In the past few years, Westerners have exulted in the country's box office boom, which included hefty grosses for major-studio films such as "Iron Man 3," "Pacific Rim" and "The Croods." With the liberalization of access to the market and a greater share of distribution money, Hollywood began to see China as the land of opportunity after decades of feeling thwarted by tight quotas for imported movies.

Yes, the China box ofice is growing, but not for everyone. In the current year, ticket sales for local films increased 144% to $1.12 billion, while imported films saw a 21% slump to $670 million -- despite the relaxing of quotas.

Is Hollywood doing something wrong, or are Chinese filmmakers doing something right? Both, which is why American studios need to quickly rethink their roles and goals.

Some already are.

The company that's made its local partnerships pay off best recently is Village Roadshow, whose Asia offshoot was an investor in the class of 2013's biggest local Chinese hit, Stephen Chow's February release "Journey to the West: Conquering the Demons," which debuted to a staggering $92.5 million (roughly the equivalent of a $300 million opening frame in North America). To compare, "Iron Man 3" saw a $64.5 million opening weekend in China.

The growth of indigenous film is due to three key elements: content, exhibition and marketing. China's filmmakers are shunning such national staples as historical epics, and instead taking a page from the Hollywood script, offering genre films, including horror, thrillers and romantic comedies, all told in a slick and fast-paced style.

And local film companies are looking beyond mega-cities like Shanghai and Beijing, which embrace international movies, instead catering to the nearly 300 third-and fourth-tier cities that accounted for 34% of ticket sales last year and are expected to hit 42% by the end of 2015.

Certainly a degree of the local success is due to China's control of all distribution, including blackout periods in which new Hollywood films cannot be released, and weeks in which studio blockbusters are stacked against each other, limiting their playability. But those who think the surge in the local Chinese film industry is due mainly to such practices are too focused on the increasing scale of the business in China rather than its growing sophistication and diversity.

While Shanghai is home to 27 million people, these "small" cities boast populations in the 1 million to 4 million range. A report this year by EntGroup Consulting cited Panjin as one such fourth-tier; the city, with a population of 1.3 million, generated $4.17 million at the box office, a jump of 867% from a year earlier. These cities are not especially enamored of Hollywood movies; their citizens' tastes lean toward films that feature China TV stars, for example.

SEE ALSO: China: Hollywood Studios Still Face Headaches

In addition, China's marketing is tapping into the country's digital growth, which some in Hollywood have underestimated.

"The U.S. studios are too big and slow. They have not yet understood that the Internet in China is bigger than the film industry," says producer Zhang Zhao, whose Le Vision Pictures scored two of the year's big hits with "Tiny Times" and its sequel. "Maybe China can now make a meaningful contribution to world cinema (in offering) a new business model."

When pictures like "Tiny Times" and "Lost in Thailand" can earn their backers 500% returns on investment, Chinese studios and filmmakers are well incentivized to continue their focus on their domestic market.

And foreign backers are perhaps well advised to join them.

Though Hollywood's business model in China is relatively new, it may be behind the times. In a market as big, fast-changing and idiosyncratic as China's, studios may find it difficult to remain as outsiders who export products and rely on third-party companies to handle their marketing and distribution.