Imagi: Challenging Pixar from China

Formerly a producer of artificial Christmas trees, the studio aspires to make U.S.-quality animated films in Asia for far lower costs

A year ago, Tim Cheung had one of computer-generated animation's dream jobs—working on the latest installment of Shrek for DreamWorks Animation SKG (DWA). Today, the 35-year-old Texas native works in an old warehouse district in a remote part of Hong Kong, helping film neophytes learns the do's and don'ts of how to make a movie featuring computer animation. "You have people who were coming from jobs in sales, who were engineers, all walks of life," he explains about his staff of 54 animators. "One guy was working at a 7-Eleven."

Hong Kong may be the center of the Chinese film industry, but as the inexperienced staff working under Cheung indicates, the city isn't exactly an animation hotbed. Cheung and other executives from Imagi Animation Studios, a Hong Kong company trying to compete with the likes of DreamWorks and Walt Disney's (DIS) Pixar, are trying to change that. They've been recruiting talented veterans of some of the top Western animation studios, including about a dozen from DreamWorks, to take on leading roles training Imagi's workers how to create computer-animated features.

It's not an easy task. Launched in 2000, Imagi used to be part of a company called Boto International that was once the world's top producer of artificial Christmas trees. In 2002, Boto sold that business to the Carlyle Group and switched the focus of the remaining company to animation. A subsidiary of holding company Imagi International, the new studio produced a short-lived animated sitcom for NBC (GE) in 2004 called Father of the Pride, but the network cancelled the show after just a few months.

Quality Trade-Offs

Since then, Imagi has focused on the big screen. It released its first feature film, an update of kids' favorite Teenage Mutant Ninja Turtles, in March, to mixed reviews. Although it was the No. 1 movie at the U.S. box office the weekend of its release, TMNT lost its audience fairly quickly. The total box office to date is $94 million, the company reports. "The relatively steep decline in TMNT's first month revenue suggests there are some quality trade-offs" to producing in Hong Kong rather than Hollywood, Goldman Sachs (GS) analysts wrote in a research report in April.

That has led to some disappointing performance for Imagi's shares. Before the release of TMNT, investors pushed up the company's stock price on the hope that the movie would be a big success. But once it was clear the film wouldn't be a home run, investors fled. Today, Imagi's shares are down 47% for the year, compared with a 40% increase in the benchmark Hang Seng index. From a high of HK$4.87 in January, the stock has lost 60% of its value.

"There was some irrational exuberance prior to the release," says Douglas Glen, a former vice-president at Mattel (MAT) and Sega who is Imagi's co-chief executive officer and executive director. Still, TMNT "was very successful," he says. "It was only the third Asian film to open No. 1 in the U.S."

Focus on Cost Advantages Now the Imagi team is trying to score a more emphatic win. Late last month, the company announced a new partnership with Warner Bros. and the Weinstein Co. The two Hollywood studios, which financed $27 million out of the $32.5 million production costs of TMNT, agreed to distribute two new Imagi movies that the studio plans on releasing in 2009. Both are adaptations of well-known Japanese anime, or cartoon, characters: the sci-fi ninja Gatchaman and the robot Astro Boy.

Glen says investors who are downbeat on Imagi's chances should focus more on the cost advantages of producing animated films in Asia. Like its big U.S. rivals, Imagi has creative people in Hollywood—writers, directors, and designers—to work on its pictures, but the studio enjoys a cost advantage by having much of the labor-intensive work done in Hong Kong. "We are a Hollywood studio," says Glen. "There's no fundamental difference other than that our wage rates are about one-sixth that of California."

Imagi isn't the only Asian company to try to break into animation big-time. Another Hong Kong company, Centro Digital Pictures, created some of the computer-generated content for Quentin Tarantino's Kill Bill and this year co-produced with Walt Disney an animated feature called The Secret of the Magic Gourd. A tale of a vegetable with special powers, the movie was the first that Disney had co-produced in China.

Hit-or-Miss Business Many people still have their doubts that any local studio can successfully challenge the U.S. animation elite. "Not everybody can be the next Pixar," says David Webb, a prominent investor-rights advocate in Hong Kong who campaigned against the Imagi spinoff. It's a difficult industry. It's very, very hit-or-miss." Webb, who once featured Boto as his stock pick for the year, notes the company is no longer profitable. (Imagi lost $9 million last year on sales of $880,000.) "All the hype over the Turtles didn't come to much," he adds. "They've been loss-making ever since they sold the Christmas trees."

Nonetheless, others are more optimistic. "We believe that Imagi can still achieve solid profits if its future movies generate revenue similar to TMNT," Goldman analysts wrote in their spring report, pointing out that Imagi's $35 million production costs per movie are far less than Pixar's $94 million and DreamWorks' $130 million. Imagi should be able to earn $44 million per movie, according to Goldman.

Sense of Optimism

And more people are joining the Imagi team. On Oct. 9 the company announced the appointment of Ken Tsumura, formerly senior vice-president at Mainframe Entertainment, a computer-animation company based in Vancouver and Los Angeles, to become the new executive vice-president in charge of production. And on Oct. 4, Imagi announced the hiring of Jakob Jensen—who had spent a dozen years working on pictures for DreamWorks and Disney—to be animation director for Astro Boy.

Another of those new hires is Cheung, the former DreamWorks animator who became Imagi's new vice-president for animation over the summer. Cheung says that the atmosphere at the Hong Kong offices is not unlike that of DreamWorks before Shrek first made its mark. Working at Imagi today "is just like DreamWorks eight or ten years ago," he insists.

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