Chinese firework industry Essay

1. Introduction—Objective and structure of this report The Chinese fireworks industry has experienced significant change since China adopted â€Å"open door policy†, moreover, it has huge market share in the world’s fireworks market. But on the other hand, the Chinese fireworks industry also has fatal weaknesses. Therefore, whether to invest in this industry is still a considerable challenge to most investors. The objective of this report is to give some suggestions to Jerry Yu on his decision of the investment on Liuyang fireworks industry. Furthermore, some proposals on how to improve the attractiveness and the competitiveness of Chinese fireworks industry at a long-run level are worked out; from personal level, there are some strategic options to Jerry Yu in terms of handling an individual fireworks firm. To achieve this objective, an industry analysis and a market audit are carried out and a gross conclusion is drawn based on the analyses and suggestions. 2. Industrial analysis The aim of this industrial analysis is to outline the situation of the Chinese fireworks industry in conjunction with analyzing the rivalry within this industry through Porter’s five forces model (please refer to Appendix). 2.1 The Chinese fireworks industry overview The general belief was that China-made fireworks actually made up about 80% to 90% of the world’s fireworks market. But although Chinese fireworks account for most of the world’s market, it can be said as a relatively messy industry in terms of its quality, packaging and timing control and distribution channels. As the most popular form in Chinese fireworks industry is family-run workshop, which is usually poorly funded and lacking of R&D and managerial input, the whole industry is basically labor-intensive and the technological innovations are also restricted. The competition is intensified by the emergence of small companies. These private workshops are flexible and quick in responding to market demand. They would copy any popular product design and sell it for much less prices than  government-owned or some collectively owned factories. This fact results in price drop which has become a serious problem for the whole industry. Besides, foreign competitors such as Japanese and Korea companies also threaten the Chinese fireworks industry. 2.2 Market trend The fireworks’ market can be divided into domestic and export market. In the past years, the demand of domestic market is declining while export sales is rising. Since China opened its door in 1979, export market has become a major market of Chinese fireworks. Figure 1 indicates the growth of export market during the period of 1994-1998. Figure 1: Export sales of Chinese fireworks industry in 1994-1998 From Figure 1, it’s clear that the demand of export market is increasing stably. Undoubtedly it’s a beneficial factor for Chinese fireworks industry. Another market trend is that the demand for display fireworks is increasing at a fast speed due to the increase of public fireworks shows, whereas the demand for consumer fireworks is expected to decline owing to the more restricted regulations. 2.3 Porter’s Five Forces Model (Appendix). Porter’s five forces model aims at examining the competitive status of the whole industry. 2.3.1 Potential entrants (High) The opportunity for potential entrants of fireworks industry is high. The capital requirement for establishing a fireworks firm is very low; the economy of scale is high and the brand identification within this industry is relatively low. All these facts provide good opportunities for firms to enter this industry. 2.3.2 Bargaining power of suppliers (Low) Because of the huge number of suppliers of fireworks and little product differentiation among fireworks products, the bargaining power of suppliers is low. 2.3.3. Bargaining power of buyers (High) Owing to the large number of choices and low even zero switching costs, the fireworks buyers have high bargaining power. 2.3.4 Substitutes (Low) The threat of substitutes of fireworks is relatively low. Although there are substitutes such as make-believe â€Å"firecrackers†, due to the heritage of tradition and culture, real fireworks are still irresistible to most consumers. 2.3.5 Rivalry (High) Rivalry of fireworks industry is high. The possibility for new entrants is high, while exit barrier is low; a bulk of existing firms that have little diversity and product differentiation are competing in this industry; buyers are more powerful than suppliers†¦Ã¢â‚¬ ¦ All these forces shape the fierce competition in fireworks industry. What is indicated through the analysis of Porter’s five forces model is that the rivalry of fireworks industry is high. Therefore, if firms were to survive in competition, they should make great effort to differentiate their strategies to achieve sustainable competitive advantages over competitors. 3. Market Audit of Liuyang fireworks industry The market audit focuses on the Liuyang fireworks market’s position through the identification of its domestic and foreign competitors and a SWOT  analysis. The goal of this market audit is to assist Jerry Yu to determine whether to invest in Liuyang fireworks industry or not. 3.1 Competitor analysis The competitors of Liuyang fireworks industry include both domestic and foreign ones. The competitors and their main competitive aspects of Liuyang fireworks industry are delivered in Table 1. Table 1: The competitors of Liuyang fireworks industry Competitors Domestic Foreign Liling Pingxiang, Wanzai Dongguan Other small establishments Japan, Korea and Spain Competitive Aspects Price competition Both price and quality, especially in low- and medium-priced markets More sophisticated management and marketing practices Copy popular design and sell much less Better quality and timing control, better packaging. From Table 1, it’s clear that the Liuyang fireworks industry has been facing fierce competition from both domestic and foreign competitors though it’s still the largest and most well known place for making fireworks in China. All of them have their own competitiveness versus Liuyang fireworks. Thus, if Liuyang fireworks industry were to sustain in the intense competition and â€Å"beat† these competitors, it’s necessary for it to modify strategy to increase its competitiveness relative to its competitors. Figure 2 shows the competitive position between Liuyang fireworks industry and its competitors on a positioning map. Figure 2: Competitive positioning map of Liuyang fireworks industry and its competitors From the positioning map, it can be demonstrated that although Liuyang fireworks industry has strong competitiveness in terms of reputation, it is seriously lacking of management capabilities compared with Dongguan and foreign competitors, which could be a disastrous factor in the future. Therefore, to improve the management of Liuyang fireworks industry is crucial for each individual investor’s success as well as the whole industry’s sustainability. 3.2 SWOT analysis of Liuyang fireworks industry Liuyang fireworks industry does share certain similar characteristics in terms of Strengths, Weaknesses, Opportunities and Threats with other Chinese fireworks manufacturers, but it also has its own features. 3.2.1 Strengths * Long reputation and product variety Liuyang has been the most well known place for making fireworks in China for a long time. It has the strongest reputation in China and even in the world market it also occupies an influential position in terms of product variety and reputation. * Huge market share As the largest manufacture community of fireworks in China, Liuyang has been enjoying huge market share in both domestic and export market. * Liuyang government’s offensive strategy In 1997, Liuyang government adopted offensive strategy responding to the  decline of its fireworks sales. This has been proven to be very useful—one year later, Liuyang fireworks sales increased. * Low labor cost Located in Hunan province, Liuyang is a relatively small and less developed city. Furthermore, most of the manufacture factories are located in rural places, where the labor cost is very low. This is a beneficial factor for manufacturers because with low cost, they could gain more profit. 3.2.2 Weaknesses * Poor management input and capabilities As identified in competitor analysis, Liuyang fireworks industry has little management input and poor management capabilities. Since most of them are family-run workshops, they have no capital to fund management. What’s more, as most workers are farmers who are not well educated, they have no intellectual resource for marketing capabilities. * Messy distribution channels The overall distribution system of fireworks industry is rather fragmented and messy. Neither the old government-run channels nor the new distribution channels are efficient and effective. On the contrary, they are rather chaotic. 3.2.3 Opportunities * Increasing revenue and demand As shown in Figure 3, the total revenue of Liuyang fireworks industry increased substantially in 1992-1996. Now the demand is still increasing especially in display fireworks category. This represents an opportunity to investors. Figure 3: The total revenue of Liuyang fireworks industry in 1992-1996 Source: Liuyang Firecrackers and Fireworks Exhibition (refer to Exhibit 1 in this case) * Technological innovation appealing to consumers Technology development triggers the technological innovations. Fireworks can be combined with modern technologies like laser beams, computerized firing and musical accompaniment to cater for customers. * Increased safety of fireworks Actually, the fireworks are not as dangerous as usually perceived by people. Technological innovation such as smokeless fireworks makes fireworks safer and as long as people can use fireworks properly, it’s not so dangerous. This can be demonstrated from Figure 4. Figure 4: The increased consumption(millions of pounds) versus decreased injuries(per 100,000 pounds) of fireworks in 1990-98 Source: American Pyrotechnics Association (please refer to Exhibit 2 in this case) What is indicated in this chart is that within 1990-98, the consumption of fireworks increased whereas the injuries decreased. The increased safety can help to build consumers’ confidence toward fireworks. 3.2.4 Threats * Intensified competition and local protectionism As illustrated in competitor analysis, more and more competitors including existing firms and new entrants are competing with Liuyang fireworks  industry. The direct consequence is the price drop which leads to the deduction of profit margin. Some small manufacturers even copy designs and purchase inferior raw materials to gain profit in competition, which worsens the quality and reputation of Liuyang fireworks industry. In addition, some local Chinese governments tend to protect local manufacturers when purchasing fireworks. * Legal restriction As fireworks has made some tragedies among users, most countries and Chinese cities more or less inhibit the sell and use of fireworks. Some places even banned the use of fireworks. This fact is undermining the fireworks industry. * Credit crisis Due to the bad debt control and lacking of respect for business contracts in China, the transaction costs are increased while cash flow are slowed down, which is a serious issue for fireworks industry. * Poor profit margin and loss of brand identities This threat exists especially in export market. The importers buy the fireworks at very low price from Chinese manufacturers and then resell at much higher prices. This is indicated in Figure 5: the comparison between FOB import prices from China and wholesale prices of four types of Chinese display fireworks in US. There is a huge gap between them. The American importers enjoy huge profit whilst Chinese manufacturers suffer from low profit margin. Furthermore, some large western fireworks manufacturers and dealers started to outsource the making of their brand-name fireworks. The Chinese fireworks manufacturers are facing the problem of losing their brand identities. Figure 5: The comparison between FOB import prices from China and wholesale prices of four types of Chinese display fireworks in US Source: China Sunsong Fireworks Corp. and Websites of fireworks wholesalers in U.S. 4. Suggestions for Jerry Yu Chinese fireworks industry is a highly competitive industry, however, it still presents opportunities for investors. Based on the analysis of Liuyang fireworks industry, the suggestion for Jerry Yu is to take the opportunities–to invest in Liuyang fireworks industry. Nonetheless, to win in the fierce competition, it’s also recommended that Jerry Yu should integrate the advantages he has into the opportunities to create competitive advantages versus his competitors. Therefore, there are some strategic options proposed for him. Furthermore, some recommendations for Chinese fireworks industry as a whole are also worked out in order to increase its competitiveness and attractiveness. 5. Proposed strategic options 5.1 Options for Chinese fireworks industry (Options 1-4) 5.1.1 Strategic option 1: Launch an industry-wide advertising campaign to change consumers’ perception and attitude toward fireworks. As interpreted before, most consumers regard fireworks as a very dangerous product, especially for youth. But in fact, it’s not as dangerous as consumers’ perception. Figure 6 shows the comparison of the dangerousness between fireworks and other products. From the treatment quantities it’s rather manifest that the treatment for youth caused by fireworks is the least among these eleven consumer products. Furthermore, as the technology of fireworks is improving, the dangerousness will be less than before. Therefore, it’s necessary for the manufacturers within this industry to launch an advertising campaign to change consumers’ perception, attitude and to build consumers’ positive belief–fireworks is much safer than what they think. Figure 6: Estimated emergency room treatment per 100,000 youth (ages 5 to 14) Source: American Pyrotechnics Association (refer to Exhibition 3 in this case) Advantages: ââ€" º To build consumers’ confidence toward fireworks can somehow prevent the decline of demand of consumer fireworks from consumers’ perspective. If consumers know fireworks are virtually much safer than their perception, probably they will purchase fireworks more actively than before in spite of the restriction of government regulations. Disadvantages: ââ€" ª To launch an industry-wide advertising campaign requires sufficient capital. But as most fireworks manufacturers are family-run small workshop, it’s hard for them to afford the cost for this advertising campaign. 5.1.2 Strategic option 2: Build TQM at an industry-wide level. Lacking of quality control is a serious weakness of Chinese fireworks industry. Therefore, it’s necessary to build TQM (Total Quality Management) industry-wide to regulate and guarantee the quality of Chinese fireworks to compete with foreign competitors and to attain trust from consumers. Advantage: ââ€" ºThe advantage is obvious–increase Chinese fireworks industry’s competitiveness with foreign competitors and in doing so, to maintain and even increase its market share in the world’s market. Disadvantage: ââ€" ª The only problem TQM might face is the messiness of Chinese fireworks manufacturers. TQM requires fund as well as regulations, but for small  workshops, it’s difficult to achieve. 5.1.3 Strategic option 3: To absorb foreign investments actively to improve both hardware (equipment, capital, etc) and software (management capabilities, etc) of Chinese fireworks industry. Advantages: ââ€" ºForeign investment can compensate one weakness of Chinese fireworks industry—lack of capital. If Chinese manufacturers have sufficient fund, they can improve their equipment, the products’ quality and packaging and their management resource such as R&D, etc. No doubt that these facets can greatly promote Chinese fireworks competitive position, through which, Chinese fireworks industry could prosper. Disadvantages: ââ€" ª There is a latent possibility that these foreign investments might finally control the Chinese fireworks industry. If this happens, Chinese fireworks industry would lose its identity. 5.1.4 Strategic option 4: Build strong brand awareness and image of Chinese fireworks industry. This can be implemented by advertising campaign or aggressive promotional activities.