CHINESE

FIREWORKS
INDUSTRY

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 Articles 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 mothers 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 15 th 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 1830s, 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 familyowned 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.

SWOT Analysis

STRENGTH

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.

WEAKNESSES
]

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 fireworkmaking 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 peoples 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

New competitors

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.

Stern Competition

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
less-seasonal 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.