How China Won the Keys to Disney’s Magic Kingdom

SHANGHAI — Disney had pushed China too hard, putting the company’s plans for a new theme park here in limbo. Now, Robert A. Iger wanted to kick the yearslong negotiations into high gear.

Mr. Iger, Disney’s chief executive, took a corporate jet to Shanghai in February 2008 to meet with the city’s new Communist Party boss, Yu Zhengsheng. Over dinner at a state guesthouse, Mr. Iger offered a more conciliatory approach, setting the tone for the next phase of talks.

After that, Disney substantially dialed back its demands. In addition to handing over a large piece of the profit, the control-obsessed company would give the government a role in running the park. Disney was also prepared to drop its longstanding insistence on a television channel.

For Disney, such moves were once unthinkable. Giving up on the Disney Channel meant abandoning the company’s proven brand-building strategy. “We’re kidding ourselves if we think we’re going to get everything we want,” Mr. Iger recalled saying at the time.

Mr. Iger’s trip and the new attitude in the talks that followed appeased Chinese officials. Before long, they had struck a landmark deal to build the $5.5 billion Shanghai Disney Resort, opening China to a singularly American brand and setting the pace for multinational companies to do business in the country.

The Shanghai park, which opens on Thursday, has become mission critical for Disney as it faces business pressures in other areas like cable. It is designed to be a machine in China for the Disney brand, with a manicured Magic Kingdom-style park, “Toy Story”-themed hotel and Mickey Avenue shopping arcade. More than 330 million people live within a three-hour drive or train ride, and Disney is bent on turning them into lifelong consumers.

But Disney is sharing the keys to the Magic Kingdom with the Communist Party. While that partnership has made it easier to get things done in China, it has also given the government influence over everything from the price of admission to the types of rides at the park.

From the outset, Disney has catered to Chinese officials, who had to approve the park’s roster of rides and who were especially keen to have a large-scale park that would appeal to adults as well as children. The Shanghai resort, which will ultimately be four times as big as Disneyland, has a supersize castle, a longer parade than any of the other five Disney resorts around the world, and a vast central garden aimed at older visitors.


Visitors peeked through the park gates in the run-up to the opening. CreditLam Yik Fei for The New York Times

Worried that importing classic rides would reek of cultural imperialism, Disney left out stalwarts such as Space Mountain, the Jungle Cruise and It’s a Small World. Instead, 80 percent of the Shanghai rides, like the “Tron” lightcycle roller coaster, are unique, a move that pleased executives at the company’s Chinese partner, the state-owned Shanghai Shendi Group, who made multiple trips to Disney headquarters in California to hash out blueprint details.

Disney then ran with the idea, infusing the park with Chinese elements. The Shanghai resort’s signature restaurant, the Wandering Moon Teahouse has rooms designed to represent different areas of the country. The restaurant is billed as honoring the “restless, creative spirit” of Chinese poets.

Such accommodation is becoming increasingly common. A growing number of multinationals have agreed to cooperate with the Chinese state through alliances, joint ventures or partnerships, all in the hopes of garnering more favorable treatment and gaining access to the world’s second-largest economy, after the United States.

And they are doing so at a time when the Chinese government isgrowing more assertive and nationalistic. Emboldened by the size and breadth of its economy, China is stepping up its demands, pressuring companies to lower their prices, hand over proprietary technology and help advance the country’s development goals, even if that means financing the growth of local rivals.

IBM has promised to share technology with China. LinkedIn has agreedto censor content inside the country. Even Google has been scrounging for a way back into China, after withdrawing in 2010 in the face of accusations of government censorship and intrusions by state-backed hackers.

“This is part of the China trade-off,” said Aswath Damodaran, a professor of finance at the Stern School of Business at New York University. “If your market is so big, we’ll accept rules and regulations we wouldn’t in other parts of the world.”

For Disney, if all goes as planned, the Shanghai park will create an ecosystem of demand in China for movies, toys, clothes, video games, books and TV programs. Mr. Iger has called Shanghai the “greatest opportunity the company has had since Walt Disney himself bought land in Central Florida” in the 1960s.

That site, of course, became Walt Disney World, a group of four theme parks that attracts roughly 40 million visitors annually. About 11 million visitors are expected next year at the Shanghai park, with annual attendance estimated to reach 20 million within a few years, according to Jessica Reif Cohen, an analyst at Bank of America Merrill Lynch.

If all doesn’t go as planned, Disney will suffer the wrath of Wall Street, which expects the resort to offset slower growth at ESPN, the company’s longtime profit engine, and some of its other theme parks. The last thing Disney wants is another Disneyland Paris, a money pit that suffered from cultural miscues and, after 24 years, is still struggling to turn a profit. Hong Kong Disneyland, which is relatively small, has had mixed financial results since opening in 2005.

While he delegated certain duties to lieutenants, Mr. Iger has been the guiding force. He pre-tasted the food, which will include items like pork knuckles and Donald Duck-shaped waffles, and decided which characters would appear in the parade. He has held face-to-face talks with Chinese presidents, prime ministers and propaganda officials.

Mr. Iger, 65, has sought a personal relationship with China’s paramount leader, President Xi Jinping. After Mr. Iger learned that Mr. Xi’s father, Xi Zhongxun, a revolutionary leader, had visited Disneyland in 1980, he pressed his staff to find a photograph. A color photograph shows the president’s father, who died in 2002, wearing a Mao suit, shaking hands with Mickey Mouse. Mr. Iger presented it to the Chinese leader as a gift and a symbol of their partnership.

When Mr. Xi stopped in Seattle last September, Mr. Iger was among the American executives on hand to welcome him. At the White House state dinner a few days later, Mr. Iger was seated at Mr. Xi’s table. Just last month, Mr. Iger flew to Beijing to meet the president at the Communist Party’s leadership compound.

“It’s good to see the fruits of efforts over the years,” a smiling Mr. Xi told Mr. Iger at a public meeting between the men at the Great Hall of the People in early May. “And I believe the new cooperation will continue to yield new outcomes.”

Mickey in the Land of Mao

It may be all smiles now, but Mickey Mouse knows all too well what can happen when the Middle Kingdom gets mad.

The year was 1997, and Disney had finally found a bit of success in China. “The Dragon Club,” a Disney cartoon series, was popular in Chinese homes, and “The Lion King” had given Disney its first big hit in Chinese cinemas. But then came “Kundun.”

As part of a now-defunct effort to make films for more sophisticated audiences, Disney agreed to back the director Martin Scorsese, who wanted to make “Kundun,” about China’s oppression of the Dalai Lama, the Tibetan spiritual leader. The Chinese government, which considers the Dalai Lama a separatist, denounced the project and pressured Disney to abandon it.

In the end, Disney decided that it could not let an overseas government influence its decision to distribute a movie in the United States. “Kundun” was released, and China retaliated by banning Disney films and pulling “The Dragon Club.”

“All of our business in China stopped overnight,” Disney’s chief executive at the time, Michael D. Eisner, recalled.

Although “Snow White and the Seven Dwarfs” was screened in Shanghai in the 1930s, Disney really had no measurable business in China until decades later, when Mr. Eisner secured Sunday evening placement for Mickey Mouse and Donald Duck cartoons on the country’s biggest state-run broadcaster. That led to Mickey’s Corner kiosks that sold consumer goods like Minnie Mouse-branded shampoo, and to more television shows.

By the time of the “Kundun” debacle, the demand was clearly there. Mr. Eisner just needed to undo the damage.

Disney hired former Secretary of State Henry Kissinger and mounted an intense lobbying effort. In October 1998, Mr. Eisner met Zhu Rongji, who had just been named prime minister, at China’s leadership compound in Beijing. Mr. Eisner apologized for “Kundun,” calling it a “stupid mistake,” according to a transcript of the meeting.

“This film was a form of insult to our friends, but other than journalists, very few people in the world ever saw it,” Mr. Eisner said during the meeting. (“Kundun” bombed, taking in just $5.7 million against a production budget of about $30 million.)

Mr. Eisner said the company had learned a lesson. And he introduced Mr. Iger, then Disney’s international president, as the person who would carry on negotiations for a theme park. The Chinese prime minister responded favorably. Land in Shanghai, he said, had already been set aside.

And just like that, the door to China started to reopen.

The negotiations that followed were slow and painful. Disney had to navigate a thicket of agencies, bureaucrats and officials. At one point, Disney essentially had to start over in Shanghai, after a senior Chinese official was abruptly arrested on corruption charges unrelated to the park.

There were sticking points large and small. Who would control the park? What kind of transportation infrastructure would support it? How were Disney’s nightly fireworks shows going to work in smoggy Shanghai? There was also the not-so-minor matter of introducing Disney characters to a country whose icon, since the Communists took power in 1949, was Mao.

“Disney had to educate the Chinese government on how they operate, and the government wanted to persuade Disney that they needed a local partner to make this thing work,” said Tang Jun, one of Mr. Iger’s former lieutenants in China.

One Bed, Different Dreams

When the Communist Party first invited overseas companies into the country in 1979, global businesses had to team up with the state. It wasn’t pretty.

As commercial interests clashed with socialist principles, there were wage disputes, allegations of intellectual property theft and conflicts over corporate strategy. To put it in the parlance of a Chinese proverb, it was like two people sleeping in the “same bed, dreaming different dreams.”

Pepsi found itself managing a tanning factory, as part of its Chinese partnership. McDonnell Douglas claimed that some machine tools had been diverted to a factory that made missiles, in violation of United States rules. The American and Chinese partners in Beijing Jeep disagreed over quality control.

“I now tell people, ‘If you don’t have to do a joint venture, don’t,’” said Don St. Pierre Sr., an American businessman who worked for Beijing Jeep.


A housing complex near Shanghai Disneyland that houses residents whose homes were demolished during the resort’s construction. CreditLam Yik Fei for The New York Times

After the blowups, China started to allow some companies to go it alone. But Disney didn’t have a choice. The Communist Party maintains strict control over media companies.

The partnership has significant perks for Disney. State-run construction companies cleared a 1,700-acre tract to build the resort, which will ultimately include two additional Disney theme parks and thousands of Disney hotel rooms, analysts say. Authorities have relocated residents, moved graves and closed more than 150 polluting factories. The government built new infrastructure, including a subway line that goes directly to the park’s front gate.

Officials have also taken unusual steps to protect Disney from piracy in China, a country where copyright infringement is common and the government rarely intervenes. Whether the state can stand by that pledge is uncertain. But early signs are promising. Last November, regulators fined five copycat Disney hotels located near the theme park. Around the same time, nearly 2,000 counterfeit Disney items, including hundreds of Winnie-the-Pooh shirts, were seized in Hangzhou. The government is even sending regulators to Disney for special training to help them better identify counterfeits.

The partnership is “structured so that it will work,” said Mr. Iger. “They have a tremendous amount riding on it.”

But Disney is stepping into a potential minefield. State leaders are growing more confident about exerting influence over multinationals. The government is pushing to upgrade China’s economy, and it wants state-owned companies to learn from partners like Disney while amassing a large share of the profits.

Along with its stake in the park, Shendi stands to make a fortune from a 4,000-acre plot of land that it controls around the resort. In other locales, Disney has typically maintained a firm grip on the immediately adjacent real estate. Shendi wants to use such land for hotels, spas and retail, like its new Shanghai Village, a 590,000-square-foot outlet mall, with luxury shops selling Armani, Kate Spade, Juicy Couture and other brands.

The Shanghai government sees Disney as just one piece of a broader effort to redevelop Pudong, the city’s easternmost region, by creating industrial parks and tourist destinations. Just 30 miles southeast of Disney’s site, the government has promoted Winterland, which bills itself as the world’s largest indoor ski resort and entertainment facility. Nearby, Haichang Polar Ocean World promises “performances” by beluga whales, dolphins, polar bears and arctic wolves.

“China wants Shanghai to be this kind of dragon’s head, a showcase city for all the world to see,” said Robert Lawrence Kuhn, an American businessman who has worked with the Shanghai government. “Disney is part of that grand strategy.”

The partnership structure puts Disney in a complicated spot. Shendi is really a consortium of four powerful government-owned companies: the Shanghai Radio, Film and Television Development Company; Jin Jiang Hotels; Bailian retail shops; and a property developer, the Lujiazui Group. And each of those companies has separate business ties to Disney’s new resort.


The Chinese government shares in the profits from merchandise sold on the grounds.CreditLam Yik Fei for The New York Times

The Jin Jiang Group has a contract to provide tourism services for the park. The Lujiazui Group helped develop the world’s largest Disney Store. The Shanghai Media Group, a division of the development company, is positioned to capture a big share of the park’s television and advertising budget, since it controls the city’s biggest television stations, as well as major newspapers, magazines and radio properties.

So Disney will have to deal with a bewildering array of state affiliates acting as partners, suppliers and even competitors, making contract negotiations complex and raising thorny conflict-of-interest issues. Shendi, for instance, has set up its own energy company to supply natural gas to the theme park site. And Shanghai Media Group has formed alliances or made investments with Disney competitors like Sony, Warner Bros. and DreamWorks Animation.

“The more partners you have, the more potential conflicts,” said Oded Shenkar, a professor of business at Ohio State University and an authority on Chinese joint ventures.

“Each of those state companies may come with multiple other affiliations,” he added. A multinational must then “contend with a whole network of relationships and interdependencies they often cannot decipher.”

A Master of Control

When Disney unveiled the website for the Shanghai park in March, the fervor was instantaneous. The site registered five million hits in less than half an hour. Tickets for the first two weeks sold out within hours. Over one weekend in early May, with the opening still a month away, more than 100,000 people visited the resort to peek through the park gates and explore a shopping area that doesn’t require a ticket.

But criticism has begun, too. Disney has been pilloried in local mediafor its prices ($1 for a single steamed bun, or about five times the street price). Some initial visitors trampled the public gardens. And Disney has had to deploy uniformed security guards to maintain order at popular rides, where lines during the soft opening stretched up to three hours. Shanghai authorities recently published an etiquette guide.

“The frenzy of Mickey Mouse and Donald Duck and the era of blindly following them have passed,” Wang Jianlin, the chairman of Dalian Wanda Group, which operates a chain of Chinese theme parks, said on state television in May.

media reports about food pricing complaints were overblown. “We made a decision with our quick-service restaurants to go higher-end, and there’s a cost to that,” he said.

Disney needs to avoid getting lost in translation, an especially difficult proposition in China. It is a deeply American brand trying to break into a country where the government wants to suppress Western ideals.


The Broadway version of “The Lion King” will be performed entirely in Mandarin at Shanghai Disney.CreditLam Yik Fei for The New York Times

Already, Shanghai Disneyland is triggering concerns about American cultural imperialism. At a gathering of China’s political leaders in Beijing in March, an official called for limiting Disney’s expansion and growth.

“I suggest that we shouldn’t allow too many Disneyland theme parks to be built” in China, said Li Xiusong, the deputy head of culture in the eastern Anhui Province. “If children follow Western culture when they are little, they will end up liking Western culture when they grow up and be uninterested in Chinese culture.”

The country’s leaders have also grown more nationalistic in recent years: Everything must serve the state’s interest. The Communist Party is using Disney to bolster the country’s own media and entertainment companies, as well as to improve China’s image abroad. And the Chinese government is a master of control, known for strictly censoring Western media. This spring, with little warning or explanation, Chinese regulators shut down Apple’s digital book service and DisneyLife, a four-month-old subscription-based movie streaming service operated by Alibaba.

Disney is going to extraordinary lengths to prove its commitment to China and the Communist Party. During a 2010 meeting with China’s propaganda minister, Mr. Iger pledged to use the company’s global platform to “introduce more about China to the world.” And he has done just that.

Disney is working with China’s Ministry of Culture to help develop the country’s animation industry and has agreed to work with Shanghai Media Group to make films for global audiences. Notably, Disney partnered with the state to produce “Born in China,” a film that promises to “showcase to the world the spectacular wildlife and natural beauty of China,” which a trailer depicts as snuggly baby pandas, snow leopards and lavish aerial shots of pristine mountain ranges.

“When global brands ask me what they need to do to improve their chances in China, I often paraphrase John F. Kennedy: Ask not what China can do for your business, but what your business can do for China,” said John A. Quelch, who teaches at Harvard Business School and has extensive experience in China. “They need to demonstrate that they are willing to promote things the government is interested in.”

Mr. Iger is trying especially to give Shanghai Disney some Chinese flair. He instructed park designers to infuse as many Chinese elements as possible.

Builders collected indigenous trees from all around China, including a 59-foot chestnut oak from Zhejiang province, to adorn the grounds. A “Tarzan” show was directed by Li Xining, an acrobatics expert who once worked for the Chengdu Military Area Command under the People’s Liberation Army. The Broadway version of “The Lion King” will be performed entirely in Mandarin — a first.

Mr. Iger even came up with a new slogan for the Shanghai resort, calling it “authentically Disney and distinctly Chinese.” He repeats the phrase constantly when talking about the site, and Disney executives in Shanghai have posted it around their offices. It is supposed to be a sign of respect for China and its people.

“What are we doing here that will make this park successful in China?” Mr. Iger said at an investor event in May. “One of the critical elements was making it distinctly Chinese, making sure that the people who visit this park feel that it’s theirs.”