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Chinese Fireworks Industry


Submitted By infinityf
Words 4077
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EXECUTIVE SUMMARY Mr. Jerry Yu, your relatives in Liuyang invited you to invest in a village-owned fireworks factory. Before you compose your reply, please consider reading the analysis and recommended course of action discussed in this report. The recommended action plan will have a high chance of success because you and the factory employees have shared values and because a great dream should be born - through effort and through fire.
Before making specific strategic recommendations for you or your company, it is necessary to frame such advice by explaining the benefits of an industry structural analysis. An analysis of the overall industry will discuss the characteristics of consumer markets. Then, using Michael Porter’s ‘five forces’ framework, plus consideration for complementors; this analysis will discuss the primary factors in the external environment that can affect a Chinese fireworks business. This report will conclude with a proposed action plan and summary of findings. II. INDUSTRY STRUCTURAL ANALYSIS
There are varying countries that may be analyzed here, for example, the fireworks industry in the factory’s domestic market, your own home country, as well as the fireworks industry in significant markets around the globe. In regards to the third sphere of reference, the report looks closest at countries with the following characteristics: having an historically low level of imports of fireworks from China, having a large population, having few laws against the use of fireworks, and having a mature or developing infrastructure for laws protecting intellectual property. Industry Structure and Industry Growth Potential in Each Geographic Sphere
An analysis of the structure of the fireworks industry suggests that, for a Chinese fireworks company having your participation, the best option may be to expand into overseas markets other than the U.S. or China. The U.S. is a large importer of fireworks, but the market is more of what the Boston Consulting Group (BCG) would identify as a ‘cash cow’ type than a ‘star.’ There is regular demand of industrial-strength fireworks on the 4th of July and New Year’s, as well as local christening or inaugural ceremonies in specific cities (such as the construction of a new government building or bridge). Personal firework import restrictions vary state by state, however in all cases transport of fireworks by air requires special Department of Transportation licensing. Although the ease of doing business and corruption indices for the US are moderate, the mature and declining nature of the market suggestions this might not be your primary market.
The PRC’s fireworks industry is extremely fragmented, exhibiting perfect competition, though the industry is boosted by price floors. However, signs of stagnating growth spurred by rising air pollution suggest that the China market is a ‘dog’ (according to the BCG). It is not advisable to attempt to expand into the Chinese consumer market at this time.
International fireworks markets that bear consideration are the Russian Federation or Malaysia. Russia has strong political and cultural ties with China, so import considerations will not have strong political limitations or artificial difficulties. Russians also have a strong desire for both industrial and personal firework consumption. Since larger cities such as Moscow and St. Petersburg are already highly saturated, targeting cities in Eastern Russia or Siberia, such as Vladivostok or Irkutsk, might yield greater market penetration. However, it should be noted that corruption in Russia is high, so this may not yield large profits immediately. Malaysia, meanwhile, is known for its relatively high ease of doing business, and with its cultural ties to China, developing a niche market is probably feasible, especially given lower shipping and transport costs.
Please refer to Appendix A for more information.

Potential Entrants to the Industry (Threat of Mobility)
It is relatively inexpensive for a new fireworks-maker to set up shop in China. A small shop for consumer firecrackers and fireworks would cost only $19,000. It would be somewhat more expensive for new entrants to acquire machinery that reduces some of the manual process. Although there has been a recent trend of consolidation, most fireworks-makers are small-sized.
The Liuyang District in China has a labor force specialized in fireworks manufacture. Recently, Liuyang’s provincial Hunan government has invested in R&D to support innovation in the industry and to promote sales of local fireworks. Other areas in China and certainly in the world would not have such an advantage. Although there are more than 3,000 varieties of fireworks made in Liuyang, the ingredients have not changed much nor have process technologies. With very poor intellectual rights protection in China, new entrants could copy other another company’s products without punishment. It would take some but not very much time for a new entrant to produce a competitive variety of fireworks products in China.
There are additional barriers to entry when exporting product internationally, such as the cost of transportation. In some foreign markets such as the U.S., government bureaus more heavily regulate the fireworks industry. Other than Red Lantern, Chinese fireworks generally have a reputation for lower quality than Japanese or Korean brands. In foreign markets, the threat of new entrants is much lower than in China.
Please see Chart 1 for more information. Bargaining Power of Customers
The threat from customers (distributors or importers) is high. There are a large number of fireworks customers from all over the world. They do not incur any cost in switching suppliers. In addition to that, the buyers are aware of the need for additional information, such as safety and pollution. They also demand products with differentiated features. Finally, pressures from the consumption restrictions and government policies in various cities or nations are unfavorable to industry profitability. There are a number of opportunities that may neutralize this industry threat: exporting to foreign markets, pursuing a product differentiation strategy, improving management skills in HR, marketing, and logistics capacities, or gaining preferential treatment from local governments.
Please see Chart 2 for more information. Bargaining Power of Suppliers
The main raw materials for fireworks include gunpowder, color ingredients, paper, fuse and clay soil. All would be easy to procure, however, the quality depends on a factory’s relationship with suppliers. Since most of the factories in Liuyang are focused on manufacturing fireworks, there are likely a large number of suppliers in the region. The more suppliers there are, the less power they have. Fireworks factories in Liuyang would not incur significant cost in switching suppliers.
Labor unions in China have little power, including with regards to the labor-intensive firework industry. The majority of the manufacturing workers are regular farmers who had learned to make fireworks just by watching and following their elders. They would work in small workshops when there was a job to be done, and go back to till their fields if there were no jobs. Most work is still done by hand, at wages of RMB500 to RMB1,800 a month depending on skill level. These wages are very low and increasing only slowly. Overall, the bargaining power of raw materials suppliers and of the human resource supply is a low threat.
Please see Chart 3 for more information.
Bargaining Power of Complementors
Within the context of the fireworks industry, personal décor such as pinwheels, bunting, or other souvenir items that are paired with specific holiday celebrations are all potential complementors. The flag manufacturing industry is also a key complementor because nearly all celebrations with fireworks will involve flag waving or display. Beverage industries, such as beer, plum wine, sodas, or lemonade suppliers (seasonal) are included, as beverage consumption peaks during occasions with fireworks. Inputs for most of these industries are commodities, so they are not unique or differentiated. There are a wide variety of companies available, so the chief concern would be developing a relationship with a reliable export company in China.
Depending on the governmental relationship with individual manufacturers or suppliers (such as ASC Fine Wines of Beijing or JinTeng Flag Co. Ltd of Zhejiang) there may be some barriers to entry. Also, the scale of purchases or partnering may be an important factor to consider, however this is not likely to have a significant impact on profitability. Input substitutions are readily available and suppliers are numerous. Still, finding suppliers with targeted regional governmental connections should be the primary concern for partnering and investing. In many foreign countries, such as Russia, this issue (or opportunity on which to capitalize) will likely be compounded.
Please see Chart 4 for more information. Threat of Substitutes
If people avoid traditional fireworks because of their tendency to pollute the environment, consumers could opt for product substitutes like ‘make-believe firecrackers’, laser beams, LED balloons and paper fireworks tubes. Most of them are cheaper than fireworks. However, ‘make-believe firecrackers’ are just used in China. Balloons may be a polluting substitute, for instance, the result of the Cleveland Balloonfest in 1986.
However, environmentally friendly fireworks, which use cold flame technology, was discovered by the Hunan Provincial government’s investing in R&D, so theoretically, any factory in Liuyang, Hunan could produce those products. If fireworks manufacturers all achieve product transition and produce eco-friendly fireworks, pollution will not be a problem. However, in China, the lack of awareness of this new product has allowed domestic customers to overlook them. Actually, eco-friendly fireworks made in Liuyang, have a big advantage on their prices in the global market. Currently, Liuyang factories lack promotion of this great innovation that can appeal to both domestic and foreigners’ standards for eco-friendliness.
The threat from substitutes may be strong. Although Chinese fireworks are unique and -in some cultures- iconic in rousing events around the world, many things can be seen as a substitute if you consider not only the fireworks product category, but also the entertainment category and tourism category. Obvious eco-friendly options such as toys, legal noisemakers, light shows, entertaining bands, etc. have more publicity than the eco-friendly fireworks in Hunan province.
Please see Chart 5 for more information. Intensity of Rivalry Among Existing Competitors
Factors favorable to industry profitability are the growth of the industry and the difficulty in leaving the industry. Neutral to profitability is that the fixed costs of the business are relatively low portion of the total company costs. Unfavorable factors to industry profitability are that competitors are all about the same size - mostly small, family-run businesses. Products can be dangerous if mishandled – the product requires a level of understanding from the consumer. There is established brand competition in Liling, Pingxiang, Wanzai. These were all strong competitors in both price and quality. Dongguan in Guangdong Province owned the high-end market share of the industry, attributable to its closeness to Hong Kong and its sophisticated management and marketing strategies. Liuyang regained control of the fireworks market by 2009, when it owned more than one third of all firms and 60% of Chinese fireworks production in the Industry.
Please see Chart 6 for more information. Summary of Major Industry Opportunities and Threats
The biggest threat seems to be the stiff competition already existing inside China. No company has a significant market share and prices and profit margins are very low. The second biggest threat is the bargaining power of fireworks importers who think less of China products’ quality than Japanese or South Korean products and can easily switch between Chinese fireworks producers for low prices. New entrants could also frustrate the factory from achieving long-term success, as it is very easy to enter the industry. Another threat is the fact that low-quality sourcing of raw materials sometimes endangers workers’ safety. Suppliers often supply companies with whom they have had a long relationship. The biggest opportunity seems to lie with differentiation products or pursuing a market outside of China. Choosing to distribute fireworks with a complementing product could also be a unique opportunity as well. III. ACTION PLAN An Internal Assessment
Mr. Yu, you are certainly familiar with the concept of a SWOT analysis, and in order to clarify your market position and capabilities a brief overview of your strengths and weaknesses is provided. Your background as an MBA student and experience in the family retail industry are key strengths that could help with import/export partnerships and joint ventures. Access to skilled labor, as well as the local history of fireworks craftsmanship in Liuyang, will reduce the risk of investing in an unproductive factory. Your mutual understanding of Chinese and American culture will help you in establishing further relationships and conducting business in China. Knowledge of the American market for small novelty items or souvenirs will also be valuable in orchestrating potential import deals of small Chinese goods or fireworks. However, there are several key vulnerabilities to consider before structuring any long-term investment. You did not have access to an infinite amount of capital, so R&D into fireworks technology is not advisable. Additional funding will need to be secured before any large investment, and a lack of government connections in China could make establishing a permanent market presence difficult. Your family’s stores may have to restructure their inventories in order to accommodate an import-export agreement with Chinese factories, which could complicate business. There is little reason to believe you can acquire significant market share, especially in China, without a government connection or influential Chinese businessmen to help increase your visibility. It is also advisable to ensure you can increase your operating margins of your family stores and develop a more concrete understanding of international markets before fully committing to expansion. Shared Values
There is a Chinese proverb, “Whether you are familiar with them or not, they are the people living in the homeland. Whether it is beautiful or not it is our homeland water.” Mr. Yu, although you live in the USA, you must have strong feelings for your hometown. Liuyang has a very good fireworks industry, for which you can feel pride. More importantly, your hometown needs your help now. It is time to develop the firework industry. It is not difficult for you to provide some professional advice to improve a company’s strategic management and operational management. In addition, the villagers will help you accomplish your goals, because they also hope to live a better life by working for this industry.
Fireworks play an important role in Chinese traditional culture. But the firework industry in Liuyang started to shrink because of low profit and the bans in China. If there are no fireworks any more next Spring Festival, can you imagine it as a Spring Festival? Protecting traditional culture is essential. The company, Phoenix Fireworks, can not only produce fireworks, but also develop them. Your company can be the champion of a shared culture. The goal could be making affordable and eco-friendly fireworks. If you achieve that goal, you can help the fireworks industry recover just as beautifully as a phoenix rises again from ashes. Strategic Options
There are many options that you have, Mr. Yu. Aside from not investing at all, you could start your own business, decide to enter the import-export trade, try to help the village by improving their online business presence, lead the villagers to integrate vertically or horizontally, etc. However, through significant analysis of the competition that the Liuyang factory faces and an analysis of what strengths and weaknesses, shared values and common goals the villagers and you possess, this report offers the following recommendation: first, raise funds, second, merge with a few other local factories to gain economies of scale, third, target international customers overseas, and fourthly, differentiate the factories’ product with quality materials and a brand name that people like and can trust.
Mr. Yu, you can take this chance to serve the world in big ways. Many entrepreneurs started with nothing but big dreams, yet because they added value for customers, they met with great success. Jack Ma, founder and CEO of Alibaba Corporation once said “We are never in lack of money. We lack people with dreams, who can die for those dreams.” Let Us Strive Toward A Dream!
By consolidating with a few other local factories, the fireworks factory in Liuyang will gain production capacity, the chance of developing economies of scale, as well as valuable human resources. Local factories that have established guanxi, or good relationships with suppliers of quality raw materials and with government officials would make great partners.
Although the majority of current consumers of fireworks are in China, the competition is very fierce and most fireworks producers have no brand equity that sets them apart. This may have to do with a lack of good management or trademark protection. For the factory in Liuyang to have a shot at making higher margins, the company must target foreign markets. Many foreign markets have little consumption of fireworks and could be places where the Liuyang factory could establish its brand and monopolize the market! The company should hire expert analysts to identify in which foreign markets the company should introduce the fireworks brand.
Buyers or importers have a significant amount of bargaining power and to them, Chinese brands have low quality and are all about the same. In order to combat this harmful presumption, investment should be made in establishing a great brand. This can differentiate the Liuyang factory’s products. The provincial Hunan government already invested in R&D that came up with eco-friendlier fireworks. If the factory is able to secure the highest quality raw materials through guanxi with suppliers, then the company brand can also differentiate by showing they have a high respect for worker safety, which many foreigners may be concerned about. Finally, the Liuyang company can also take advantage of the sentimentalism associated with the long fireworks history in China and the hard-working people in Liuyang. Resources Required
The resources necessary for global expansion are financial backing, stable company infrastructure, lucrative business/governmental connections, and foreign market and culture analysts. It is also necessary for the company to have stable internal infrastructure - established and sophisticated management, skillful employees, and effective international accounting practices and reporting. Establishing strong business relations with foreign governments to ease entry into foreign markets and quality suppliers to increase brand reliability are also necessary for the consolidation of Chinese factories and global expansion.
To acquire said resources, the company needs to employ appropriate marketing strategies such as positioning the product in the fireworks industry in a distinctive place in the market relative to the competition. The report recommends Phoenix as a logo, because Phoenix means a prosperous and happy life in Chinese culture. These things are in everyone’s mind, so it is easy for domestic customers to have a deep connection to the brand. Even outside of China, everyone knows that the Phoenix is a beast that even death cannot overcome!

Obtaining Financial Resources
Raising funds in China is not as easy as in Silicon Valley or Wall Street. Because Chinese investors are generally much more risk-averse and Chinese banks are more stringent than ever. However, receiving funding from family and friends is a very effective and popular way to gather initial capital for a business. Such funding should be structured as a high interest loan for one year. Debt financing allows the company to maintain full ownership.
As an MBA graduate, you may be familiar with the angel investor. An angel investor is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. Numerous companies raise money this way. Nevertheless, an initial investor may not be the right financial partner for the long run. Perhaps one can get money from friends and family with no business plan, but angel investors look for the extra discipline and effort demonstrated in a detailed plan. IV. SUMMARY
In closing, this report argues that Phoenix Fireworks has tremendous potential for overseas expansion, but careful cultivation of proper funding and networking is critical. Opportunities for building import-export relationships abound, with particular attention paid to the Russian and Malaysian markets. This can be achieved by combining local consolidation with international marketing. By adopting a global view towards investment and brand awareness, Mr. Yu can transform his family’s company into a global purveyor of quality fireworks and Chinese culture.

APPENDIX A | China | U.S. | Other Countries | Generic Industry Structure | Fragmented industry | International Industry | International Industry | Economic Market Structure | Perfect competition but with government-enforced price floors | Monopolistic competition | Oligopoly or even monopoly | Boston Consulting Group’s Growth-Share Matrix | “dog”(low market share and low market growth rate)Declining to stagnant growth because of extreme air pollution. | “cash cow”(declining growth rate but higher market share)Stable consumption on New Year’s and 4th of July. | “question marks”(possibly high market growth rate but low market share)Optimistically, stars!Markets with little patent enforcement may be “dogs.” |

Chart 1: Threat Factor Affecting Industry Profitability | Favorable(+) | Neutral | Unfavorable(-) | 1. Do large firms have a cost or performance advantage in the industry? | | | X | 2. Are there any proprietary product differences in the industry? | | X | | 3. Are there any established brand identities in the industry? | X | | | 4. Do customers incur any significant costs in switching suppliers? | | | X | 5. Is a lot of capital needed to enter the industry? | | | X | 6. Are serviceable used products expensive? | | | X | 7. Does the newcomer to the industry face difficulty in accessing distribution channels? | | | X | 8. Does experience help companies to continuously lower costs? | | X | | 9. Does the newcomer have any problems in obtaining the necessary skilled people, materials, or supplies? | X | | | 10. Do products or service offering have any proprietary features that give companies lower costs? | | X | | 11. Are there licenses, insurance, or qualifications that are difficult to obtain? | | X | | 12. Can the newcomer expect strong retaliation on entering the market? | | | X |

Chart 2: Threat of Bargaining Power of Customers | Favorable(+) | Neutral | Unfavorable(-) | 1. A large number of buyers? | | | X | 2. Does the customer face any significant costs in switching suppliers? | | | X | 3. Is the buyer aware of the need for additional information? | | | X | 4. Customers are not highly sensitive to price. | | | X | 5. Prevent buyers from taking function in-house | X | | |

Chart 3: Threat Factor Affecting Industry Profitability | Favorable(+) | Neutral | Unfavorable(-) | 1. Inputs are standard rather than unique or differentiated. | | | X | 2. Companies can switch between suppliers quickly and cheaply. | X | | | 3. Suppliers would find it difficult to enter this business or to perform this business’s function in-house. | | | X | 4. Companies can substitute inputs readily. | X | | | 5. Companies have many potential suppliers. | X | | | 6. Companies level of business is important to suppliers. | | X | | 7. Company’s cost of purchases has no significant influence on overall costs. | X | | |

Chart 4: Threat Factor Affecting Industry Profitability | Favorable(+) | Neutral | Unfavorable(-) | 1. Inputs (materials, labor, supplies, services, etc.) are standard rather than unique or differentiated | | X | | 2. Companies can switch between complementors quickly and easily | X | | | 3. Complementors would find it difficult to enter my business or my customers would find it difficult to perform my function in-house. | | X | | 4. Companies can substitute inputs readily | X | | | 5. Companies have many potential suppliers. | X | | | 6. Companies level of business is important to complementors | | X | | 7. Company’s cost of purchases has no significant influence on overall costs. | | X | |

Chart 5: Threat Factor Affecting Industry Profitability | Favorable(+) | Neutral | Unfavorable(-) | 1. Substitutes have performance limitations that do not completely offset their lowest price. Or, their performance is not justified by their higher price | X | | | 2. The customer will incur costs in switching to a substitute | | | X | 3. Customer has no real substitute | X | | | 4. Customer is not likely to substitute | | X | |

Chart 6: Threat Factor Affecting Industry Profitability | Favorable(+) | Neutral | Unfavorable(-) | 1. The Industry is growing rapidly | X | | | 2. The industry is not cyclical with intermittent overcapacity | | | X | 3. The fixed costs of the business are a relatively low portion of total costs | | X | | 4. There are significant product differences and brand identities between the competitors | | | X | 5. The competitors are diversified rather than specialized | | | X | 6. It would not be hard to get out of this business because there are no specialized skills and facilities or long-term contracts commitments, etc. | X | | | 7. Customers would incur significant cost in switching to a competitor | | | X | 8. Products are complex and require a detailed understanding on the part of my customer. | | | X | 9. Competitors are all of approximately the same size. | | | X |

[ 1 ]. Chinese New Year(Beijing) (

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