Case Study:

The Chinese Fireworks Industry

By: 亓文杰 张艳艳 张敏 邹爱丽 杨立超 张安冬 罗喻

Outline

1. Synopsis1. Synopsis

2.Problem Statement2.Problem Statement

3.Analysis

3.1 PEST Analysis of the General Environment

3.2 Five Forces Analysis of the Fireworks Industry

4. Conclusion and Recommendations

1.Synopsis

1.1 About Liuyang

Liuyang, a city in HunanProvince, is known as the “the home of firecrackers and fireworks”. The fireworks making in Liuyang has a long history and tradition in China, and enjoys high reputation in the domestic market. In addition, it was the top fireworks exporter in the world, covering 60% of the global production.

1.2 About Jerry Yu

Jerry Yu, who was running a small chain of gift stores in NewYork, was asked to invest in a fireworks factory during his visit to Liuyang. He was impressed by the extravagant fireworks shows he had seen during the spring festivals. He’d like to know more about the development background and specific situation of the Chinese fireworks industry before his investment.

1.3 About the report

This report intends to make a detailed and comprehensive analysis in terms of the general environment and fireworks industry itself based on the PEST and Five Forces Model.

At last, some recommendations are provided for Jerry.

2. Problem Statement

2.1 Should Jerry invest the Liuyang fireworks industry?

2.2 What was the best way to capitalize on the potential that remained unexploited in the industry?

Economic Environment

Social Power

Political PoliciesTechnology

Suppliers

New entrant

Suppliers Industry competitors Buyers

Substitutes

3. Analysis

3.1 PEST Analysis of the General Environment

3.1.1 PEST Analysis of General Domestic

Environment

3.1.2 PEST Analysis of General Foreign

Environment

Advantages: (Advs)Eased legal restriction of foreign direct

investment

Chinese fireworks market

----a magnet for foreign investors

3.1.1 General Domestic Environment

Political

Disadvantages: (Disadvs)

More regulations on cost-driven firms Environmental concern

Stringent Government Restrictions1

2 Unordered Fireworks Market

Discretionary copying of popular design regardless ofintellectual property protection

Local Protectionism3

Government purchases are apt to local companies

Economic

Advs:

Climbing demands which are driven by economicalgrowth, increasing income level and living standard

Disadvs:

shrinkage of profit margins for many small manufacturers

Constant increasing costs of labor and raw materials 1

Intensified competition ： set-ups of private workshops2

Social

Increased environmental consciousness

Abundant diversities of means of modern entertainment

Safety Concern

1

2

3

inherent explosive nature

low quality stuffing materials

Technological

Advs:

Disadvs:

Novelties on product varieties

Inadequate innovation & stagnation of process technology

Reasons?

Small family-owned-and-operated workshops

Lack of professional training

Lack of investment into R & D

No initiative or professional human resources for

technological innovation

Many fireworks-related injuries many countries makerestrictive regulations on fireworks Esp. USA more complex

P

S

The diversity of the cultures in foreign countries reduce the seasonality of the fireworks production and sales

T

The Internet become a marketing outlet for Chinese fireworks, 20%--25% of the worldwide sales

3.1.2 General Foreign Environment

Advs

Disadvs

In recent years, foreign investments are funneled into the Chinese firework industry, especially Liuyang.

1)the industry’s status in foreign market ■a lower reputation in quality, packaging and timing control ■ fierce competition ， limited profitability

2)Foreign competitors ■ Japanese and Korean products are superior ■ foreign companies try to control more of the value chain ■ foreign manufacturers outsource their brand-name to china,

Chinese industry losing brand identity.

3 ） Foreign buyers powerful

E

3.2 Five Forces Analysis

of the Fireworks Industry

3.2.1 The Competitive Rivalry

Liling,Huan:uncompetitive in reputation&variety,but competitive in price

Dongguan: closeness to Hong Kong and sophisticated marketing and practices and management

Pingxiang&Wanzai, Jiangxi: competitive in both price and quality, low and medium-priced market.

Liuyang: “the home of firecrackers and fireworks”. South Korea &Japan:

Quality, innovation and brand identity

Domestic Competition

Private Workshops

Flexibility

Cost

Copying

Quick and flexible response to market demands

Low cost of labor, production, administration, etc, which contribute to a lower selling price

Negligence to intellectual property protection and plagiarizing of popular design, which also lowered the cost

Foreign Competitors

Products made in Japan and Korea

are superior in quality

2Foreign companies try to control more of the value chain, high markup

3Foreign manufacturer outsource some manufacturing activities to China

1

Entry barrie

r2

3

1Capital requirement

Labor forces and costs

Distribution channel

3.2.2 The threat of new entrants

According to Porter’s five forces model, easier for market entry, more competition; On the contrary, more barriers to entry means less threat of new entrants.

Capital requirement: The initial capital requirement for startingfireworks manufacturing facility is low. Setting up a small family workshop, < RMB125,000 a well-equipped factory, only RMB1,250,000

Labor forces and labor cost: The majority of the workers are regular farmers. Only a few places (like Liuyang ) have a large pool of skilled fireworks-makers. Besides, the labor costs are still very low, though they are steadily increasing.

Distribution channel:

manufacturers wholesalers

street peddlers and convenient stores

consumers

capital requirement

labor cost

labor force

distribution channel

Evaluation

low

low

sufficient

relatively effective

Conclusion:

easy entry

3.2.3The threat of substitute products

Due to the increasing environmental-consciousness and more diversities of modern entertainments, some substitute products have appeared. For instance:

1. laser beams with

sound effect

2.make-believe

firecrackers

3. The use of ballons

instead of firecrackers

in weddings

3.2.3The threat of substitute products

☺Chinese tradition determines its uniqueness

Although some substitute products have appeared, no real substitutes could replace fireworks in China, because it is in the national character for Chinese to celebrate with an atmosphere of noisy happiness.

So, the threat from the substitutes of fireworks is small.

Domestic Customers

Foreign Customers

3.2.4 The Bargaining Power of Customers

Common customers

Governments

Common customers

Increasing economic development and living standardsRising in the past three decades

Lifted Restriction

Explosion

Low

High

Inviting bidding to decide on suppliers

Large quantity—100,000 to several million

Governments

Foreign Customers

High

Hiring agents

Dealing directly with the factories

No switching

costs

Very well informed

Low

The raw materials are not difficult to procure.

3.4.5 The Bargaining Power of Suppliers

4.Conclusion and recommendations

PEST

4.1 Conclusion

Foreign market Domestic market

Restrictive regulations

Fierce competition

Easy foreign investments

Diversified cultures

Popular on-line selling

Stringent regulations

Eased legal restriction of foreign direct investment

low initial

capital

Increasing costs, fiercecompetition

Increasing demand

Environmental consciousness, safety concern

Wide varietiesInadequate innovation

Low reputation

in quality, packaging…

Five Forces Analysis

Competition: fierce Threat of new entrants: small

Threat from the substitutes: small

Bargaining power common customers: lowgovernments and foreign customers: high

Bargaining power of suppliers:low

All in all, it will be profitable for Jerry to invest the Liuyang fireworks industry.

1. Product differetiation 2. Quality control; packaging upgrading; timing control...

4.2 Recommendations

Corporate strategy

Business strategy

Functional strategy

1. Brand-building strategy (I P)

2. Foreign expansion

esp. European market

1. R&D strategy (E C)

2. Innovation of products

3. Staff training

1. Yes, he should invest.2. Issues for him to consider when capitalizing: