Jerry Yu is an American born Chinese man with an MBA who runs a small family chain of businesses in New York. He is faced with a decision to invest in the Chinese fireworks industry. Jerry must assess the attractiveness of the fireworks industry along with the risks involved. Throughout this paper we will analyze the pros and cons of entering the market of Chinese fireworks. In our opinion, Jerry Yu should not invest in the Liuyang fireworks factory. While there are many factors that could give Jerry the opportunity to be successful, the low profit margin and the high instability of the market outweigh the chances of success. The regulations throughout the fireworks industry varies from market to market.
For example, China’s domestic market has deregulated since 2005, while the American market remains regulated. The high competition paired with the low selling prices due to undercutting has caused the profit margin to decrease, especially for new entries. The reason for this is that the established fireworks companies have long term contracts with suppliers, causing Jerry to sell his fireworks at a lower price. Established companies also cause a problem because of their relationships with the raw material suppliers. Due to their longstanding relationships, these companies have a right to supplies before the new entries. This results in the new entries receiving lower quality materials, leading to a worse product and less safe working environment. Even though technology is involved in the production of the fireworks, the cheaper quality materials cause a greater risk of an accident during the manual mixing of powders, which is the most dangerous step.
The risk of an accident is so high that most factories are built in rural areas near a water source with separated departments in case of an explosion. Another factor that should be considered is the environmental hazards of fireworks production and use. With an increase concern for the environment and “going green”, stricter regulations have been put into place. With the new restrictions and concern to avoid pollution, the consumption of and desire for fireworks could eventually fade away. Substitutes have already entered the market that are more environmental friendly. These substitutes include popping of red balloons and laser light shows. Considering all of the risks, along with the entrance of substitutes, we advise that Jerry Yu not invest in the Chinese fireworks industry.
Jerry Yu has many factors to consider involving risk associated with the Chinese fireworks industry; however, there are many advantages in investing that he should not overlook. The Chinese fireworks industry is a highly competitive market. With over 6,000 companies, it is hard to differentiate products. The attractiveness of investing in the industry is that there is easy entry. In Liuyang, there are over 400,000 laborers working in the industry, and this makes for low cost labor and easy access to skilled labor. While the majority of workers in China are not skilled, the residents in Liuyang have gained experience with producing fireworks. Jerry has an opportunity to use this to his advantage. If he can rework the business structure of the company previously run by the village, he can set his factory apart from the average family run and operated businesses.
Jerry Yu must recognize that in 2009, the current market size is $675 million, and if he plays his cards the right way, he can grab a large portion of the market share. In order to do this, his factory should have a competitive advantage. The question is, how can he go about this? We believe that he can achieve this goal by building his factory to be different from all others in the industry and specializing specifically in fireworks instead of firecrackers. Jerry Yu needs to create a niche where he, and only he, has the ability to make the highest quality of fireworks in the world. He must create a marketing strategy that has not been introduced to the current market, and he must hire the most qualified engineers to make the safest and most extraordinary combination of fireworks that exists. In doing so, Jerry has an opportunity to push the technology bubble to a place that fireworks have never been before. Creating a more unique, high quality product that will blow the competition away will give Jerry the ability to set his prices higher than other manufacturers.
Jerry does not need to concentrate his sales upon the low cost average firework sales that sell in bulk, but he must sell a few high quality fireworks that give him a large margin. He needs to stay away from the price competition, and the way he will do this is by creating a niche firework that the world has never seen before. One way that Jerry can set his factory apart from other firework competitors is to embrace the new and changing technologies. Instead of looking at lasers and music as negative competition, he can make an alliance with them. Jerry can team up with a laser light show and a music show to complement the firework display.
Creating a bundle package for the most elite firework show that the world has ever seen is an answer to the niche market that Jerry should pursue. Jerry Yu should also focus on brand advertising and brand awareness, so his brand of fireworks can stand out above the other businesses in the market. He could create a marketing campaign that emphasizes that his fireworks are the best in the world, as well as the safest. A major objective for Jerry Yu should be to aim for a specific, high paying target market. The competition is high in the basic firework industry, and entering this market would result in price gouging; this would be too hard for Jerry to gain market share at this level. He will have to set his product apart from what already exists.
He should guarantee that his fireworks are the safest and highest quality, which can give him the competitive advantage to target high paying customers. For example, Jerry Yu does not need to concentrate his sales to the common buyers. He should aim to get his product to a popular show, such as the Beijing Olympics, or to high paying customers in the United States and Europe where the price is not a huge concern. In ensuring his high paying customers of safety and quality, there will be very few businesses, if any, that can compete with Jerry. While the objective of Jerry Yu should be to aim at a particular market, this goal is not in the best interest of Liuyang Firecrackers and Fireworks Industry Department to go that route. In our opinion, Jerry Yu should advise Liuyang to encourage its citizens to consolidate its family owned businesses into bigger corporations. As of now, one of the only ways to differentiate products is by undercutting other manufacturers’ prices.
The entire industry should focus on a way that each company can pull away from price gouging and work together to make sure the prices stay at a constant medium that will benefit all of the manufacturers. One way businesses could do this is to designate certain types of fireworks and firecrackers to be made by specific manufacturers or areas. In doing so, the designated companies could increase productivity and steer clear of price gouging. After analyzing the circumstances associated with entering the Liuyang fireworks factory, we believe Jerry Yu should not invest his time and money into the market because the risks highly outweigh the benefits. The market is too unpredictable, restricted, and saturated to guarantee a successful investment. If Jerry Yu did take on this investment opportunity, the costs he would endure to improve the company would not be worth it in the long run. With the industry being the way it is, it would be difficult for Jerry Yu to become profitable.
Courtney from Study Moose
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