April 28, 2015
Fireworks refers to any device that is designed to produce visual or audible effects through combustion or explosion. They have been said to have been invented by a Chinese cook by mixing Sulphur, Charcoal and Saltpetre and has in the last thousand years been developed with a new modern design. The Chinese were the first makers of fireworks and it is part of their culture. Fireworks is more than just a livelihood for the Liuyang people with an offering of two categories, display and consumer fireworks. Liuyang makes 13 types and over 3,000 varieties to choose from. In 1979 most factories were broken up and became family run units of production. Liuyang is the leading manufacturer of fireworks and is among the top 5 in China. They hold an extensive production portfolio with a great track record focused on consumer products being strategically located. Liuyang is known as “the home of firecrackers and fireworks”. Liuyang has a high reputation in the domestic market being the top fireworks exporter in the world, occupying 60% of the global production.
Jerry Yu was running a small chain of gift stores in New York when he was asked to invest in a fireworks factory during a visit to Liuyang. He was impressed by the fireworks shows he had seen and wanted to find out more about the Chinese fireworks industry before he decided to invest.
Dominant Economic Features
Market size and growth rate: display fireworks have seen little growth over the last 15 years while the consumer fireworks has seen significant growth over the same 15 years.
Number of Rivals / Scope of Rivalry: It is said that China-made fireworks make up 80-90% of the world’s fireworks market. China’s wholesale prices were also 80% cheaper than its rivals in Japan and Korea.
Scope of competitive rivalry: There is a domestic market as well as and Export market
Number of Buyers: The number of consumer fireworks purchased is much larger than the number of display fireworks. The exports of fireworks from China is much larger than the domestic use since the opening of the Chinese economy in 1979.
Degree of product differentiation / product innovation: 13 types of fireworks and over 3000 varieties of fireworks are made in China, innovation has never reached beyond product variations. The ingredients have remained more or less the same and process technology has not changed much either. The use of machines for certain processes could alter the production but it costs more to run machines than it does to hire laborers.
Demand-supply conditions: with the broadening of uses for fireworks the supply and demand has risen to accommodate every such occasion. Fireworks were first used by the Chinese for grand openings, weddings, funerals, festivals and special occasions. In the past two decades the demand has risen because of increased economic development and living standards.
Pace of technological change: Use of the internet has opened up the possibilities for the industry in regards to sales and marketing.
Vertical Integration: N/A
Economies of scale: Economy of scale is high and brand identity is low.
Learning/experience curve effects: Many of the workers are not highly trained and are generally farmers when they are not making fireworks. The industry could benefit in a training program to avoid safety issues and accidents associated with being an under skilled worker.
General External Environment
Demographic: The Chinese domestic market is faced with legal restrictions, cutthroat price competition, local protectionism, and hard to penetrate distribution channels. The foreign direct investment has opened up as the fireworks industry is very attractive in China for investments in technology, automation, R&D and new factories.
Eased legal restrictions of foreign direct investment
Magnet for foreign direct investment
Trade and tariffs…