Foreign recording label will use HK arm to gain pioneering 70pc control Warner Music will become the first foreign recording label to establish a majority-owned distribution company on the mainland, taking advantage of the closer economic partnership arrangement. The new venture, Warner Music Shanghai (WMS), will give the United States music label full control over manufacturing and distribution of compact discs for the first time on the mainland, ending its reliance on local distribution partners. Central government approval is due soon. 'The old model was royalty licensing,' said Samuel Chou, who runs Warner's Greater China operations. 'The good thing about that was it's easier. But if you want to take the China market seriously, then it's a problem.' From next year all Warner music discs sold in China will be distributed by WMS, which will be 70 per cent held by the label's Hong Kong arm - Warner Music China (HK). Under the Cepa framework, Hong Kong companies can own up to 70 per cent of a mainland music distributor, compared with just 49 per cent for foreign entities. Warner will hold a 70 per cent stake in WMS, which will open next month with a staff of 20. A local music distribution company will take a minority stake. Warner now licenses local distributors on an album-by-album basis. The distributor manufactures the disc and jacket and sells them to local retail outlets with Warner receiving a percentage of the wholesale price. This process is fraught with risks including under-reporting by distributors in an effort to reduce royalty payments. Other foreign labels own only minority stakes in their mainland distributors, giving them less control over distribution. '[Majority ownership] will solve a lot of problems because you will have a lot more control and you can manage the books better,' said Adam Tseui, the managing director of Sony Music Taiwan. WMS will use its own manufacturing facilities, and working with only one or two national distributors, sell through a network of about 500 retailers. This will allow Warner to watch quality control and sales figures. 'The distribution problem must be solved so that the record company can make enough money to promote domestic artists,' Mr Chou said. 'If you have control and transparency, then you have an incentive to promote [them].' Foreign labels are reluctant to promote in the mainland because of piracy. Success hinges on the efforts of their distributors and the return on investment is typically small. It is more efficient to import albums from Taiwan and Hong Kong whose music idols are already widely recognised. Warner's stable of Mandarin singing stars includes Taiwan-based FIR, the region's top-selling group; Singapore vocalist Stefanie Sun Yan-zi; and mainland stars Pu Shu and Zhou Xu. With the International Federation of the Phonographic Industry estimating that more than 90 per cent of all discs sold on the mainland are pirated, stars there make as much from product endorsements as they do from music sales. Warner sold six million albums in China last year. Because of piracy and modest royalty rates, profit was smaller than from the sale of just 2.2 million albums in Taiwan. 'This is the only way to save the record business in China,' Mr Chou said. 'More and more artists are realising that they need to sell CDs if they are to become big.'