25 October 2016
Major US players like Disney and Universal have made substantial investments in China, which is on track to become the biggest theme park market by 2020. Photo: Xinhua
Major US players like Disney and Universal have made substantial investments in China, which is on track to become the biggest theme park market by 2020. Photo: Xinhua

China theme parks: If you build them, will people come?

When it comes to theme parks, the old adage “if you build it, they will come” might apply initially, but for how long?

That will depend on numerous factors.

The story we hear regularly from global theme park operators is that location-based entertainment projects typically only generate the desired returns on investment if the guest experience remains world-class and truly memorable.

This means that the operating standards need to be first-rate, regular maintenance and protection of health and safety are paramount, and new attractions or shows need to be introduced on a regular basis.

If the venue does not live up to expectations then, in this information age, gate numbers can diminish dramatically over a very short period.

As China grows economically, the expectations of increasingly wealthy Chinese tourists will naturally go up as well.

It would not be too surprising if the current large numbers of Chinese tourists visiting foreign destinations led to increased demand domestically in China for better quality and more discerned attention to how they spend their entertainment budget.

In the battle for China’s domestic entertainment market, developers who are not prepared to invest appropriate effort and funds may well find themselves losing business very quickly.

The Chinese theme park market is growing rapidly.

It is estimated that China is on track to surpass the US and become the world’s largest market by 2020.

Naturally, this makes China very attractive to the major US industry players.

Disney and many of its peers have already made substantial investments in China. Universal is expected to open its largest overseas theme park in Beijing in the next four to five years and other operators such as Six Flags and Merlin have also indicated their interest in opening theme parks in China.

This is indicative of what we are seeing in TMT (telecom, media, technology) mergers and acquisitions more broadly, with a substantial increase in US entertainment and media companies’ interest in accessing the Chinese market.

China represents a massive and growing market of consumers who have more money to spend on entertainment and media products than ever before.

Western brands and culture are gaining popularity alongside the growing domestic market.

US movie studios, games producers and other content creators view China as a huge market for their premium content.

Simultaneously, we are also seeing increased Chinese interest in Western entertainment and media assets, frequently as a means of gaining access to IP (intellectual property) and assets that can be further exploited in China.

Chinese media and related companies are increasingly realizing the importance of global brands as a means to grow their presence internationally and their status at home.

The major influence is always going to be the desire to grow domestic demand, although the slower than expected economic growth in China is almost certainly a factor in the increase we are seeing in investments abroad as well.

A growing number of Chinese companies are looking to gain access to globally recognized content and make it available to Chinese consumers.

As China grows more prosperous, the demand for high-quality content using foreign-owned IP will continue to grow.

One of the key concerns during times such as this, when property developers have significant financial resources available for deployment, is that the licensors of IP might be lured by the opportunity to charge substantial fees.

This could mean selecting a developer that, while currently successful financially, is not going to provide the long-term support necessary for a project to continue to be successful for a sustained period.

Conversely, potential developers, when faced with the prospect of having to pay large upfront fees, are having to make decisions without having the information available to determine whether such fees will cut into the amount that should be held aside for capital expenditure and maintenance.

From the outside, developing location-based entertainment venues and attractions can seem like a glamorous and lucrative industry but as with any investment that has the promise of significant financial rewards, the potential risks are similarly substantial.

For both developers and licensors, an in-depth analysis of the risks of the project, appropriate due diligence of what the parties are bringing to the table and realistic expectations of revenue and expenses are essential.

Combining property development, operations management, intellectual property, financing and numerous other issues, these kind of transactions pose many complex legal challenges for everyone involved.

Ultimately, even the most spectacular venue requires paying guests for the “magic” to become reality.

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Of Counsel, Paul Hastings

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