Case Study:

The Chinese Fireworks Industry

By:

Outline
1. Synopsis 2.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. Hed 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?

Technology
New entrant

Political Policies

Suppliers Suppliers

Industry competitors

Buyers

Substitutes

Economic Environment

Social Power

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

3.1.1 General Domestic Environment

Political

Advantages: (Advs)
Eased legal restriction of foreign direct

investment
Chinese fireworks market ----a magnet for foreign investors

Disadvantages: (Disadvs)
1 Stringent Government Restrictions

More regulations on cost-driven firms Environmental concern

2

Unordered Fireworks Market

Discretionary copying of popular design regardless of intellectual property protection

3 Local Protectionism

Government purchases are apt to local companies

Economic Advs:
Climbing demands which are driven by economical growth, increasing income level and living standard

Disadvs:
1 Constant increasing costs of labor and raw materials 2 Intensified competitionset-ups of private workshops

shrinkage of profit margins for many small manufacturers

Social

Increased environmental consciousness

Abundant diversities of means of modern entertainment

Safety Concern

inherent explosive nature

low quality stuffing materials

Technological

Advs:
Novelties on product varieties

Disadvs:
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

3.1.2 General Foreign Environment

P
Many fireworks-related injuries many countries make restrictive regulations on fireworks Esp. USA more complex

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

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

Disadvs
1)the industrys status in foreign market
a lower reputation in quality, packaging and fierce competition limited profitability

timing control

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

3Foreign buyers powerful

3.2 Five Forces Analysis

of the Fireworks Industry

3.2.1 The Competitive Rivalry

Liuyang: the home of firecrackers and fireworks.

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

South Korea &Japan: Quality, innovation and Pingxiang&Wanzai, brand identity Jiangxi: competitive in both price and quality, low and medium-priced market.

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

Domestic Competition
Flexibility Quick and flexible response to market demands

Private Workshops

Cost

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

Copying

Foreign Competitors
1
Products made in Japan and Korea are superior in quality Foreign companies try to control more of the value chain, high markup

Foreign manufacturer outsource some manufacturing activities to China

3.2.2 The threat of new entrants

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

1
Entry barrie r

Capital requirement

2 3

Labor forces and costs

Distribution channel

Capital requirement: The initial capital requirement for starting fireworks 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

Evaluation
capital requirement
labor cost

low

low
sufficient relatively effective

Conclusion:

easy entry

labor force distribution channel

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.

3.2.4 The Bargaining Power of Customers

Domestic Customers
Common customers

Governments

Foreign Customers

Common customers

Increasing economic development and living standards Rising in the past three decades Lifted Restriction

Explosion

Low

Governments

Inviting bidding to decide on suppliers

High Large quantity 100,000 to several million

Foreign Customers

High

Very well informed

Hiring agents

Dealing directly with the factories

No switching costs

3.4.5 The Bargaining Power of Suppliers

The raw materials are not difficult to procure.

Low

4.Conclusion and recommendations

4.1 Conclusion
Foreign market Restrictive regulations Easy foreign investments Domestic market Eased legal Stringent restriction regulations of foreign direct investment Increasing low initial costs, fierce competition capital Environmental Increasing consciousness, demand safety concern Inadequate Wide varieties innovation

Fierce Diversified competition cultures

Low reputation in quality, packaging

PEST

Popular online selling

Competition: fierce Threat from the substitutes: small Bargaining power of suppliers:low

Five Forces Analysis

Threat of new entrants: small

Bargaining power common customers: low governments and foreign customers: high

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

4.2 Recommendations
1. Yes, he should invest. 2. Issues for him to consider when capitalizing: 1. Brand-building strategy
(I P) 2. Foreign expansion 1. Product differetiation 2. Quality control; packaging upgrading; timing control...

Corporate strategy

esp. European market

Business strategy

1. R&D strategy (E C) 2. Innovation of products 3. Staff training

Functional strategy