The Chinese Fireworks

Industry
By Bisma Shahzad, Fatima Safdar Ali,
Mariyam Mohsin, Syeda Saleha Munsoor &
Zoha Junaid
Introduction
• American Born Chinese  Jerry Yu
• Spent his Chinese New Year holidays in Liuyang in
1999
• Relatives invited him to invest in a fireworks
factory owned by a village
• Wanted to assess the attractiveness of fireworks
industry
Core Issue

• Investment decision  Should Jerry Yu

invest in the fireworks industry of Liuyang?
• How should Liuyang capitalize on the
potential if he decides on investing?
History of Fireworks and
Firecrackers
• Fireworks  Devices designed to produce
visual or audible effects through combustion
or explosion
• Firecrackers  special kind of fireworks,
usually in the form of a noisemaking cylinder
• Main ingredients  Potassium Nitrate,
Charcoal and Sulphur
• Chinese – first makers of fireworks
History of Fireworks and
Firecrackers
• Uses of firecrackers in China:
o Frightening evil spirits
o Celebrating New Years, Weddings, births
• 7th Century  Arabia, 13th Century  Europe, 15th Century 
religious festivals and public entertainment
• Used in USA for first independence day celebration in 1777
• Until 1830 limited colors
• By 2009, six basic colors were used
Hometown of Firecrackers and
Fireworks
•Fireworks originated during Tang Dynasty in Liuyang
•Liuyang fireworks chosen as official tributes to the
imperial family and were sold all over the country
•By 1875, exports of fireworks and firecrackers to:
Japan, Korea, India, Iran, Russia, Australia etc.
•Liuyang-made fireworks and firecrackers won many
awards
•Pillar industry of Liuyang – fireworks and firecracker
industry
Hometown of Firecrackers and
Fireworks
• Accounts for almost 50% of all jobs and 1/3 of total
population in Liuyang
• By 2008  Liuyang had 2702 fireworks manufacturers
against a total of 6458 in China with most owned by
villages and families
• Liuyang  top exporter in the world  made up 60% of
global production and China contributed to 89% of world’s
exports
• Competition intensified in China due to increase in demand
The Product

• Two main categories:

1. Display Fireworks
2. Consumer Fireworks
Display Fireworks
• Aerial shells
• Maroons
• Large roman candles
• Only for professionals (licensed) for large public display shows
• Designed to produce:
o Visual & audio effects at heights above ground compared to consumer
fireworks
• Known as Class B fireworks before 1991
• Now known as Explosives 1.3
Consumer Fireworks
• Known as Class C fireworks before 1991
• Now known as Explosives 1.4
• Easily purchased in convenience stores
• Can be used for private parties and used
in their own backyards
 Indoor Garden
Fireworks Fireworks

Classifications
in the UK Display
Fireworks
Display
Fireworks for
Professionals
only
Fireworks Made in Liuyang
• 13 types of fireworks
• More than 3000 varieties
• Fountains
• Rockets
• Handheld novelties
• Nail and hanging wheels
• Floral shells
Change in Trend
• Shift from firecrackers to fireworks
• 1999- firecrackers made up 20% of total sales
• Old fireworks reached up to 20 meters in the sky
• New fireworks reached up to 400 meters in the
sky
• Ingredients remained the same
• Lesser manual labor used
Safety Issues
• Fireworks mainly comprise of gunpowder
• Listed under list of explosives
• Numerous accidents resulted in human injuries & damage of property
• Most dangerous steps in manufacturing process:
oPowder mixing
oPowder filling
• Use of impure ingredients increases possibility of accidents
• More accidents in private parties compared to public displays
US Consumer Products Safety
Commission Data
• Firework related injuries declined by 44%
• 1997:
• 8300 firework related injuries,
• 32% caused by firecrackers,
• 42% involved illegal firecrackers
• fireworks were safer than products like
baseballs, pens and pencils
• Children of ages 5-14 were most frequently
involved in firework related injuries
Control & Safety Measures
• The Bureau of Alcohol Tobacco and Firearms (BATF):
o Controlled manufacture, storage, sales and distribution of explosives i.e., Class B fireworks
• The CPSC and Department of Transportation:
o Transportation of fireworks i.e., Class C fireworks
• At federal level, fireworks and firecrackers were allowed if safety features were up to the
standard
• Permits needed from federal and local authorities as well as fire departments for display
fireworks
• The Canadian Explosives Research Laboratory:
o Responsible for setting standards and testing products
Regulation of Fireworks
• Out of 50 states:
o 10 do not allow any fireworks
o 5 allow novelty fireworks
o 18 allow “safe and sane” fireworks
o 17 allow all consumer fireworks
• Less stringent regulations in most of Europe
• Extremely restrictive regulations in Canada
• No Chinese company found on the list of fireworks companies allowed to sell
fireworks to Canada
Firecrackers and Fireworks
Industry in China
• Industry dominated by small family-owned-and-operated
workshops
• Low-tech, highly labor-intensive industry
• After 1949  government-run factories replaced family-
owned workshops
• Automation of some processes due to increase in scale and
government funds
• Key processes like mixing color ingredients  skilled workers
Firecrackers and Fireworks
Industry in China
• Location of factories  further away in case of accident, near a water source, in
sparsely populated rural areas
• After the reform towards market economy in 1979, business reverted back to
family run units of production.
• Restricted technological innovations, minimum R&D
• Research facilities poorly funded and equipped
• Majority of workers were regular farmers
• Only 4-5 fireworks factories would operate in the year
• 500+ workshops  worked when orders came
• Initiation of Environmentally friendly fireworks, cold flame fireworks technology
Firecrackers and Fireworks
Industry in China
• Liuyang  most well-known place for fireworks yet faced competition
• Liling, Hunan Province  majority community of fireworks
• Faced competition due to price and quality
• The initial capital requirement to start a facility was relatively low
• Labor cost low  20-30% of total cost
• Raw materials were easy to procure
• Long term relationships with suppliers to guarantee quality
• Social responsibilities like healthcare, retirement benefits
• Cheap unskilled workers, cheap equipment & raw material – cut costs –
disastrous – stricter regulations
The Domestic Market
• Fireworks used in China for good luck and public attention
• Rise in demand in the past two decades due to increased economic
development and living standards
• More profit opportunities as demand for fancier and expensive fireworks
increased
• Increased concerns over environmental pollution and safety of human rights
& property
• Rise in firework related accidents led to increased regulations
• By 1998, one-third of the cities banned the use which led to decline in
domestic market
• Domestic competition increased and was based on price
The Domestic Market
• Emergence of small family run workshops
• Workshops would exceed 500 in peak time and would drop
to half in slow period
• Government run general merchandise companies were
replaced by private dealers
• Wholesalers could get shipments directly from the
manufacturer and then distribute it.
• Reselling to street peddlers or convenience stores
• In display fireworks market, buyer was government making
purchases for shows on public holidays and celebrations.
The Domestic Market
• Reasons for negative impact on domestic sales of Liuyang
Fireworks:
• Legal Restrictions
• Local Protectionism
• Cutthroat price competition
• Hard to penetrate distribution channels
• Bad debt
• Lack of respect for business contracts leading to credit crisis
The Domestic Market
• Liuyang Fireworks started an offensive strategy
• Opened 29 offices in major provinces, cities and regions for
promotion
• Regulated prices that the company could quote & sell in export sales
• Resorted to government-to-government relationships to get large
contracts
• One year into launching the strategy their sales increased
The Export Market
• Exporting was a big chunk of the fireworks industry
since the Chinese economy opened in 1979
• 1994: US $143 million
• 1995: US $172 million
• 1998: US $200 million
• 2022: US $97.5 million
Comparison of FOB
Import Prices from
China & Wholesale
Prices of Chinese
Fireworks in the US
Stats for
2022
Top
Importers
Events where Fireworks are
used the most
• UK: Guy Fawkes Night (5th November)
• UAE: New Year’s Eve (1st January)
• Australia: Sydney, New Year’s Eve (1st January)
• France: Paris, Bastille Day (14th July)
• US: Independence Day (4th July)
• Canada: Vancouver, Celebration of Light (July)
• Japan: Niigata, Katakai Festival (September)
Issues with Exports
• Despite having more than 90% of the exports, the industry suffered
• Profits were limited
• Countries like Spain, Japan and Korea would repackage the fireworks better
• Fireworks makers in China were losing their brand names
• Due to the West outsourcing fireworks, companies lost brands
• Produced as manufacturers only
• 5 blocks of exports: North and South America, Europe, Asia, rest of the world
Laws Regarding Fireworks
Around the World
• USA: strict laws, vary from state to state which usually allow
fireworks on the 4th of July and New Years Eve, people over 21 can
buy them, Massachusetts and Delaware banned them completely
• Hong Kong: only government organized firework shows are allowed
due to 1967 riots
• Japan: explosive types are not allowed, and consumers cannot take
them home
• Vietnam: only hand-held sparklers allowed for people 18+, fireworks
used by the government during the Tet festival (spring and Lunar year)
Laws Regarding Fireworks
Around the World
• India: mostly used in Diwali, Delhi banned them in 2022 due to air
pollution
• Netherlands: banned overall due to injuries but can only be sold between
29th-31st December
• Germany: same law as the Netherlands
• Singapore: Dangerous Fireworks Act of 1972, completely banned
however, exceptions are very rare (Exemption Law of 2018)
• Malaysia: only two types of fireworks allowed, Happy Boom and Pop Pop
• Australia: banned everywhere except for the Northern Territory and
Tasmania, both of which have strict rules
Fireworks & the Environment
• Beijing completely banned fireworks, even on Lunar
New Year’s Eve due to the air quality
• Shanghai air quality improved between 2013-2017 due
to fireworks regulations
• Particulate matter decreased (Yao, L., Wang, D., Fu, Q.,
Qiao, L., Wang, H., Li, L., … Chen, J. (2019))
• Private use of fireworks leads to particulate
concentrations if no restrictions are placed (Lai, Y.;
Brimblecombe, P. (2022)
Fireworks & the Environment
• Air pollution in China gets worse during the
Chinese Spring Festival (Wu, G., Tian, W.,
Zhang, L., & Yang, H. (2022))
• The global Fireworks market was valued at
USD 2481.6 million in 2020 and is expected to
reach USD 3243.8 million by the end of 2027,
growing at a CAGR of 3.9% during 2021-2027.
Fireworks & Health
• Fireworks can lead to the following:
• Restlessness
• Temporary/hearing loss
• High Blood Pressure
• Sleep Disturbance
• Chronic/Allergic Bronchitis
• Bronchial Asthma
• Pneumonia
• Laryngitis
The Future of the Fireworks
Industry in China
• Jerry Yu: regulations are killing the industry
• Traditional celebrations will be replaced by modern techniques
• Makeshift firecrackers: red plastic tubes strung along with a spark
emitting bulb
• People run over balloons to emulate the sound of firecrackers
• Safer alternatives: cold fireworks, glow sticks, glow in the dark bubbles,
elephant toothpaste, pinatas, laser-beams, confetti poppers, drone show
• Most believe that fireworks cannot be replaced e.g., US Congressional
Resolution of 1963
The Future of the Fireworks
Industry in China
• According to the report generated by Business Research Insights:
• Global Fireworks Market 2022 is projected to touch USD 3381 million by
2028, growing at a CAGR of 3.9% during the review period
• Information such as key player profiles, production limits, demand status,
CAGR status, growth opportunity, value, costs, revenues, and contact
information
• This report contains data, market trends, and values
• The market overview and geographic region, as well as market size,
growth, new trends, and new opportunities, are all covered in the research
report.
Main Players Identified In The
Report
Standard (IN), Sri Kaliswari (IN), Ajanta (IN), Coronation (IN),
Sony (IN), Diamond Sparkler (US), GROUPE F (FR), Panda
(CN), Lidu (CN), Zhongzhou (CN), Liuyang (CN), Guandu
(CN), Jeeton (CN), Qingtai (CN), Bull (CN), Hekou (CN), Dahu
(CN), Dancing (CN), Shenma (CN), Jinsheng Group (CN),
Sanlink Group (CN), Fuxiang (CN), Hefung (CN), Shenghong
(CN), Shengding (CN), Meaning (CN), Juntai (CN),Shijihong
(CN), Kim TAE (CN), Qianzi (CN)
PEST ANALYSIS
Political
• Local governments have different regulations regarding
fireworks
• One-third of the cities in China banned fireworks
• Environmental and safety of human rights & property
• Eased legal restricts on foreign direct investment
• Implementation of offensive strategy
o Local offices, government to government relationships &
price regulation
Economic
• Improved standard of living of people leading to:
o Increased demand
o Higher profit margins
o Low initial capital requirements to set up a factory i.e., RMB 1,250,000
o Low labor costs which led to increased local workshops
• Unfavorable export regulations leading to:
o Lower profit margins
o Less coordination of export sales
o Underpricing becoming common
o Increased competition
Social
• Environment pollution and safety concerns
o Accidents during production and the events
o Regulation across countries regarding fireworks
o Decline in injuries caused by fireworks as stated by Consumer Products Safety Commission

• Diversity of culture
o Reduction in seasonality of production

• Workers were majorly domestic farmers

o They had learned the skill of making fireworks by following their elders

• Cultural values
o Fireworks were used as a sign of good luck
o Frightening of evil spirits
o Celebrating good news
Technological
• Labor intensive industry
• Family-owned workshops following traditional ways
• Key processes done manually
• Restricted technological innovation
• No resources allocated to R&D
• In Liuyang out of 400,000 workers very few were engineers with professional training
• Emergence of E-commerce
• Internet was used to market the fireworks
• 20-25% of the sales were due to the emergence of internet
Porter’s 5
Forces Model
Threat of New Entrants
• Risk of new or existing competitors offering same
products
• Low capital required:
o Gunpowder, plastic, cardboard, clay soil
• Low-cost labor:
o Every family has knowledge and expertise
• Licensing is easy
• Increased chances of new entrants means lower
profits
Threat of Substitute Products
• Threat of purchasing products from a different industry
o Product is lower cost, replaceable, more attractive
• Firecrackers are used for private and public celebrations
• Manual labor is used more than technology in production
• Environmental issues and damages ( people, property)
• Substitute products:
o Glow sticks
o Confetti Poppers
o Laser light show
Competitive Rivalry within
Industry
• Constantly growing industry
• Price competition:
o Lower costs- in areas where manual labor can be hired
at lower costs
o Hazarded level of quality – safety standards may be
compromised
• Copy new and popular products
• Japan and Korea- better quality and packaging
Bargaining Power of Suppliers
• The power that suppliers have over buyers to change the price for
themselves
• In China:
o Easily available raw material
o Sustainable supply of labor
o Various potential suppliers
Bargaining Power of Buyers
• The power that the buyers have over the sellers to negotiate to
get higher quality products at a lower price
• Increasing living standard
o More people using fireworks to celebrate
• Government ( higher bargaining powers)
o Bulk buying- national holidays, special celebrations
o Bidding done on a larger scale to decide on suppliers
COVID-19 Impact
• Industry fell silent in 2020
• COVID stopped most public celebrations  paused hiring of
pyrotechnicians and orders
• Halt on production, demand and supply due to quarantine zones
• Closed borders  no exports
• 4th of July expected on Saturday  surge in demand expected
• Pandemic put everything to halt
• Annual revenue decreased to around $90 million in 2020
COVID-19 Impact
• Costs increased from 2019 to 2022 for raw materials, shipping, transportation, labor
• Overall costs are up 35% according to American Pyrotechnics Association
• Shipping cost $45,000 per container today vs $10,000 in 2019
• Disruption in supply chain led to higher shipping and freight charges  costs
increased
• Global supply chain disruption  US not able to see as many China-made
fireworks in NY, Washington
• Orders from US increased by 30% compared to last year, but they are in short
supply brought by transportation pressure
Final Investment Decision
• Yes, Jerry Yu should invest in the company
• Although the case identified it as a sunset industry, it is still
prominent
• It is projected to grow even further
• With proper implementation of laws, fireworks can be used better
• Government supervised national festivals, special events consumer
a lot of fireworks
• Alternatives for fireworks can be used for private events
• 25/30 companies are Chinese
Final Investment Decision
• Profits and potential in industry
• Purchase high quality material to minimize accidents
• High quality material should pass quality standards worldwide like
AFSL, Canadian Fireworks Standard
• Implementation of health and safety standards
• Training of employees, R&D  product differentiation
• Brand building and a brand equity strategy
• Revenue increased  positive sign to invest
Fireworks: The Past, Present
and Future of this Chinese
City
 • https://www.globaltimes.cn/page/202
107/1227665.shtml

References
• https://www.npr.org/2018/07/03/6254
05653/for-independence-day-firework
s-u-s-depends-on-china#:~:text=But%
20those%20of%20us%20who,of%20t
he%20American%20Pyrotechnics%2
0Association
• https://www.statista.com/chart/14525/
china-accounts-for-the-bulk-of-us-fire
works-imports/
• https://www.washingtonpost.com/dc-
md-va/2022/06/30/fireworks-shortage
-july-4-pandemic/