videos
China’s online video market is expected to reach RMB 36.8 billion (US$5.8 billion) in 2015, a 50 percent increase from 2014, according to iResearch, a Chinese internet consultancy. Around RMB 15.2 billion of that figure comes from online video advertising, with the remainder consisting of subscriptions and purchases.
While that’s seems high, online video is still a small portion of the RMB 209 billion (US$32.9 billion) Chinese internet users expect to spend in overall online entertainment, which includes music and games.
This fragmented environment cemented China’s reputation as a market where copyrights go to die.

The gap is apparent when taken into context with how users spend their time online. As of June 2015, Chinese Internet users spent 33 percent of their time on the web on online videos. That’s by far the biggest chunk of time spent on online entertainment activities—social networking was 10.6 percent, and online gaming was only 5.9 percent. The remainder was spent on non-entertainment online activities.
In other words, revenues from online videos aren’t commensurate with usage demand. China has more than 650 million internet users, and monetizing the online video market has become an arms race between domestic internet giants.
Wild Wild West
The question is, how to convince millions of Chinese web users to pay for content?
In the United States, Hollywood movies generally follow the same distribution model. Films are shown in cinemas first, followed by DVD, Blu-ray, and streaming/on-demand platforms. Netflix, Amazon.com, and Hulu are the major players in online paid streaming video.
Media and entertainment giants view China as the new frontier. And in many ways, it’s still akin to the “Wild Wild West.”
No specific distribution channel is customary for domestic Chinese movie releases. Studios may choose to debut films and TV shows on any number of distribution channels including online and mobile. Legal streaming services are numerous and fragmented, coexisting with a number of sites streaming low-quality pirated content.
This fragmented, free-for-all environment encouraged the rampant piracy that has plagued Chinese entertainment industry in recent decades, and cemented China’s reputation as a market where copyrights go to die.
Arms Race
There are new sheriffs in town. The impending culture shift is led by the “BAT,” China’s big three internet giants of Baidu, Alibaba, and Tencent.
Their strategy is to create online platforms with libraries of high-quality and desirable content in high definition, able to be streamed or downloaded on-the-go. With a compelling product, they—and Hollywood studios—hope some users would move from illegal sites to these paid platforms. The services will be promoted alongside the internet giants’ existing products—think Taobao, WeChat, and QQ—which already dominate the social lives of Chinese internet users.
“The generation of users born post 1990 understands the value of content. They are cash-rich, but time-poor. They are willing to pay for the convenience of accessing quality without having to go through the complications of finding illegal content,” Yang Xianghua, senior VP of iQIYI, said in an interview with Variety magazine.
Alibaba, which runs e-retailer Taobao and its namesake internet wholesaler website, is spending billions in this effort. On Nov. 6, Alibaba agreed to pay around US$4.4 billion to purchase the remaining stake of Youku Tudou it doesn’t already own. Youku—a Chinese cross between YouTube and Hulu—hosts a number of well-known video bloggers, has a huge user base, and can drive traffic to Alibaba’s more lucrative online video ventures.
One service standing to benefit is Tmall Box Office, a streaming service launched by Alibaba earlier this year. Similar to Netflix, it requires monthly or annual subscriptions and offers a mix of Chinese and foreign movies and TV shows. Payments (around US$6 for the monthly plan) can be conveniently made via—you guessed it—Alipay, the company’s online payment service.
Taking a page out of Netflix’s playbook, Alibaba is also turning itself into a movie studio. Hong Kong-based Alibaba Pictures was launched in March 2015 to produce Chinese-language TV shows and movies. It also invests in large-scale Hollywood productions—in June Alibaba signed a deal to invest an undisclosed amount in the next “Mission: Impossible” film. Last year the company obtained rights from Lionsgate to broadcast and stream movies such as “The Twilight Saga” and TV shows such as “Mad Men” and “Weeds” in China.
Baidu, China’s No. 1 search engine, also built its online video platform iQIYI into a major player in content streaming. Last month, iQIYI signed an agreement with Comcast Corp. to become the exclusive online distributor of Universal Studios’ new and existing films in China.
comc, which owns China’s biggest social media platforms QQ and WeChat, reached an agreement last week to become the exclusive online distributor of Paramount Pictures’ future releases including “Star Trek Beyond,” set to debut in 2016. The company also acquired online distribution rights to Metro-Goldwyn-Mayer’s James Bond franchise, including the newly released “Spectre.”
It already has a war chest of popular western films. Tencent owns online distribution rights to Walt Disney’s “Star Wars” franchise, Time Warner’s HBO properties, and recently acquired an equity stake in the upcoming movie adaptation of video game “Warcraft.”
For Hollywood studios, China has long been a flawed market. Studios frequently face off against Beijing’s censorship police, which demands content alterations before release. Even after films are approved, box-office receipts are the only material form of revenues for studios. DVD and Blu-ray sales are virtually nonexistent due to rampant piracy.
To make up for this gap, U.S. studios see digital distribution as a potential new revenue stream in China. Timing will largely follow the U.S. distribution model. For example, MGM’s latest Bond film “Spectre” will be

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Rupert Hoogewerf (R), best known as Hurun, announces China’s richest list in Beijing on Oct. 19, 2012. (Wang Zhao/AFP/Getty Images)Rupert Hoogewerf (R), best known as Hurun, announces China’s richest list in Beijing on Oct. 19, 2012. (Wang Zhao/AFP/Getty Images)

Nine of the top ten on an independent list of China’s wealthiest have ties with the Chinese Communist Party, according to a recent report by Chinese state media, further underlining the interwoven nature of business and politics in China.

The state-run Beijing Youth Daily reported on the political participation of the ten richest men in China after the release of the Hurun Report, an annual survey of China’s wealthiest, on Oct. 10.

Despite the slowdown in the economy, China’s richest have defied gravity, recording their best year ever, and creating more wealth than any country has ever done before in a year.

— Rupert Hoogewerf, Hurun Report chairman and chief researcher

Wang Jianlin, the property and entertainment magnate who topped the Hurun list, is a member of the Chinese People’s Political Consultative Conference (CPPCC), a political advisory body. Wang, Internet giant Baidu’s Robin Li, China Oceanwide Holdings Group’s Lu Zhiqiang, Zhang Jindong of Suning Commerce Group, China’s largest retailer, and Red Bull rights holder Yan Bin all attended recent sessions of the CPPCC.

Representatives of the National People’s Congress, the Chinese regime’s rubber stamp legislature, include: Zong Qinghou, the head of Hangzhou Wahaha Group, the largest beverage producer in China; Pony Ma, the head of Internet company Tencent Holdings; Lei Jun, the founder of new smartphone company Xiaomi Technology; and Lu Guanqiu, head of automotive components company Wanxiang Group Corporation.

Two in China’s richest list—Wang Jianlin and Lu Guanqiu—had the honor of joining sessions of the National Congress, a five-yearly event in Beijing where pre-arranged political appointments to top Party offices are put to vote and formally sanctioned.

While Yan Hao, China’s sixth wealthiest individual, doesn’t have a high political rank or is a member of the above consultative groups, the founder of China’s biggest private construction company, Pacific Construction Group, is currently the deputy director of the state-run China Private-Owned Business Association and deputy executive director of China Private Economy Research Society.

Business and politics are inextricably linked in communist China. Having a Party membership and friendly ties with the Party elite helps businessmen secure top projects and investment in China’s hugely competitive business environment.

In turn, the Party co-opts these businessmen into their political meetings and events to give a sign of inclusiveness. For instance, four members of the Hurun top ten list—Robin Li, Lu Guanqiu, Jack Ma, and Pony Ma—were part of the group of Chinese businessmen who accompanied Party leader Xi Jinping on his first formal state visit to the United States.

Even individuals who appear to be unconnected with the Party publicly prop it up. In a speech at Columbia University in 2011, Jack Ma, CEO of Chinese e-commerce conglomerate Alibaba, said Google should “respect the government” if it wished to succeed in China. Ma also later acknowledged having spent “a lot of time” studying how the Party runs.

A July 2014 by the New York Times found that four Chinese companies investing in Alibaba are helmed by either the sons or grandsons of former top Party officials.

Alibaba, however, was chastised by Chinese authorities in January for selling counterfeit goods and other violations. The attack on Ma’s company was viewed in some quarters as spillover from a fierce Party factional struggle. Alvin Jiang Zhicheng, grandson of former Chinese leader Jiang Zemin, has a 5.6 percent stake in Alibaba. Jiang, his family, and associates are the primary targets in current Party leader Xi Jinping’s anti-corruption campaign.

The Hurun Report on China’s richest was started by Rupert Hoogewerf, a chartered accountant, is considered to be a reliable bellwether of the ultra-rich in China.

The 2015 reports finds China with 596 billionaires as compared to 537 in the United States. These 1,877 Chinese citizens on the list hire over 1 percent of China’s 801 million workforce, and paid $100 billion in taxes.

Hoogewerf, the chairman and chief researcher of the Hurun Report, said: “Despite the slowdown in the economy, China’s richest have defied gravity, recording their best year ever, and creating more wealth than any country has ever done before in a year.”

The ten richest Chinese according to the Hurun Report follows:

1) Wang Jianlin, Wanda Group, $34.4 billion

2) Jack Ma, Alibaba Group, $22.7 billion

3) Zong Qinghou, Wahaha, $21.1 billion

4) Pony Ma, Tencent, $18.8 billion

5) Lei Jun, Xiaomi Technology, $14.4 billion

6) Yan Hao, China Pacific Construction, $14.2 billion

7) Robin Li, Baidu, $13.3 billion

8) Lu Zhiqiang, China Oceanwide Group of Beijing, $13 billion

9) Zhang Jindong, Suning Group, $12.7 billion

10) Lu Guanqiu, Wanxiang Group, $10.2 billion

10) Yan Bin, Reignwood Group, Reignwood Group, $10.2 billion

Frank Fang contributed to this article.

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A shopper passes in front of a Louis Vuitton store in Hong Kong, September 2012. Last year, Chinese consumers surpassed American shoppers as the world’s No. 1 purchaser of luxury goods. (PHILIPPE LOPEZ/AFP/Getty Images)A shopper passes in front of a Louis Vuitton store in Hong Kong, September 2012. Last year, Chinese consumers surpassed American shoppers as the world’s No. 1 purchaser of luxury goods. (PHILIPPE LOPEZ/AFP/Getty Images)

Pundits keep pushing the Chinese consumer who is supposedly going to take over from the investment growth model. This time it’s Jack Ma’s turn.

In a letter to investors published on the U.S. website of the Chinese online retailer, he said: “China’s economy is transitioning from an export sales-driven economy to a domestic-consumption economy, and from investing in infrastructure to operating infrastructure. “

Same old story with the caveat that it’s just not happening.  Recent news rather supports the theory that a lack of investment spending is finally impacting the job market.  

Late September, Longmay Group fired 100,000 coal workers, or 40 percent of its workforce. 

More recently, China Daily reports some jobs are disappearing altogether:  

“The changing economic structure affects certain traditional careers. The need for professionals in certain fields declined, and some even disappeared,” Zhu Hongyan, the chief career consultant for Zhaopin.com (a think tank) told the paper. 

But the decline in jobs is not limited to blue collar jobs. According to Zhaopin’s latest competition index for white collar jobs shoed 35 applications for one position, up from 26 in the first quarter of 2015. 

 “Workers in [traditional] industries are forced to seek career opportunities in other ones, increasing competition in the market for job seekers,” said Hongyan. 

Combined with the fact that Goldman Sachs says only 2 percent of Chinese workers can actually afford to pay income tax, this should give Jack Ma pause.

But it doesn’t, as he also thinks China’s middle class is far more numerous than Goldman says. According to Ma, the middle class now counts 300 million members (Goldman says 146 million) and he thinks it will grow to 500 million in 10 years. 

He also thinks the savings of the Chinese people can be spent in a downturn.

“The saving rates in China are some of the highest in the world. During economic downturns, Western consumers may have trouble borrowing to maintain their lifestyles, but their Chinese counterparts have savings for retirement or for times of crisis. Therefore, slower economic growth does not mean declining purchasing power.”

This sounds great in theory but he forgets that the Chinese don’t save for fun. They need to in order to shoulder all the costs for education, healthcare and retirement—which the state doesn’t provide. 

Ma says about his own company: “Many are trying to understand us through the lens of an outsider and may not have a full or accurate understanding of who we are and what we do.”

Maybe the same principle applies to the billionaire’s assessment of the Chinese middle class. 

 

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