Although the Philippines and South Korea have historically been the countries of choice for offshore animation services, with a softer kids entertainment market forcing producers to shave even more off already-slim production budgets, China’s low-cost workforce and strong infrastructure have made it an increasingly popular center of production.

When U.K.-based Telemagination was looking for an Asian service outfit to deliver its shows at a lower cost, the obvious choice for studio head Beth Parker was China. Not only does the region deliver quality shows for 15% less than South Korean studios, the language barrier is not as problematic. ‘A lot more Chinese people speak English, so it’s easier to get the point across,’ she says. In addition, whereas Korean studios close after 6 p.m. (when it’s still early morning in Europe), Chinese studios tend to work well into the evening, making it easier for Parker and her team to contact their partners during their day.

‘Our experience with the Chinese is much better than other Asian studios,’ sums up Parker, who has been sending work to Asia for six years. Telemagination has contracted jobs to South Korea’s Hanho and currently works with Pasi in the Philippines on feature films. To date, the studio has serviced three series out of China, including Pongwiffy, a 26 x 13-minute series animated by Hong Kong-based Agogo Entertainment, which operates four studios within China. Other Chinese studios Telemagination has worked with include SMEC Media and Entertainment Corporation.

Telemagination is not the only Western company focusing on the region. Studios such as L.A.-based PorchLight Entertainment and Paris, France’s Antefilms Production are just as enthusiastic about working with Chinese partners. While South Korea and the Philippines are still the place to go for feature-quality animation, as far as the service industry goes, China’s red star is rising. And although cheap service work is the initial reason most companies are venturing into the region, they’re staying for the chance to establish their brands in the world’s biggest TV market.

There are signs that China is opening up to allow private toon houses to compete with the dominant state-run animation firms, and this will pave the way for more co-productions and merchandising opportunities. The government is also permitting more foreign investment in production companies – a development that will change the way the TV business is conducted in Asia.

For years, China’s central government has held foreign animation companies at bay. In February 2000, it kicked Turner’s Cartoon Network off the airwaves in a fit of pique over unfavorable news reports that aired on its sister station CNN. It also forced broadcasters to cover logos on foreign-produced cartoons.

But worried about the lack of good children’s programming in its burgeoning TV universe, Beijing’s State Administration of Radio, Film and Television (SARFT) announced in August that it will create three new national kidnets and at least 60 provincial and city-level stations devoted to children’s programming by the end of 2006. These channels are in addition to a children’s network launched by the public broadcaster China Central Television (CCTV) last year. The government has also asked provincial TV stations to carry 30 minutes of kids programming each day.

The authorities are offering financial incentives like increased advertising time during prime time to broadcasters that screen more cartoons, as well as letting foreign companies buy minority stakes in Chinese television production companies to fund more kids shows.

Despite these perks, it’s anticipated that of the 60,000 new minutes of kids programming needed to fill the schedules of the new channels, Chinese companies will only be able to produce 20,000, leaving a gap of 40,000 to be filled by foreign content or co-productions. And Hollywood’s heavyweights, who have been quietly waiting in the wings, are already pouncing. In March, Viacom announced plans to co-produce kids programming with the Shanghai Media Group and supply new kidnet CCTV 14 with shows (although the deal hasn’t been approved by SARFT yet). And in July, Disney’s animated series Kim Possible started airing on CCTV 14.

Other animation producers are interested in venturing into the market, particularly now that co-productions are no longer lumped into a 30% foreign import threshold imposed on broadcasters by SARFT.

When PorchLight was looking to secure its first Chinese service deal in the late ’90s, the company turned to the Shanghai outpost of Taiwan’s Hong Ying Universe to work on its Jetcat shorts for Nickelodeon’s Kablam! series. The experience was so satisfying that the company extended the deal to include a one-hour special called The Haunted Pumpkin of Sleepy Hollow, which first aired on HBO Family and has also now been sold to Cartoon Network US.

But when PorchLight was ready to outsource work on its longer-format toon series Four Eyes (26 x 30 minutes), the company went with Agogo because it’s better equipped to handle volume. The 14-year-old studio, which used to be called Animation Enterprises Hong Kong, has a 600-plus labor force in four different cities across China. Having churned out 318 half hours in 2003, Agogo ranks as one of Asia’s top service studios. And it’s now attempting to position itself as a co-producer rather than a service partner, reducing the fees it charges clients in exchange for rights in the Chinese market.

Agogo tried out this new model on Tomato Twins, a 2003 co-pro with Singapore-based Peach Blossom for Nickelodeon Asia. Catherine Lam, Agogo’s former head of business development, says the company is also developing a 26 x 24-minute series called Straight Football with Paris-based Tele Images Kids and an undisclosed Italian partner in anticipation of the 2006 World Cup.

‘I think what’s happening is that the broadcast marketplace is opening up, and the demand and interest from outside and inside China is more vibrant,’ says PorchLight COO Bill Baumann. His company is already benefiting from the new hunger for children’s programming in China. PorchLight has licensed Jay Jay the Jet Plane to CCTV and tapped Brian Zheng’s Playhut, which has offices in Los Angeles and Guangzhou, as its licensing and home video agent in China. Although Baumann wouldn’t discuss the size of TV license fee he received for the 80 x 12-minute series, he says any profits to be made in China will have to come from merchandising. And that’s a lesson Chinese animation companies have already learned the hard way.

Even the most famous cartoon in China – the largest television market in the world – cannot make money from TV alone. 3,000 Questions for Blue Cat and the Naughty Mouse, a four-year-old educational series featuring a blue cat and his animal friends learning lessons in English, computers and history, has spawned 3,000 12-minute animated episodes to date. But it can’t shake enough Chinese yuan out of local broadcasters to pay for its actual production costs of about US$1,800 per minute. Nor can it sell advertising space during its various late-afternoon time slots because Chinese marketers aren’t interested in that airspace.

So Blue Cat’s production company, Beijing-based Sunchime Film Studio Development Corporation, has taken an unusual road to profitability in Communist China – it’s using its unsold advertising slots to promote its own merchandise. The company has turned a US$604,000 profit by selling character-branded products such as dolls, comics, stationery, bags and apparel in its 2,400 shops across the country.

Even the production arm of the Shanghai Animation Film Studio is hoping to recover the production costs of its new 52 x 22-minute series project Bravo Dong Dong (budgeted at US$600 per minute) by building the brand over the course of a couple years and selling licensed merch.

Herein lies the rub in China: Demand for children’s programming is greater than ever before, but domestic license fees amount to almost nothing. China’s top two animation companies – an arm of the State-owned CCTV national network and Shanghai Animation Film Studio – pump out roughly 7,000 minutes of fully funded programs each year. But that covers only a fraction of the need in China, according to Fu Tiezheng, vice director of the China TV Artists Association’s Cartoon Arts Committee. ‘Either the government has to subsidize more private companies…or set up a minimum price that TV stations must pay for children’s programming,’ he says.

Behind the scenes, most privately owned producers are furiously wheeling and dealing to get their shows on-air. The state-run broadcaster in Beijing pays about US$120 a minute, and top provincial TV stations pay as little as US$6 to US$9. Most local broadcasters don’t even offer a license fee, bartering advertising time instead. To add insult to injury, indies are further hampered by the fact that public broadcaster CCTV gives preferential treatment to its in-house animation studio, says Zhu Huaxin, GM of Beijing Touch Comic Co., which operates a website on China’s animation industry. Chinese broadcasters are still very conservative, he adds, emphasizing education over entertainment and targeting kids younger than 15.

Co-productions, merchandising and service deals are the only salvation for domestic prodcos. ‘It’s unrealistic to expect Chinese television to raise the price of programming fees automatically, and it’s unlikely that the government will issue regulations to establish a minimum price,’ says Zhang Guoqiang, GM of Shanghai Animation Film Studio. Even his state-sponsored enterprise had to enter into a co-production arrangement with Korea’s Sunwoo Entertainment to get its US$3.6-million pet project Space Hiphop Duck (26 x 22 minutes) off the ground. An environmental protection series targeting nine-year-olds that’s destined for CCTV and KBS in Korea, Space Hiphop Duck is the first animated series China and South Korea have ever developed together. (Political opposition has traditionally kept them apart.)

But even if a low Chinese license fee isn’t a co-production hurdle, finding a story that can satisfy both Chinese and Western audiences certainly is. The Chinese government bans ghost stories and violence – two very popular genres in kids TV. Companies have to be creative to find themes that appeal across cultural lines. Eric Shu, owner of Shanghai-based Hosem Studio, is taking the tried-and-true approach by developing a martial arts-inspired feature film called Lee Raise Her Hand with French artist David Encinas. ‘The Chinese government needs some animation heroes, so they mine Chinese historical stories based around kung-fu,’ says Shu, whose 200-plus personnel is also doing service work on Funky Cops for Antefilms. While kung-fu concepts are always sure to attract audiences from both East and West, GDC Entertainment is tapping another Chinese icon that melts hearts everywhere: the cuddly panda bear.

The Shenzhen-based shop, which specializes in CGI, is co-producing Panshel’s World with France’s Product and Partner Multimedia. GDC will own the Chinese copyright to the 52 x 10-minute series, which is about winged pandas who live in a fairyland world. Another project on its boards is the US$3-million CGI feature Thru the Moebius Strip, which GDC is personally financing after listing on the GEM stock exchange of Hong Kong in August 2003, as well as on the Regulated Unofficial markets of Frankfurt, Berlin and Munich Stock Exchanges. GDC has also entered into a co-production agreement with L.A.’s Enteraktion Studios for three more CGI films that will be scripted and co-directed by Phil Roman (founder of Film Roman) and Tom Walsh. The total package is worth US$60 million, according to GDC manager Xu Ling.

‘The competition for CGI work is not intensive on the mainland, and the cost here is only one-eighth of that in the U.S.,’ says Xu. The downside of film work, of course, is China’s thriving black market. Not only are copycat DVDs and videos churned out at an alarming rate, but clothes, dolls and other popular merchandise is also pirated. Sunchime has discovered pirated disks of its Blue Cat series in 21 different provinces. ‘According to our research, there are more than 7,000 different pirated animation DVDs on the market,’ says Zhu of Beijing Touch Comic Co. ‘One can easily imagine how large the market could be without these pirated DVDs.’

With so many hurdles on the domestic front, the service industry remains Chinese animators’ bread-and-butter. Studios such as Hong Ying churn out as many as 150 22-minute 2-D animated episodes a year for big-name clients such as Nelvana and DIC Entertainment. To remain competitive as new service outfits in India and North Korea enter the global marketplace, companies such as Hong Ying and Hosem are opening studios outside the main Chinese cities and training inbetweeners to fill in character motion under the guidance of a chief artist. Despite this new domestic diversification, Hosem’s Shu warns that foreigners should seek out larger studios with 100-plus staff and a track record. ‘Most small studios just do local projects and don’t understand Western style,’ he says.

Indeed, there are already enough creative difficulties to working with the established service shops, says Telemagination’s Parker. Everything sent to these studios in terms of layout and character design has to be ‘spot-on.’ There won’t be any extra acting – animators will often intuitively inject some personality into characters, but one can’t expect these flavorings from Chinese animators. And cultural disconnect does sometimes seep through in the animation. For example, production staff in China find it difficult to make characters strike Western postures because Chinese body language is more subtle.

Anthropomorphism is also a challenging proposition. Telemagination lost money when it had to reanimate a cat sidekick in Pongwiffy. Looking at the animation, it was clear that the Chinese animators didn’t like cats, says Parker. The walk was not feline and flowing, and the tail did not move at all. ‘It was almost as if they’d never seen a cat move.’ (Indeed, after the 1949 Chinese Communist Revolution, Mao banned the ownership of dogs as pets, labeling them, and cats by extension, as dirty.) So the company parachuted in a British expert to animate a walk cycle. There are some cultural divides that just can’t be crossed.

With files from Jin Yuejue in Shanghai