Kung Fu Panda 3: A Collaboration Between Dreamworks and China's State Council

Kung Fu Panda 3 opens simultaneously in the U.S. and China on Jan 29th to high hopes by Dreamworks Animation and Oriental Dreamworks, which is a joint venture formed with China Media Capital and Shanghai Media Group. A test run of two screenings at various Chinese theaters last weekend yielded an impressive $6.5 million, and January 29th is a coveted opening date in China due to its proximity to the Chinese New Year and Valentines Day.

The Shanghai Media Group is a State-run organization, and animation is a strategic technology that has its own Five-Year Plan. The following is a high level overview from the 12th Five Year plan (2011-2015):

• Guiding the production of original animation creation
• Creating a system to make innovation profitable
• Promoting the balanced development of the animation industry
• Advancing the technical innovation ability of the animation industry
• Implementing the strategy for key enterprises and major projects
• Strengthening talent support
• Facilitating the animation industry to “go global”
• Enhancing the international cooperation of the animation industry
• Encouraging the animation industry to “go global”
• Safeguarding measures including increasing financial input to the industry, protecting intellectual property, and improving investing and financing policies

China's emphasis on improving its animation production facilities is a double-edged sword for foreign companies. On the one hand, it gives foreign animation companies like Dreamworks (NASDAQ: DWA) or Walt Disney (NYSE: DIS) hard-to-get access to China, which is arguably the most important market in the world. On the other hand, it gives China access to the foreign company's intellectual property through overt technology transfer that happens when foreign companies hire Chinese engineers who eventually leave the foreign company and take their newly found skills to a Chinese animation company. There is also covert technology acquisition which can occur through hacking and other secretive means.

One reason why the Chinese government is so enthusiastic about animation is that it serves the Chinese Communist Party's propaganda function. Song Lei, an expert in the subject and a former employee of China's Ministry of Culture wrote a blog post about Japan and America's use of animation as propaganda (machine translation):

"Of course. Japanese anime serve as propaganda in postwar Japan an important role in East Asian countries have large numbers of young people are fond of Japanese anime, there are tens of thousands of Chinese students learning Japanese because the Japanese anime away every year, the book in Japanese scholars Endo reputation , also devoted to the "knowledge-Japanese" and "Hari clan" generation. American animation also with its strong capital in the world to promote their liberty, equality of the world, the US-centered values, as well as a variety of American superheroes."

Later in the post Song writes that in comparison to Japan and America, China's animation propaganda has just started and the quality is relatively low. This is at least partly why foreign film and animation companies will find open arms in China, at least until China's ambitions in this area have been achieved. When that happens I predict that access to China's market will tighten considerably for those same foreign firms.