Chinese firework industry Essay

1. IntroductionObjective and structure of this reportThe Chinese fireworks pains has experienced signifi force outt change since china adopt open door policy, moreover, it has huge foodstuff sh ar in the fields fireworks market. But on the other hand, the Chinese fireworks patience in any case has fatal weaknesses. thitherfore, whether to invest in this intentness is still a considerable challenge to most investors. The objective of this report is to give some suggestions to Jerry Yu on his ending of the investment on Liuyang fireworks industry. Furthermore, some proposals on how to improve the attractiveness and the rivalrousness of Chinese fireworks industry at a long-run level argon worked turn out from personal level, there are some strategic excerptions to Jerry Yu in terms of handling an individual fireworks firm. To achieve this objective, an industry analysis and a market analyse are carried out and a gross conclusion is drawn based on the analyses and suggestio ns.2. Industrial analysisThe aim of this industrial analysis is to outline the piazza of the Chinese fireworks industry in conjunction with analyzing the rivalry within this industry through Porters five forces model (please refer to Appendix).2.1 The Chinese fireworks industry overviewThe general belief was that China-made fireworks actually made up about 80% to 90% of the worlds fireworks market. But although Chinese fireworks account for most of the worlds market, it can be said as a relatively messy industry in terms of its quality, package and timing control and dispersion 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 gossip, 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 dema nd. They would copy any popular harvesting design and sell it for such(prenominal) less prices thangovernment-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 place trendThe fireworks market can be divided into domestic and exporting market. In the past years, the demand of domestic market is declining while export gross revenue 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 1994-1998From Figure 1, its hap that the demand of export market is increasing stably. Undoubtedly its a beneficial factor for Chinese fireworks industry. Another market trend is that the demand for display fi reworks 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 Porters Five Forces puzzle (Appendix).Porters 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 neat requirement for establishing a fireworks firm is very let loose the economy of scale is high and the brand identification within this industry is relatively grim. all these facts provide good opportunities for firms to fancy 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 firework s 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 situate-believe firecrackers, due to the inheritance 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 All these forces shape the fierce competition in fireworks industry.What is indicated through the analysis of Porters 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 industryThe market audit focuses on the Liuyang fireworks markets position through the identification of its domestic and foreign competitors and a SWOTanalysis. 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 analysisThe competitors of Liuyang fireworks industry include both domestic and foreign iodins. The competitors and their main competitive aspects of Liuyang fireworks industry are delivered in plug-in 1.Table 1 The competitors of Liuyang fireworks industryCompetitors Domestic unknownLiling Pingxiang,Wanzai Dongguan Other small establishments Japan,Korea and Spain competitoryAspects Price competition Both price and quality, especially in low- and medium-priced markets More modern guidance and marketing practices Copy popular design and sell much less Better quality and timing control, better packaging.From Table 1, its clear that the Liuyang fireworks industry has been facing fierce competition from both domes tic and foreign competitors though its still the largest and most well known place for make 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 beat these competitors, its necessary for it to modify system 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 competitorsFrom 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 investors success as well as the whole industrys sustainability.3.2 SWOT analysis of Liuyang fireworks industryLiuyang fireworks industry does shell out certain similar characteristics in terms of Strengths, Weaknesses, Opportunities and Threats with other Chinese fireworks manufacturers, and it also has its own features.3.2.1 Strengths* Long reputation and product varietyLiuyang 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 shareAs the largest manufacture community of fireworks in China, Liuyang has been enjoying huge market share in both domestic and export market.* Liuyang governments offensive strategyIn 1997, Liuyang government adopted offensive strategy responding to thedecline of its fireworks sales. This has been proven to be very usefulone year later, Liuyang fireworks sales increased.* Lo w labor costLocated 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 capabilitiesAs 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. Whats more, as most workers are farmers who are not well educated, they have no intellectual resource for marketing capabilities.* Messy distribution channelsThe overall distribution system of fireworks industry is rather fragmented and messy. Neither the old government-run channels nor the new distribution channels are streamlined and effective. On the contrary, they are rather chaotic.3.2.3 Opportunities* Increasing reve nue and demandAs 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 consumersTechnology development triggers the technological innovations. Fireworks can be combined with modern technologies want laser beams, computerized firing and musical accompaniment to cater for customers.* Increased safety of fireworksActually, 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, its 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 1990-98Source 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 topical anaesthetic protectionismAs illustrated in competitor analysis, more and more competitors including existing firms and new entrants are competing with Liuyang fireworksindustry. The direct consequence is the price drop which leads to the deduction of profit margin. roughly 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 restrictionAs firework s has made some tragedies among users, most countries and Chinese cities more or less prohibit the sell and use of fireworks. Some places even banned the use of fireworks. This fact is undermining the fireworks industry.* Credit crisisDue 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 wrong of brand identitiesThis 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 horse opera fireworks manufactu rers 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 USSource China Sunsong Fireworks Corp. and Websites of fireworks wholesalers in U.S.4. Suggestions for Jerry YuChinese fireworks industry is a highly competitive industry, however, it still presents opportunities for investors. base on the analysis of Liuyang fireworks industry, the suggestion for Jerry Yu is to take the opportunitiesto invest in Liuyang fireworks industry. Nonetheless, to win in the fierce competition, its 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 set up to increase its competitiveness and attractiveness.5. Proposed strategic options5.1 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, its not as dangerous as consumers perception. Figure 6 shows the comparison of the dangerousness between fireworks and other products. From the treatment quantities its 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, its necessary for the manufacturers within this industry to launch an advertising campaign to change consumers perception, attitude and to build consumers incont rovertible belieffireworks 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 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 To launch an industry-wide advertising campaign requires sufficient capital. But as most fireworks manufacturers are family-run small workshop, its 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, its necessary to build TQM (Total Quality Management) industr y-wide to regulate and guarantee the quality of Chinese fireworks to compete with foreign competitors and to attain trustfulness from consumers.AdvantageThe advantage is obviousincrease Chinese fireworks industrys competitiveness with foreign competitors and in doing so, to maintain and even increase its market share in the worlds market.Disadvantage The only problem TQM might face is the messiness of Chinese fireworks manufacturers. TQM requires fund as well as regulations, but for smallworkshops, its 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.AdvantagesForeign investment can compensate one weakness of Chinese fireworks industrylack 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 th at these facets can greatly promote Chinese fireworks competitive position, through which, Chinese fireworks industry could prosper.Disadvantages 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 war-ridden promotional activities.