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Chinese Fireworks Industry (Export Market (1979, openning of chinese…
Chinese Fireworks Industry
History of Fireworks
Firecrackers for New Years celebrations, weddings, grand openings, births, deaths and other cerenomial occasions
Main ingredients remain almost the same
Chinese were the first makers of fireworks
13th century: Arabia and Europe
15th cenrtury: religious festivals and public entertainment
Italians best known names in Europe and America
Liuyang
Hometown of firecrackers and fireworks in China
Early Exports: Japan, Korea, India, Iran, Russia, Australia, ENgland, US
Liuyang-made fireworks & numerous awards
Pillar indsutry - Every native knew sth. about fireworks - pool of skilled labor
2008: 2,702 manufacturers in Liuyang (2,144 in sorrounding areas)
6,458 in total in China
Trend to consolidation, most firms still owned by villages or families
about a dozen are medium to large firms (100-500)
rest are small workshops (10-15) depending on demand
60% of global production (export by Liuyang)
89% by China
China become largest market for fireworks
Increase demand intensified competition
all new demand met by chinese fireworks industry
instead of increase margins - profit margin for small firms shrunk in past decade
cutting corners to make up a difference on the market
cost cutting by expense of safety standards
Accidents by decrease safety standards by lack of money due to cost competition - regulation of prices
Product: Fireworks
visual and audible effect through combustion or explosion
Pyrotechnics
Previous: Firecrackers (90% of total production & sale)
Today: Shift away from firecrackers to fireworks
2009: 20% firecrackers
skills levels of fireworks-making greatly improved (20 to 400 metres)
2 categories:
display (professional) and consumer fireworks
Production: not much had changed
Ingredients more or less the same
Technology not changed much (some automations)
innovation not beyond production variations
Safety Issues
made by gunpowder
accident resulted tragic human injuries
Heavily regulated in most countries
most dangerous during production process
transport and storage relative safe
strict safety measure and quality of ingredients are significant important
higher competition led to decreasing safety standards in order to safe costs
Injuries declined substantially, even though use increase
most accidents by children
dramatic and widely publicized
government agencies control manufacture, storage, sales & distribution (BATF)
locals have own regulations
Firework Industry China
Domintaed by small family-owned-and-operated workshops
after 1949, government-run factories, increased scale and government funds made automation of some processes_key processes by skilled workers
-large factory buildings needed, due to safety conderation
1979, reform market economy, family-run firms increased (privatisation should help motivate people to increase productivity and rais output) - restrict further technological innovations - hardly any R&D facilities, no human capital allocated to R&D - resources spend on product varieties - only few engineers
initiatives to upgrade traditional firework industry. R&D investments - environmental friendly fireworks
workers=regular farmers, trained by watching and follow elders
dependend on demand
few factories: operated year-round. Most: operate as orders come in. Pool of skilled fireworks.makers
Competition
Liuyang most well-known place (Hunan Province)
Liling, (Hunan Province), another major manufactory community, not same reputation and variety, but fierce price competition
Pingxiang and Wanzai (Joangxi Province), became strong competitors in price and quality, especially on low-and medium priced market
Dongguan (Guangdong Province) takes advantages of its closeness to Hong Kong and more sophisticated management and marketing practices, snatched market shared from Liuyang
2009: more than 1/3 and 60% of chinese production remaind Liuyang
Capital requirement relatively los
set up factory with necessary equipment for large displays = RMB1,250,000 (US$1=6.60 Yuan)
Setting small family workshop making consumer firecrackers and fireworks = less RMB125,000.
= Number of small ones increased after government started to encourage private business
Labor Costs
very low, but steadily increasing
Due to Chinese economic growth, wages had doubled over past 5 years
many workers were moving to less dangerous occupations
skilled workers in major processes earn RMB1,200 to RMB1,800 per month. non-skilled workers = 500-7000RMB. In large firms labor costs are 20-30% of total costs
Main raw materials not difficult to procure.
Costs of raw materials steadily rising due to growth of chinese domestic firework industry
Another Problem: Supply in Quality, ling-lasting relationship to guarantee quality of material
Number of small companies intesified competition, as they are flexible and quick in responding to market demand - did not entail much administrative costs - incur the costs of providing health care, retirement benefits and housing
usually no product reserach or design
copa any popular product design and less it much cheaper - resulting price drop is searious problem for whole industry
Domestic Market
traditional in China for any ceremonies
Until recently, demand was stable, but had risen in past 3 decades due to increase economic development and living standards
Economically, market reform and unprecedented growth gave rise to daily appearance of multitudes of new companies and stores
people income level and living standards kept rising, fancier and pricier fireworks were desired over cheap simple ones, creatin more profit opportunities for manufacturers
almost every household spend at leat couple of hundred RMB on firecrackers and firework during Spring Festival
before 2000s: increased concerns about evironmental pollution and safety led more cities to regulate consumption
accidents reported on mass media before and after Spring Festival
Wave of regulations
After 2000s: Demand began to soaw when Beijing lifted ban on fireworks, other cities follows, lead to explosion in chinese domestic market
Domestic competition growth intensively
reform toward market economy: family-run workshop appear
competition mainly on price
every province had manufacturers, opend with skilled workers migrated from Liuyang, located in rural, underdeveloped areas with low labor costs, manually work with safety measures, using cheap raw materials and simple techniques
difficult for Liuyang to sell in those areas and copy new popular product designs, even using their brand names
Wholesale markets in China were important outlets for distributing fireworks
Display fireworks, buyers are mostly central and local governments, good opportunitiy and many advantages to supplying local government, high demand to publics shows
Account receivables and bad debt control was a problem
bad debts and lack of respect for business contracts created credit crisis in China
bad debt increases trasnaction costs, slowed down cash turnover, some withdraw sellings in domestic market
--> Government start offensice strategy, 1. opened local offices to promotoe Liuyang fireworks, 2. regulated prices, 3. resorted government-to-government relationship to secure contracts for large public fireworks in each privince --> sales increased
--> 2009, controlled 60% of global market
--> more and more legal restrictions were lifted, most notable eased foreign direct investments, Chinese Firework industry become magnet for foreign investors
Export Market
1979, openning of chinese economy --> exporting became major market for chinese fireworks
2009: US$675 Exports of firecrackers
Product from China: rich in variety and low prices, lower reputation in quality control, packaging and timing control, compaed to product from Korea and Japan
80% lower than similar prpoduct from korea dn japan
limited profitability of chine firework industry, export prices beteween 1/5 and 1/3 the wholesale price in US
Importers enjoyed high amrkup after paying import duty
gap pushed domestic and foreign companies to find ways to control the value chain from production to retail
Risky loosing brand identities
low costs and good quality of chine fireworkers, many large fireworker and dealers in the West started to outsource the making of their brand-name firworks
Failing to see importance of brand equity, losing their own brands
firework merchant from Korea, Japan and Spain buy chinese firework and repackage them and sell for higher prices
5 Export blocks: Southeast Asia, North America, Europe, South America, and the rest of the world
Europe popular due to kess stringent regulations, and large quantitiy orders and better prices
US tough market with complex regulations and high compeition, but necessary if a firm wanted to be world-player
Canada in past virtually closed, 2009 chinese imports dominate canadian market
Strong foreign Importers
-very well informed due to past dealings with China and Internet
able to hire agents familiar to Chinese industry
deal directly with factories will to offer low prices
no switching costs, play suppliers against each other
Diversity of cultures in destination countries reduce seasonality of firework production and sales
result: orders event throughout the year
Peak seasons: end of year
Internet became marketing outlet
20-25% worldwide sales through internety
export sales still mainly through foreign trade companies or agents
Foeirng investments were funneled into firework industry
Liuyang, 4 of the largest factories had foreign investments, made mainly by firework trading companies in Hong Kong.
2009:Liuyang Fireworks Company listed on Toronto Stock Exhchange, a first chinese firework manufactuere
Future of Firework Industry
Optimistic vs pessimistic view
Current Situation
2009
Jerry Yu
American Born Chinese
MBA
Small family-owned gift store in Brooklyn
relatives invited to invest in firework factory owned by village in Liuyang