On November 13, Lucky Film Co. Ltd. (Lucky) issued a report saying that the controller of the company, China Lucky Film Corp., and Eastman Kodak Co. had reached a consensus that Kodak would retreat from Lucky. The cooperation between the two, which aroused immense curiosity in the film industry, ended after four years of experiment.

The partnership was supposed to last 20 years but Kodak suffered sharp losses in this cooperation. Four years ago, Kodak promised to purchase 20 percent of Lucky's stakes for nearly $100 million in cash and a set of equipment. But Lucky stated on November 13 that Kodak would sell all of its Lucky stocks at $37 million.

Tian Geng, Public Relations Manager of Kodak China, said Kodak indeed lost a lot in this transaction. "The reason for the suspension was the market is changing too fast," he said. "Even if the decision means a huge loss, we have to do it."

Picture perfect deal

To ensure its dominant position in the Chinese photography industry, Kodak signed an agreement with many government departments in 1998. This was known as the "98 Agreement," and forged joint ventures with six film imaging companies except for Lucky. In return, the government promised not to allow any other foreign companies to enter the film material industry for three years.

The agreement affirmed Kodak's dominant position in the mainland market and its rival Fujifilm was shut out of China. In 2001, Kodak occupied over 60 percent of the market in China and the country became the second largest market of Kodak globally.

On October 23, 2003, Kodak announced to have beaten out Fujifilm to ink a 20-year-long cooperation agreement with Lucky and has since controlled 20 percent of the Chinese company.

Before the agreement, Fujifilm went through a long series of negotiations with Lucky, insisting that it control 50 percent of Lucky shares and participate in its management. Kodak's final offer of 20 percent undercut the hopes of Fujifilm, and Kodak became the only giant in the Chinese film industry.

Digital downfall

On September 25, 2003, one month before the Kodak-Lucky agreement, Kodak stated that it would transform itself to offer digital products. It is obvious that Kodak had already sensed the growth potential of the digital market, but it couldn't forfeit the huge profits of the traditional film sector.

Ying Yeh, Vice President of Kodak, once described the Chinese film industry like this, "I don't believe tradition means death. It could be the sunset, but the sun will still rise tomorrow." She continued, "Only 20 percent of Chinese households own a camera. For the 80 percent who don't, I don't think they will use digital cameras right away." At that time, Yeh believed that emerging markets in the Middle East, Africa and Southeast Asia would support the traditional film industry, and this became a common development goal of both Kodak and Lucky.

To her great surprise, the digital wind blew so strong that traditional filming technology was soon forgotten. In four years, people started to use digital cameras even in small and medium-sized cities. Moreover, Kodak's rivals became Nikon and Cannon instead of Fujifilm.

"We knew there was going to be a storm, but it came too soon and too strong," Yeh said four years later. "It was unexpected."

But Yeh did not regret the agreement signed four years ago. "In retrospect, the ‘98 Agreement' left Kodak with an excellent team, distribution channels and brand recognition," Yeh said. "More importantly, it brought Kodak five to seven years of glory. Today's platform is actually built on the achievements Kodak made in the past few years."

Lucky runs out

As a matter of fact, retreating from Lucky is in line with Kodak's global effort of transforming to digital products. Since 2003, Kodak has sold off irrelevant parts of its operations and stopped injecting money into the non-digital sector. Now a burden, Lucky couldn't live up to its name.

There were also other reasons for the suspension of cooperation. "When we signed the agreement, the shares of a company on the Chinese yuan-denominated A-share market could not be traded totally," Tian said. "The 20-percent stake was agreed under the prerequisite of the non-tradable share system."

However, shortly after the purchase of the 20 percent stake, China started a reform to convert non-tradable state shares into ordinary ones. Lucky's reform was delayed once and again. Lucky explained that this was because its cooperation project with Kodak hadn't been completed yet and that share structure reform must be put off.

"Ending the agreement also shows Kodak's respect to the stock conversion reform in China, and Kodak is willing to sacrifice," said Tian.

Tian Geng said Lucky's parent company will inject money into finishing the stock conversion reform, while Kodak will be able to control its business more freely. The two companies retain cooperation in three areas. Lucky will be allowed to use Kodak patents, Kodak will provide raw materials to Lucky, and Kodak will help maintain the assembly line.

Changing times

The film industry is now a sunset industry. Major film companies except for Kodak and Fujifilm had all gone through a metamorphosis. In 2005, AGFA, a 100-year old Belgium film company, declared bankruptcy. One year later, Nikon stopped producing many types of film cameras. Konica Minolta stated later that it would stop producing all kinds of film cameras and film.

Lucky has also been confronted with pressure to transform. Its half-year report said the traditional imaging material business continued to shrink amid huge challenges from digital products and the color film market suffered huge losses. Meanwhile, the report said 80 percent of its net profit came from investment. The gross profit of color imaging material business dropped 1.43 percent compared with the first sixth months last year.

On November 13, Kodak agreed to sell its Lucky shares to Guangzhou Chengxin Venture Investment Co. (Chengxin Venture), putting an end to the four-year long cooperation between Lucky and Kodak.

"China Lucky Film Corp. chose to introduce the third party investor instead of repurchase by the parent company," said Yin Zhongyu, analyst with Shanghai Longrange M&A Consulting. "It demonstrated the company's determination to give the shareholder structure more variety." Yin said that if Lucky's shares were counted on 12 yuan per share in the stock market, Chengxin Venture would have to pay over 800 million yuan ($108 million) for the 20 percent stake. Instead, the company only spent $37 million.

Chengxin Venture said it hoped to help Lucky optimize the current shareholder structure and promote the development of its nationwide industry.