Chinese Fireworks Industry
Chinese fireworks industry case analysis...
“CHINESE FIREWORKS INDUSTRY”
CLASS B GROUP 1 Melo, Arlene Villegas, Christine Joy Tuscano, Jeana Claire Siasat, Renalyn Cruz, Ana Marie
CHINESE FIREWORKS INDUSTRY Goals, Purpose and Significance of the Article To provide information regarding Fireworks Industry to investors that may help them in making decisions, shedding light on its tight market competition, production, safety, dispersal and previous market trends.
Statement of the Article’s Research Problem While the Liuyang fireworks industry dominated the worldwide industry, Jerry had to decide whether he should invest in the one of the companies in the province. If he did invest, what was the best way to capitalize on the potential that remained unexploited in this industry? He wondered whether he could apply the industry analysis framework he had studied in his MBA program.
Background Jerry Yu was an ABC (American-Born-Chinese) and with an MBA, he runs a small family owned chain of gift stores in Brooklyn, New York. He has given the chance to invest in a fireworks industry located at his mother’s hometown Liuyang. However, he wanted to consider the standing and development of the said industry for him to capitalize. Firecrackers and fireworks are originated in Liuyang known as the “hometown of firecrackers and fireworks of China”. As early as 1723, Liuyang fireworks were chosen as official tribute to the imperial family and were sold all over the country. The said product had become the pillar industry of the community. The loud reports and burning fires of firecrackers and fireworks were found to be perfect for frightening off evil spirits and celebrating good news at various occasions. For more than a thousand years, the Chinese had been seeing off past years and welcoming in new ones by firing firecrackers. By the 15th century, fireworks were widely used for religious festivals and public entertainment. In 1777, the United States used fireworks in its first Independence Day celebration, and fireworks have become closely associated with July fourth celebrations ever since. Up until the 1830’s, the colors of the early fireworks were limited, but by 2009, there were six basic colors used in fireworks. The firecrackers and fireworks industry in China was dominated by small family-owned –and operated workshops. After 1949, government run factories replaced the family-owned-workshops. These move made possible for the automation of some processes while other are still manually done. But after the reform, most of the factories became family run units of production again. This serves to restrict further technological innovations.
The Product Fireworks could be classified into two categories: display fireworks and consumer fireworks. Display fireworks were further carefully divided into four categories: indoor fireworks; garden fireworks; display fireworks; and display fireworks for professionals only. There were many varieties of fireworks, Liuyang made 13 different types with more than 3,000 varieties. The major types included fountains, rockets, hand-held novelties, nail and hanging wheels, ground spinning novelties, jumping novelties, floral shells, parachutes and firecrackers. Not much had changed in fireworks-making. Over the last few decades, numerous novelties were added to the fireworks family. However, innovation had never reached beyond product variations. The ingredients had remained more or less the same. The process technology had not changed much either, although some manual process could now be done by machines.
Liuyang - “hometown of firecrackers and fireworks of China” The long history and tradition had made fireworks more than just a livelihood for the Liuyang people. And because almost every native person in the area knew something about fireworks making, or had actually made firecrackers or fireworks in their lifetime, Liuyang claimed that they have an impressive pool of skilled labor. Besides, Liuyang was considered the top fireworks exporter in the world, making up 60 per cent of global production. The trademark brand “Red Lantern” had becomed well known to fireworks-lovers around the world. Now, China accounted for 89 per cent worldwide fireworks exports with the vast majority of that coming from Liuyang. In addition, over the past ten years, China had become the largest market for fireworks.
Novelty on Product Varieties: Hunan and other local governments began initiatives aimed upgrading the traditional fireworks industry. Among these initiatives were environmentally friendly fireworks, which used cold flame fireworks technology.
Accounts receivable and bad debt control Bad debts and lack of respect for business contracts had created a credit crisis in China, where the cash turnover slowed downand worst even some withdraw from the industry of other manufacturers.
Low Research and Development Investment Since most of the manufacturers in China are family-owned-and operated workshops and usually this kind of producers have limited capital compared to government-run factories, they cannot afford to appropriate fund to research and development cost of the product so they usually stick to their varieties. Also, there were scarcely R&D facilities, human and capital resources allocated in most fireworks companies where, limited resources were spent on product varieties.Even in Liuyang, out of the 400,000 or so people working in the industry, very few were engineers with advanced professional training.
Lack of Training Majority of the workers were regular farmers. Since they only ponder on what they have learned from their elders, skilled fireworks makers are few. And since firework-making is one of the dangerous job, many skilled workers shifted to less-dangerous occupation making the total labor costs increased more.
OPPORTUNITIES Increasing Demands as people’s income level and living standards kept rising Because of the increasing economic development and living standards, demand for fireworks and firecrackers have risen. People will be more willing to purchase fancier and pricier products, thereby creating more profit for the producers and manufacturers.
Government Interference Though fireworks industries were completely banned in Year 1998 and multiple government agencies were involved in regulating fireworks, it began to change during mid 2000s up to now.
Magnet for foreign investors Due to cheaper price compared to the products of the Japan and Korea and a good reputation in the fireworks industry, Liuyang manufacturers dominated and supplied the global market with 60% of the total demand. And since the they have new variety now that are incorporated and combined with modern technologies like laser beams, computerized firing and musical accompaniment to make the appeal of fireworks more irrestible to the importers, consumers and inventors.
Diversity of Cultures Because of diversified cultures, the seasonality of producing fireworks has been lessened. Some believes that it is perfect for frightening off evil spirits and celebrating good news at various occasions. Others used it for welcoming new ones. And by the 15th century, fireworks were widely used for religious festivals and public entertainment. In 1777, the United States used fireworks in its first Independence Day celebration, and fireworks have become closely associated with July fourth celebrations ever since.
The use of Internet The internet had become a marketing outlet for Chinese fireworks. 20 to 25 percent of worldwide sales were through the Internet.
THREATS Easy Entry-More Competition
Since the initial capital requirement to set up a factory was relatively low, this will probably make it easier to enter into the industry.The investment would be around RMB 1, 250,000 while setting up small family workshop would require less than RMB 125,000. The main raw materials for fireworks were gunpowder, color ingredients, paper, fuse and clay soil which are all easy to procure but cost were steadily rising, while the labor was not the problem in the area because the local residents have the history and learnings from their elders in making their product. But since mostly existing competitors in the market were family-run workshops, they would resort to cheaper raw materials and even unskilled workers to incur lesser cost without even thinking that they may even sacrificed the quality of the product.
Even a well-known placed, Liuyang, faced increasing competition within China. Liling, another city in Hunan Province, were fierce in price competition even it do not have same reputation and variety like Liuyang products. Jiangxi, Pingxiang and Wanzai fireworks had been compete in terms of price and quality in its low and medium priced product. Dongguan in Guangdong Province, had taken advantage of its closeness to Hongkong. Also, due to health and environment concerns, the demand for the products declined due to regulations to prohibit the use of fireworks but it began to change when the regulations were lifted by the government. As a result, in an instant, many workshops appeared that leads to intense product and price competition. These workshops were selling fireworks with much lower prices than Liuyang, plagiarizing popular designs which also lowered the cost.
Losing brand identity
Since the Liuyang province in China is the top manufacturer of fireworks and firecrackers having cheap prices, some importers and other manufacturers would copy their products. Some would even buy their product and then change other parts and materials in the product to improve the quality of the product and sell it to a much higher price therefore losing their brand and trademark.
Safety Issues The fact that fireworks were made with gunpowder and listed under explosives brought about the issue of safety. Numerous accidents related with fireworks had resulted in tragic human injuries and considerable property damages. As a result, fireworks had become heavily regulated in most countries. During the production process, powder mixing and powder filling, were the most dangerous. The workers had to abide by strict safety measures. Even a tiny spark caused by dropping of a tool on the floor or the dragging of a chair could start a major explosion. The quality of the ingredients was also of significant importance. Impure ingredients could greatly increase the possibility of accidents. In Liuyang, almost every year, there would be one or more accidents that resulted in deaths and damages. With an ever increasing number of firms entering the industry, safety was an ongoing concern.
Rise of Substitute Products: Changing Lifestyles Since people are now more environmentally-conscious and being practical, some are finding alternatives instead of more dangerous and expensive fireworks and firecrackers. One of these is the “make-believe firecrackers” that already appeared as substitute in China in the places where the fireworks are banned. Also, more interesting substitutes were used at some weddings in Beijing, were people paved the road with little red balloons to make explosive cracking sounds as well as leave behind red bits and pieces of debris.
Continues Search for Alternative Product Although some substitute products have appeared, no real substitutes could replace fireworks in China thus, some are still searching for alternative because fireworks is the national character for the Chinese in celebrating the important event of the lives with an atmosphere of noisy happiness. Government Restrictions In United States, multiple government agencies were involved in regulating fireworks. Although, at the federal level, fireworks and firecrackers were allowed as long as the safety features were up to the standard, local governments would have their own different regulations regarding fireworks consumption. Out of 50 States, one would allow only novelty fireworks, 5 had banned all consumer fireworks but allowed professional pyrotechnics, and 4 allowed customers only wire or wood stick sparklers and other novelty items. However, the remaining 40 would allow essentially all consumer fireworks. For display fireworks, permits would have to be obtained from federal and local authorities and fire departments.
Conclusion and Recommendation With the analysis of the condition of the domestic and global market of Liuyang fireworks and firecrackers manufacturers we believe that industry would not die at all and with better management practices, Mr. Jeffrey Yu can consider investing in the company because 1) Company in Liuyang was already operating in a few decades now which mean they already earn a good reputation in the domestic and global market and they are trusted brand by many buyers making them the top manufacturer supplying 60% of the demand with even cheaper prices compared to the products of Japan and Korea. 2) The fireworks are very meaningful to the lives of the Chinese making it as part of the tradition so the demand and market would not die at all even though in the past years there is a decline in the market because of the regulations that banned the use of fireworks and also now that the regulations are lifted even cultures are diversified making the product more demandable and lessseasonal making the industry more profitable for investments. 3) Also even though there is existing substitutes in the market, there is no real alternative that can surpass the satisfaction that is given by fireworks to the Chinese because that is their tradition so there is no need to worry about the decline in demand of the product. In fact, Liuyang made products are continually making name in the global market since more and more foreign countries are gradually recognized by the advertisement in the internet and also by the fireworks display in some countries. 3) And lastly, the government takes action regarding to contracts with big sum of money. They will now handle the collection of account in order to lessen the problem of bad debts control and accounts receivable turnover of the manufacturers in the industry which will be beneficial especially to the family-run workshops since they are less powerful compared to the government-run factories.
And with these, we recommend that he consider the following: 1. R & D Strategy, Innovation and product differentiation They need to innovate in order to produce more varieties in their products so that the substitutes that already exist and those that will exist in the future will not overpower the products in the market. He may also consider investing in high quality technology equipments, research and development and hiring skilled pyrotechnicians and have continues training programs. 2. Quality Control: Foreign Expansion The quality is another factor to attract more potential buyers and investors especially in the global market. Use of high quality raw materials must be considered to lessen the possibility of accidents. It also needs improvement along with their market strategy in order to be profitable and stable. The quality of the product and price are the most important factor that the investors and buyers are considering in buying products because quality involves the health and safety of the consumers. And if there is improvement in the product of Liuyang, they can attract more consumers in the global market. 3. Safety Controls Safety measures and equipment must be also considered by the companies especially for productions that are mostly manual work are required, the safety of the employees are important. 4. Brand building Strategy Companies in the Liuyang, China must give importance to their brand identities since more and more of importers are taking advantage of their good reputation in the global market. They must penalize those consumers who use their products as their own while replacing other parts or materials to increase the quality and even sell it at higher price because they are losing potential and existing buyers in the market that can affect their profitability.