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The Chinese fireworks industry thrived the late 1970s, and grew to make up 90 % of the world’s fireworks export sales. However, starting from the mid-1990s, safety concerns led governments both in China and abroad to set up stricter regulations. At the same time, there was rapid growth in the number of small family-run fireworks workshops, whose relentless price-cutting drove down profit margins. . Jerry Yu is an American-born Chinese in New York who has been invited to invest fireworks factory in Liuyang, Hunan.
The industry analysis, estimating the industry attractiveness, and proposing possible ways to improve the industry attractiveness from an individual investor’s point of view, has been presented in this report. Other investment options are introduced for the investor in this report. Introduction
Situated in the Hunan province of China, Liuyang has a greater concentration of fireworks manufacturers than anywhere else in the world. Liuyang currently produces about 65% of the world`s fireworks. In fact it has over 1,000 factories in Liuyang each specializing in a specific product, thus there are factories making only sparklers, only firecrackers, etc.
To support these factories, Liuyang also has related manufacturing such as chemical processing, paper mills, fuse factories, printing factories.
It also has a highly skilled fireworks workforce. These factors make Liuyang the most economical place to manufacture fireworks. Furthermore, the support of the local government makes Liuyang a fireworks friendly environment. Liuyang has been producing fireworks for more than 1300 years. The earliest fireworks were produced in the Tang Dynasty (618-907), and Chinese fireworks manufacturing began to flourish during the Song Dynasty.
During the Yongzheng reign of the Qing Dynasty (1644 -1911), Liuyang was honored to be the official supplier of fireworks to the royal families. After 1949 government- run factories replaced the family- owned workshops. Since 1979 legal restrictions, local protectionism, aggressive price competition, hard to penetrate distribution channels have limited the domestic sales of Liuyang fireworks. The Chinese fireworks industry thrived after China adopted the open door policy in the late 1970s, and grew to make up 90% of the world`s fireworks export sales.
Chinese companies began to export fireworks to more than 20 countries and regions. Today, Chinese fireworks are amongst the best in the world and the quality and variety of the pyrotechnics. But on the other hand, the Chinese fireworks industry also has weaknesses. Indeed, the fireworks industry in general is unstable. In terms of quality, packaging and timing devices. There are problems with distribution channels in which it is hard for companies to penetrate established chain of delivery. The most common form of factory in Chinese fireworks industry is the family-run workshop which is poorly funded and lacks R&D capital, and managerial input.
The competition is intensified bythe emergence of a huge amount of small companies. The abundance of small, flexible, competitive shops has created a climate of intense commercial rivalry. It is common that certain companies copy any popular product design and sell it for much less prices than government-owned or some collectively-owned factories, which results in price drop, and this fact has become a serious problem for the whole industry. Furthermore, foreign competitors also threaten the Chinese fireworks industry. Therefore, whether to invest in this industry is still a challenge to most investors.
The objective of this report is to advise the investor on his decision to invest to a Liuyang fireworks industry or consider other alternatives. Proposals on how to improve the attractiveness and the competitiveness of Chinese fireworks industry at a long-run level are presented. To achieve this objective, an industry analysis is carried out, using Evironmental analysis and Porter`s Five-Force model analysis, and a gross conclusions are drawn based on the analyses and suggestions. The Environmental analysis describes a framework of macro-environmental factors.
The model’s factors vary in importance to a given company based on its industry. Porter’s five forces model aims to examine the competitive status of an industry. According to this model, the nature of the competition that determines industry structure is personified in the following five forces: bargaining power of suppliers, bargaining power of buyers, threat of new entrants, threat of substitute products or services, and rivalry among common competitors. These five forces are very significant for strategy formulation of a company can succeed. Industry Analysis
Each industry is different, and to be able to provide the necessary information for the investor the analysis of the industry environment and Five- Forces analysis on the state of the market of Chinese fireworks will be completed.
Before creating business plans or making decisions, it is important to ‘scan’ the external environment. This can be achieved through an Environmental analysis, which is an investigation of the demographic, political, economic, social and technological influences on an industry. It is a tool to identify changes in a business environment that can create great opportunities for the fireworks industry – and cause significant threats.
China’s population growth rate is only 0.47% and the population of Liuyang is estimated of 1,278,928 by 2010. The Chinese domestic market is expanding and has potential to grow. Despite the fact that the market is faced with a number of the legal restrictions, a very intense price competition, local protectionism and difficulties to penetrate distribution channels there are still a number of opportunities to succeed in the fireworks industry.
The foreign direct investment has opened up in China lately. Considering a global population growth rate of around 1.14% per year and a number of baby booms worldwide, an international market has a big potential to expand. Economic factors
Heavy competition in the market is faced with reduced prices and profit margins affecting the whole industry. There has been an increase in level of income, better and increased job opportunities to the workforce in emerging markets. This is good for the industry with increased demand, but it is a disadvantage when skilled workers are lost to a different industry. The industry will be faced with constant increasing cost of labor and raw materials. Technological
There is not much technological innovation in Fireworks production process or new kinds of innovations in the industry. The raw materials basically remained the same. Although machines could now complete some manual processes, the process technology also basically remained the same. The R&D investments have been low when compared to variation in manufacturing, mixing and process improvements.
This led to some concerns over quality issues. Initially there was not much R&D, so in response the government began initiatives aimed at upgrading the traditional fireworks industry. There were new technological competitors that were being developed. On the positive side, the internet has become a large means of procuring fireworks for foreign customers. Socio Cultural factors
The green-house gases emitted globally are on the rise affecting our environment every day. Lately, there is greater concern and consciousness towards the environment. The industry will have to deal with this due to environmental impacts. Due to advanced technology and other improvements, there are many other alternative options. Lately there are many other outdoor activities such as laser shows with music and water fountains with music. However, the demand and usage of fireworks along with these is still dominant. All over the world, there is a safety concern for either display or consumption of fireworks. Political / Legal factors
There are both advantageous and disadvantageous aspects. One disadvantage is the safety issues associated with fireworks that resulted in them being heavily regulated in most countries. This industry is still highly regulated in most countries due to the nature of this product. Regulation exists at all stages right from manufacturing, distribution and consumption phase. Maximum impact to safety is during production process and quality of raw materials used.
Industry faced with ever increasing environmental impact and concerns globally. Another disadvantage is that there is no pricing regulation. The legal system is not strong enough in China to enforce protection of intellectual property rights, copying of brand, identity and duplicates. One advantage, however, is the offensive strategy applied in 1997, which resulted in many legal restrictions being lifted. One in particular that was eased was foreign direct investment.
Fireworks are manufactured not only in China, but in many other south East Asian countries. Globally emerging markets and developed markets are the primary importers of fireworks and the demand has been steadily increasing. Increased use of fireworks across nations traditionally has been during their major holidays such as Chinese New Year, July 4th in US, etc. There is also evidence of additional consumption in developed and emerging markets. Demographic Trends
China’s population growth rate is 0.47%
World`s population growth rate is 1.14%
Environmentally conscious society
Fireworks are a huge tradition in China
Due to heavy competition, the market is faced with reduced prices Industry with increased demand
Workers are lost to a different industry
The industry faces with constant increase in cost of labor and raw materials. Demand of domestic market is declining
Export sales are rising
Highly regulated industry:
No protection for:
-intellectual property rights
-copying of brand
Low R&D investment
New kinds of innovations in industry
Global Trade Issues
Globally emerging markets
Steadily increasing demand
-New Year celebration
-major celebrations as Olympics etc.
Fireworks is manufactured in many other south East Asian countries and Europe
Bargaining Power of Suppliers
The bargaining power of suppliers is low because of the large number of suppliers of raw materials available, a limited product differentiation among fireworks products and just variation in the quality. Bargaining Power of Buyers
The bargaining power of buyers is high due to a steadily increasing demand for fireworks both domestically and internationally and very low switching costs. The customers in fireworks and firecrackers market can be divided into individuals and business units such as government institutions, private associations or general companies. Every country has different regulations about manufacturing, selling and using fireworks and firecrackers. Because more and more countries prohibit the public launching fireworks and firecrackers, the individuals market declined dramatically.
In the contrast, the business units market went up because in the display fireworks market, the buyers were often central and local governments who purchase product for public shows on national holidays or special celebrations. The foreign buyers have a high power due to the high demand in international market. Besides, foreign buyers are very well-informed and dealing usually directly with the factories, which results in high power as well. Threat of New Entrants
The threat for new entrants is high. The opportunity for potential entrants is high due to the fact that the capital requirement for establishing a fireworks factory is very low. The economy of scale is high and the brand identification within this industry is relatively low. Furthermore, there is easy access to a labor force, materials and suppliers plus easy licensing process. All these facts provide very good opportunities for the new companies to enter this industry. Threat of Substitute Products or Services
In terms of the threat of substitute products or services, several modern technologies already are applied in some performances, firecrackers still cannot be replaced because firecrackers present certain meanings and culture. Furthermore, fireworks can create several kinds of patterns in the air such as peony, ground bloom flower, etc. No real substitutes can replace fireworks. There are substitutes such as make-believe firecrackers and laser beams that have potential to replace the firecrackers in the future. Rivalry
Rivalry of the fireworks industry is high due to the fact that it is easy to enter the industry and the exit barrier is low. There is also a little differentiation among products which makes competition even fiercer. According to exhibit one in the case, firecrackers and fireworks total revenue in China increased 36 % from 2007 to 2009.
The revenue went up 68 % from 750.000.000 USD to 1.262.500.000 USD. Most factories are dominated by small family-owned –and –operated workshops and most of the employees in the factories are regular farmers who had learned how to make fireworks just by watching and following their elders. As a result, those factories only manufactured fireworks instead of designing fireworks.
In terms of international rivalry, a number of different brands has become well known around the world, Chinese fireworks have lower reputation in quality control and packing comparing to the products made in Japan or Korea. In addition, some fireworks merchants will buy the products from China and repackage them, then resell them for much higher price. Domestic competition and foreign competition is very high.
Assessment of the industry attractiveness
Every industry has life cycle includes introduction phase including early phase and innovation phase, growth phase, maturity phase and decline phase. The Chinese fireworks industry is no longer in a period of growth and has begun to plateau. As a result, it is it`s maturity phase now. However, if the investor can input different strategy into this sunset industry, fireworks industry will probably start another life cycle.
The investor can focus on high-end market and provide unique products and service in order to gain high profits. A good business model can make a company to succeed but it may take time and investment capital in order to prepare the company to start another life cycle. Fireworks industry is still a global opportunity because every country still has fireworks shows every year and the scare seems to become larger and larger. The revenue in both domestic the international market still also grows up.
This analysis indicates that rivalry of fireworks industry is extremely high and hence, if the company was to survive in competition, it should make great effort to differentiate their strategies to achieve sustainable competitive advantages. There are opportunities in this sunset industry if the company can build a totally new infrastructure. In terms of infrastructure and product development the investor should focus on the product diverseness and SOP (Standard Operating Procedures) management to have more competitiveness to their rivals. First of all the investor should concentrate on R&D to produce the fireworks that can shoot long distance and safely.
R&D department also has to develop more environment-friendly fireworks by changing materials. Every New Year, most of the big cities in the world will schedule the large-scale fireworks displays. Those displays all are high altitude fireworks. However, more and more cities regulate the consumption and launch of the fireworks and firecrackers because of increased concerns about environmental pollution and safety. Launching fireworks becomes a business program to attract domestic and international tourists. Investor should recruit more young employees with art and design background to make fireworks to a brilliant shows. Furthermore, investor should enforce training programs such as enhancing working safety classes and machining.
Experienced employees also need to learn new skills and learn how to work more efficiently. Labor costs in China are relatively low compared with that in Japan and Korea. As a result, fireworks made from China always have price superiority to provide lower price. Since Liuyang is investor’s hometown, he can also understand the working culture in China and can more easily to manage the local employees. Doing business with the Chinese government is not easy because interpersonal relationship is a very important element. Bureaucracy is also a problem. In contrast, the export market is not easy, either. Unfortunately, many products made in China have a doubtful reputation.
Investor has to reverse the company imagine. Creating a brand identity costs long period of time and money. However, once the brand becomes famous and international one, customers will trust the quality of the produces from the company and the value of company will also increase because of brand value. The company can attend more international exhibition to get popularity and also focus on quality control and time control. Investor should reorganized the company structure and improve the equipment in my company to pass international identification and put more budgets in marketing to enlarge the popularity of the company.
The company can sponsor different international events such as Olympic, etc. In terms of technological development fireworks and firecrackers displays can still combine with laser beam, computerized firing and music accompaniment to strengthen the visual, audio and emotional effects. Moreover, the investor should focus on the fireworks display design. What the company sells is not only the fireworks themselves but also the ideas of how to present more colorful modeling during the displays. The company should put more creativity into the display to make impossible turn to possible and impress all audiences. Most fireworks displays are launched at night.
However, some events take place during a daytime, which can also be an opportunity for the company to distinguish itself from its rivals. Establishing relationships with universities worldwide and develop prototypes for new fireworks can help a brand building and for the company. Another strategy is to establish strategic alliances with other companies like suppliers, government agencies, distributors, etc. Such relationships can develop synergy that thrives in the industry and help to gain access to better quality raw materials at cheapest price and absorb foreign direct investments to improve equipment, capital and the above R&D facility.
Jerry Yu should be prepared that all those changes, both internal and external, will take time to implement and require capital investment. Probably in terms of long-term investment the fireworks industry will sooner or later shift towards more environmentally friendly industry and use substitutes more and more. Recommendations
Considering China’s one-child policy has led to one of the world’s largest elderly populations. Roughly 10 percent of the population is expected to be over 65 by 2015 and, by 2050, the average age in China is forecast to be nearly 45 – one of the oldest in the world. Additionally, some 20 percent of the population is already suffering from liver disease, cancer, diabetes and similar inflictions, and this number is likely to grow alongside its aging population. Private healthcare expenditures are expected to grow another 36 percent by 2015 to over US$200 billion.
The entire medical services market is expected to reach US$500 billion by 2015. So if Jerry Yu may consider other investment opportunities I would advise him to invest in China’s medical industry and health care industry. In terms of more sustainable investments for a longer period of time the health care industry is more attractive both domestically and internationally.
Beamish, Paul W. Chinese Fireworks Industry – Revised. Richard Ivey School of Business. 2011 Porter E. Michael. The five competitive forces that shape strategy. Harvard Business Review. 2008 T. Hesketh and W. X. Zhu. The healthcare market. BMJ. 2007 May 21
http://www.chinadaily.com.cn/china/2007-10/24/content_6201487.htm http://www.mindtools.com/pages/article/newTMC_09.htm#sthash.gasxWHcJ.dpuf http://businesscasestudies.co.uk/business-theory/external-environment/pest-analysis.html#ixzz2fnrTq
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