Exporting Entertainment: Can CJ E&M Rely on the Chinese Market?
In November 2017, CJ Entertainment and Media CEO Tae-sung Jeong breathed a sigh of relief upon hearing the news: South Korean President Jae-in Moon had reached a consensus with Chinese President Jin-ping Xi on improving trade relations between the two countries.
Betting on China
CJ E&M, the largest media conglomerate in Korea, was formed in 2011 from a merger of five entertainment and media companies under the umbrella of CJ Group. The company bet big on the high-growth Chinese market for entertainment, opening offices in Beijing and Shanghai and setting in motion numerous co-productions with Chinese studios.
For a time the bet seemed to be paying off, as Korean entertainment products from TV series to films to music rode the Hallyu wave—that is, the growing craze for Korean pop culture. At the beginning of the supply chain, Chinese studios licensed Korean intellectual property (IP) to produce localized versions. Near the end of the supply chain, Chinese theater chains, TV stations, and digital platforms purchased Korean content and added Chinese subtitles or dubbing before distributing it to local audiences.
When Korean and American military officials made a July 2016 announcement that the Terminal High Altitude Area Defense System (THAAD) would be deployed in rural Korea, the Chinese response was swift. THAAD was designed to shoot down missiles and primarily aimed at neutralizing North Korea’s growing ballistic capabilities. The Chinese government issued a firm declaration that the system undermined China’s security interests, and orchestrated a de facto ban of Korean content in the domestic market.
In the aftermath, CJ E&M’s stock price tumbled by 25.92% compared to just one year prior to announcement of deployment. Profits were hit even harder, declining 35.73% in the same timespan.
Localizing Korean Content
As content starring Korean actors or based on Korean IPs was pulled from the air, CJ E&M’s China employees found themselves sitting idle. CJ E&M management responded by rapidly downsizing its Beijing and Shanghai staff, but refrained from closing the offices completely in hopes that political relations would normalize in the next few years.
On a longer time horizon, CJ E&M hoped to mitigate the effects of China’s governmental policies on its bottom line by doubling down on content production in other territories. In October 2017, Jeong announced at a press conference that the company planned to produce at least 20 titles in over 10 different languages every year starting in 2020. Keenly aware of the limited global appeal of Korean-language media, CJ E&M would focus on adapting existing IPs to fit local cultural contexts.
CJ E&M also planned to take advantage of substantial synergies with sister company CJ CGV, a multiplex cinema chain that was rapidly expanding in Southeast Asian markets such as Vietnam. Since entering Vietnam in 2011, CJ CGV had risen to 43% market share and become the country’s number 1 exhibitor, with plans to open 12-15 more locations per year until 2020. As a result, CJ E&M could bypass lengthy negotiations and unfavorable deal terms when distributing its films in Vietnam.
The Global Market
In 2017 Korea was rocked by a political scandal involving conservative President Geun-hye Park, who had pushed for deployment of THAAD. In the aftermath of Park’s impeachment, liberal candidate Jae-in Moon was elected President and set out to normalize relations with China.
Yet the THAAD crisis must serve as a warning against perpetuating CJ E&M’s dependence on the Chinese market. After all, this is only one episode in China’s recent history of using regulations to protect domestic industries, and in invoking nationalism to turn local audiences’ attention to homegrown entertainment. While producing localized content for smaller but growing markets in Southeast Asia is a step in the right direction, CJ E&M would be remiss to ignore the growing market for truly global content.
One compelling option is to replicate the success of CJ E&M’s 2014 English-language film Snowpiercer, but on a smaller scale. The prestige project starred Hollywood talent like Chris Evans and Tilda Swinton and was aimed at the international market, with a budget several times the size of the most expensive Korean films. Yet with digital platforms such as Netflix offering a more aggregated distribution process than theater chains, even smaller films can reach a global audience in one fell swoop. Furthermore, digital platforms offer sophisticated recommendation algorithms that allow content with low marketing budgets to reach narrow-interest audiences around the world. This means that CJ E&M can monetize global projects that are less expensive than Snowpiercer.
Another possibility is to take advantage of CJ E&M’s existing inventory of content, built up over years of being an industry leader in Korea. Once again, digital platforms offer new opportunities by reinvigorating interest in older content through recommendations. More importantly, CJ E&M can gauge interest in older intellectual property by making it readily and globally available online, then collecting data on different territories’ appetite for localized remakes or spin-offs.
But having established that digital platforms offer unique distribution alternatives, to what extent do these same platforms pose a threat to more traditional entertainment studios like CJ E&M?
(Word count, not including citations: 795)
 Swaine, Michael D. “Chinese Views on South Korea’s Deployment of THAAD.” China Leadership Monitor, no. 52, Feb. 2017, p. 1.
 Swaine, Michael D. “Chinese Views on South Korea’s Deployment of THAAD.” China Leadership Monitor, no. 52, Feb. 2017, p. 3.
 김진성. “CJ, 콘텐츠 실적 회복 외부 악재 해소가 관건.” 한국경제, 28 Nov. 2016, p. 1.
 Kil, Sonia. “China’s Blockade of Cultural Korea Marks Troublesome Anniversary.” Variety, 24 Aug. 2017.
 Brzeski, Patrick and Hyo-won Lee. “CJ Entertainment Chief on South Korea’s Global Film Plan (Despite China’s Ban).” The Hollywood Reporter, 3 Nov. 2017.
 Lee, Hyo-won. “CJ Entertainment to Expand Slate of Overseas Productions.” The Hollywood Reporter, 13 Sept. 2017.
 Lee, Hyo-won. “South Korea’s CJ CGV to Invest $200M in Vietnamese Theaters by 2020.” The Hollywood Reporter, 4 Sept. 2017.
Student comments on Exporting Entertainment: Can CJ E&M Rely on the Chinese Market?
I agree that China’s growing dominance and assertiveness in the world economy and political order, coupled with increasing global reliance on its massive consumer base, signals that these protectionalist trade conflicts will only grow in incidence and prevalence. This will not be CJ E&M’s only rodeo with the Chinese government. However, given China’s sheer media consumption power, pulling the plug on this lucrative market is clearly not an option. I’d like to hear your thoughts on the possibility of exploring potential export loopholes. For example, CJ E&M can partner with non-Korean studios (such as those in Hollywood / Bollywood) to create content that would appeal to Chinese consumers, and then export this content to China in such a way that it is not “made in Korea” or utilizes “Korean IP”. Of course, this is likely a quite round-about way that is not particularly efficient – but an option worth exploring.
Digital platform helps expand the audience base and allows viewers to watch content on demand. My question is that if CJ E&M is building it’s own digital platform, how should it monetize it? To whom should it distribute its content? A digital distribution is more likely to be a one time, fixed cost for the company. Whereas the distribution on Televisions is more likely to be a variable cost. The company may negotiate how much it will charge the TV stations or sponsors based on how many times the content will be played. Also, will there be other regulations that may impact the broadcast of Korean dramas in other countries? I agree that digital platform will help the company to reach a global market, but there’s also some customization need to be made to adjust to the local markets and the digitization.
To Toby Johnson’s point, the Chinese market will continue to be vital for C&J media so they need to determine a strategy to more sustainably access this market given the relations between the two countries could continue to be strained. One thought is whether they use research to determine a suitable distribution of television shows versus films. They would both need to assess Chinese demand for each category and balance this with the fact that ongoing television shows could be riskier given the unstable relationship. Films on the other hand have a quicker turnaround, making it less likely to have to halt production midway. They also can profit immediately upon release, unlike new television shows which can take time to build traction over a season.
This is an interesting article to me. The political conflicts impact the business so much. But it’s interesting that in 2016 and 2017 when I was in China, I still saw several Korean shows are quite popular in China. So I assume there is some smart way to broadcast Korean content in China. For instance, partnering with Chinese local companies to change the label of the Korean content.
The other take out for me is, in this globalized market, the public and private sectors are so integrated and impact each other. The government should be cautious when making policies and really consider the economic impact of the political decision. At the same time, the companies need to build close relationship with government, to lobby the government when necessary.
Overall, I still have positive attitude toward the global market. I believe different countries will build better and better mutual understanding and reduce conflict which leads to lose-lose situation.
Thank you for the interesting essay! I worry about CJ E&M’s ability to depend on China’s user base given the easy to which China was able to ban all of Korean content. While I agree that the Chinese user base should not be ignored by CJ E&M, the company should double down on areas where political conflicts will be lower to ensure that they can broadcast their content. With a digital platform, I believe that CJ E&M should not focus on monetizing it but use it to understand the big data of where their content could be expanded more broadly. I agree with dc’s assessment that ignoring the global market would be a mistake. I also question as to whether CJ E&M is able to sell its content to existing distribution networks, such as Netflix, Hulu, or Amazon, in order to expand broad access to its shows.
A fascinating and well-written piece, thank you.
CJ E&M may have hope now that President Jae-in Moon is endeavoring to normalize relations with China. However, I agree that they must act to protect themselves against political risk while aggressively pursuing international expansion. Like Toby Johnson, I believe the Chinese market is too large to forgo, and CJ E&M possesses the significant advantage of knowing the Chinese audience’s tastes and behaviors. For these reasons, they should try to expand again in China.
That said, they do need risk diversification. Governments always value employment and increased economic opportunities for their citizens. CJ E&M could link themselves to Chinese companies in such a way that communicates clearly how they are enriching the Chinese economy. Select joint ventures and partnerships with media companies, producers, and platforms could be worth exploring. If the benefits of CJ E&M exceed the costs (political and economic), the government will be more inclined to allowing them to stay in operation.
The notion of global distribution to narrow-interest audiences around the world is exciting. However, fear the likelihood of CJ E&M’s content to be found via recommendations will decline as streaming platforms increasingly favor their own content.  To move the needle with such small audiences around the world, CJ E&M may need to invest heavily in localizing its content to many countries. I feel more comfortable with the approach the company is taking in Vietnam, with a very aggressive plan to sweep a specific geographic market.
Thanks for the interesting article. I think this article well reveals a painful fact of doing business in China for foreign companies. The China market is a high risk, high return asset. You can hardly resist a market of 1.3billion people. On the other hand, you never know whether your business will encounter severe challenge overnight because of the regulation issue, a phenomenon rare in other countries.
Personally, I don’t support the ‘methodology’ of the Chinese government to leverage its economic bargain power to efficiently achieve the political purpose. However, I want to argue that I think it’s a mutual responsibility of China and many other countries. Holding a totally different ideology, China has never been truly welcomed by the western world. In addition, the rise of China is also a huge threat to the dominance of western countries. China has been struggling for decades to develop under a pressing international political environment. The communist party has to do all it can to prevent this country from being undermined or even segregated, a lot of times the measure of doing so is to information regulation. For those who were wondering why China is so unique or weird, this is my answer. It’s really a both-sided, political thing.
It seems the interdependence and conflict of China with the western world will continue in a foreseeable future. It is advisable for those who want to do business in China develop a safe strategy and operating model to prevent the sudden shock. Having the political savvy is key. A company should evaluate itself before entering China market. Am I a potentially politically risky industry? You may argue regulating Google’s operation in China is a violation of boundless information access and freedom of speech. I totally agree. However, with a google map, the US government can also keep close track of the key military information-say the deployment of military base-of China, a huge threat to the safety of China. Also, it is critical to build a meaningful relationship with the government and regulatory institution to get first-hand political move news ahead of the curve so that mitigation plan can be taken fast to minimize the loss.
This case is a great example of showing how costly both sides have to pay due to the lack of trust.