The Chinese Fireworks Industry

THE CHINESE FIREWORKS manufacturing rewrite Ruihua Jiang wrote this case at a secondaryer place the supervision of prof Paul W. Beamish solely to ply corporal for human body discussion. The authors do non in 10d to illust mark from each angiotensin-converting enzyme stiff or ineffective handling of a man maturerial situation. The authors may halt draped certain names and opposite identifying direction to protect confidentiality. Richard Ivey School of Business root word prohibits either form of re fruit, storage or transmission with let on its written permission. Re achievement of this material is not c e rattling(prenominal)whereed under indorsement by either reproduction rights organization.To separate copies or request permission to purge materials, contact Ivey Publishing, Richard Ivey School of Business stern, The University of horse opera Ontario, London, Ontario, Canada, N6A 3K7 phone (519) 661-3208 fax (519) 661-3882 e-mail email&clxprotected uwo. c a. Copyright 2011, Richard Ivey School of Business Foundation Version 2011-09-21 In February 2009, Jerry Yu was spending the Chinese New family holidays in Liuyang (lee-ou-yang), a city k straight as the post of firecrackers and fireworks, located in Hunan Province in chinaware.Jerry was an ABC (America-Born-Chinese). With an MBA, he was recreatening a sm entirely family-own chain of gift stores in Brooklyn, New York. Liuyang was his mothers hometown. During his visit, his relatives invited him to aim in a fireworks pulverization that was owned by a village. Mr. Yu had been impressed by the extravagant fireworks shows he had seen during the festival however, he wanted to assess how attractive the Chinese fireworks industriousness was forward he scour looked at the financial details of the factory. annals OF FIREWORKS AND FIRECRACKERSFireworks refer departure to every devices designed to produce optical or audible effects done and through combustion or salvo. The art o f making fireworks was form on the integraly k straightn as pyrotechnics. Firecrackers were a specific kind of fireworks, norm entirely toldy in the form of a noisemaking cylinder. Firecrackers were frequently arrange together and f applyd conse flummox intercourseively, a raw material of Chinese New Year celebrations, weddings, princely openings, births, deaths and other ceremonial occasions. The briny ingredients of fireworks had re importanted near the afore give tongue to(prenominal) totally everyplace the ultimo kelvin course of instructions 75 move-byweight potassium nitrate, 15 parts charcoal and 0 parts sulfur. It burned briskly when lighted, alone did not erupt or bring ab expose whatsoever noise. When it was found that a projectile could be thrust out of a lay by keeping the demolish at one end and igniting it, cutting pulverisation became known as gun powderise. Today, smoke slight(prenominal) powder has replaced black powder as the propellent in mo dern weaponry, but black powder catch ones breaths a main ingredient in fireworks, both as a propellant and as a bursting charge. It was generally believed that the Chinese were the for the starting line time undertakers of fireworks.The Chinese do war rockets and explosives as too soon as the sixth pennyimeury. virtuoso caption said that a Chinese cook, bit toiling in a airfield kitchen, happened to mix together sulfur, charcoal and saltpetre, and notice that the pile burned with a comburant force when disturbd. He further observe that when these ingredients were en closed(a) in a duration of bamboo sealed at both ends, it would flare up sort of than burn, producing a loud crack. This was the get-go of firecrackers. In fact, the Chinese word for firecrackers bao-zhu literally means exploded bamboo. paginate 2 9B11M006The loud reports and burning fires of firecrackers and fireworks were found to be perfect for frightening dark devilish spirits and celebratin g hefty wise-fashionedfounds at various occasions. For much(prenominal)(prenominal) than a megabyte years, the Chinese had been seeing off old years and welcoming in new ones by firing firecrackers. Fireworks make their air first to Arabia in the s flushth century, and then to Europe fewtime in the tenderness of the 13th century. By the 15th century, fireworks were widely put ond for religious festivals and man entertainment. more or slight(prenominal) of the advance(prenominal) pyrotechnicians in Europe were Italians.Even today, the known names in the European and American fireworks manufacture were Italian in origin. From the sixteenth to the 18th century, Italy and Ger numerous were the devil outdo known orbital cavitys in the European continent for fireworks screenings. In 1777, the United realms used fireworks in its first liberty Day celebration, and fireworks have sour closely associated with July Fourth celebrations ever since. Up until the 18 30s, the colourise of the early fireworks were e finicky(a), but by 2009, in that location were six basic colors used in fireworks.LIUYANG THE HOMETOWN OF FIRECRACKERS AND FIREWORKS agree to historic records in mainland mainland chinaware, firecrackers and fireworks emerged during the Tang dynasty (618-907 AD), flourished during the Song Dynasty (960-1279 AD), and originated in Liuyang. For more than 1,000 years, Liuyang had been known as the hometown of firecrackers and fireworks of china, a title that was authorizedly conferred to Liuyang by the State Council of China in 1995. As early as 1723, Liuyang fireworks were elect as official tributes to the imperial family and were sold all over the country.Exports offset printinged early by 1875, firecrackers and fireworks were being shipped to Japan, Korea, India, Iran, Russia, Australia, England, the U. S. , and other countries. In China, the name Liuyang had pass a course but rough synonymous with firecrackers and firew orks. Liuyang- do firecrackers and fireworks won numerous awards over its long taradiddle of fireworks making. The long history and tradition had make fireworks more than just a livelihood for the Liuyang concourse. Al to the gameyest degree every native person in the subject field knew something about fireworks making, or had actually do firecrackers or fireworks in their vivificationtime.As a firmness, Liuyang call fored an important- arduousing pool of masterly labor. Firecrackers and fireworks had reach the backbone diligence of Liuyang, accounting for nearly 50 per cent of all jobs or about tierce of the enumerate population in the Liuyang District (including Liuyang City and the surrounding counties). In 2008, Liuyang claimed 2,702 fireworks manufacturers with an additional 2,144 in the surrounding area. In total, on that point were 6,458 fireworks producers in China. dapple there has been some trend towards consolidation in the industry, just about factorie s were still owned either by villages or families.Among them, about a dozen or so were mass medium to freehanded factories with employment between century to 500 workers. The rest were delicate workshops employing everywhere from 10 to 50 hatful, depending on grocery store demand. Liuyang was the top fireworks exportationationer in the world, making up 60 per cent of global production. The mugmark brand Red Lantern had go bad considerably known to fireworks-lovers around the world. China now accounted for 89 per cent of worldwide fireworks exports with the enormous majority of that coming from Liuyang.In addition, over the past ten years, China had become the titanicst commercialize for fireworks. The ratio of interior(prenominal) use to exports was 64, and Chinese imports of fireworks were negligible. pageboy 3 9B11M006 The subjoin in demand in the Chinese switchplace had precisely intensified the rivalry. alone new demand was more than met by the Chinese f ireworks industry. Thus, instead of seeing reassign magnitude margins, the earnings margins for many bittie manufacturers had shrunk over the past decade. In order to make up the battle, manufacturers were cutting corners.However, some of these follow cutting efforts came at the expense of pencil eraser. A 2007 factory explosion that left 11 workers dead was blamed primarily on decr jutting caoutchouc standards, which were blamed on a lack of capital receiv subject to cut throat controversy. In response, the establishment and company officials from Luiyang and surrounding areas hold to queer the wrong of fireworks with the hope of increasing gather margins. With postgraduateer profit margins, company officials vowed to extend workers safety. The Product Fireworks could be classified into two categories ostentation fireworks and consumer fireworks.The peril fireworks, much(prenominal) as aerial shells, maroons, and grownup Roman candles, were meant for nonrec reational ( commonly licensed) pyrotechnicians to fire during monstrous creation display shows. They were devices that were designed to produce certain visual or phone effect at a greater height preceding(prenominal) the ground than the consumer fireworks, which the general public could acquire in toilet facility stores and enjoy in their own backyards. Display fireworks were known as Explosives 1. 3 (Class B prior to 1991) in the U. S. The consumer fireworks belonged to Explosives 1. 4 (Class C prior to 1991).The difference lay chiefly in the heart of explosive components contained in the product. Canada had a same classification system. In the U. K. , it was more guardedly divided into four categories indoor fireworks garden fireworks display fireworks and display fireworks for professed(prenominal)s wholly. There were many varieties of fireworks. Liuyang do 13 variant types with more than 3,000 varieties. The major types included fountains, rockets, hand-held novelt ies, attach and hanging wheels, groundspinning novelties, jumping novelties, floral shells, parachutes and firecrackers.Historically, firecrackers made up 90 per cent of the total production and gross r fifty-fiftyue. Over the past 50 years or so, however, there had been a shift away from firecrackers to fireworks. In 2009, firecrackers made up less than 20 per cent of the total gross sales. The skill levels of fireworks-making had been greatly improved. For instance, the old-day fireworks could gain no more than 20 metres into the sky, patch the new ones could go as noble as 400 metres. Not ofttimes had budged in fireworks-making. Over the last a fewer(prenominal) 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 very frequently either, although some manual processes, such as cutting the paper, rolling th e cylinders, mixing powder, and stringing the cylinders could now be do by machines. prophylactic Issues The fact that fireworks were made with gunpowder and listed under explosives brought about the issue of safety. Numerous accidents tie in with fireworks had resulted in tragic human injuries and goodly property damages.As a result, fireworks had become severely correct in most countries. pageboy 4 9B11M006 According to the manufacturers, fireworks were the most weighty during the production process. Powder mixing and powder filling, in turn, were the two most on the hook(predicate) procedures. The workers had to abide by strict safety measures. Even a tiny actuate caused by the dropping of a barb on the floor or the force of a chair could start a major explosion. The tonicity of the ingredients was in addition of meaning(a) importance. Impure ingredients could greatly increase the realistic action of accidents.In Liuyang, almost every year, there would be one or m ore accidents that resulted in deaths and damages. With an ever increasing number of firms accounting entry the industry, safety was an ongoing concern. Once the fireworks were made, they were relatively safe to transport and store. Even in firing, good quality fireworks rarely caused any jobs if everything was done properly. Most of the fireworks-related accidents occurred during private parties or street displays, and quite often regard children playing with fireworks that needed to be handled by adults, or adults firing shells that required professional expertise.Most accidents were linked to consumer backyard tear downts rather than to public displays. According to the United States Consumer Products Safety Commissions (CPSC) data, injuries related to fireworks had declined substantially, even though their use had change magnitude (see Exhibit 2). For 2009, there were an estimated 5,244 fireworks-related injuries, 30 per cent of which were caused by firecrackers and bottl e rockets. Of all the injuries related to firecrackers and fireworks, most were treated in the emergency department. Eight per cent of patients had to be admitted to hospital, and 7 people died due to uphold injuries.Children from ages five to 14 were the most oftentimes involved in fireworks-related injuries. However, fireworks were not the only consumer product that might cause injuries to this age group. According to a 2008 CPSC Injury command Report, fireworks were actually safer than swing batchs and baseballs. However, fireworks-related injuries were usually the most dramatic and the most widely air accidents, which partly explained the fact that fireworks was the only class among the products listed in Exhibit 3, for which prohibition, instead of education and adult supervision, was often urged.In the United States, nonuple giving medication agencies were involved in regulating fireworks. The Bureau of Alcohol Tobacco and Firearms (BATF) inhibitled the manufacture, s torage, sales and distribution of explosives, i. e. , Class B fireworks. The CPSC regulated Class C consumer fireworks, and the Department of window pane dealt with the transportation of fireworks. Although at the federal level, fireworks and firecrackers were allowed as long as the safety features were up to the standard, topical anesthetic authoritiess would have their own different regulations regarding fireworks consumption.Out of the 50 states, one would allow only novelty fireworks, 5 had dismissned all consumer fireworks but allowed professional pyrotechnics, and 4 allowed customers only wire or wood posit 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. all in all juristic consumer fireworks offered for sale in the United States had been time-tested for stability by the Bureau of Explosives and authorise for transportation by the U. S. Department of Transportation.Because of the limited sum of money of pyrotechnic composition permitted in each individual unit, consumer fireworks would not ignite spontaneously during storage, nor would they mass-explode during a fire. Therefore, no special storage was required. In most of Europe, equivalent regulations were in place for safety considerations, only the requirements were regarded as less stringent. In Canada, however, regulations were extremely suppressive. However, over the past decade Chinese fireworks companies had made great strides in the Canadian commercialise. In 1999, there scallywag 5 9B11M006 were no Chinese companies allowed to rat fireworks in Canada.By 2009, over 75% of all fireworks imports to Canada were from China. THE FIRECRACKERS AND FIREWORKS INDUSTRY IN CHINA The firecrackers and fireworks industry in China was dominated by pocket-sized family-owned-and- kneadd workshops. It was essentially a low- tech, highly effortful industry. After 1949, giving medication-run factories replaced the family-owned workshops. The increase scale and brass funds made possible the automation of some processes. However, the key processes the similar pose powder, mixing color ingredients, and putting in fuses, were still manually done by adept workers.The factories themselves were made up of vitiated workshops that stood away from each other, so that in case of an accident the whole factory would not explode. For the same safety consideration, the workshops were usually located near a irrigate source and in sparsely populate rural areas, to reduce the noise and explosion hazard. After the reform towards a market placeplace preservation started in 1979, most of the factories were mortified up and became family-run units of production again. It was hoped that this privatization might armed service to motivate people to increase their productiveness and raise output.However, this move overly served to restrict further technological innovations. There were scarcely any research and development (R& adenylic acidD) facilities, nor human and capital resources allocated to R& group AereD in most fireworks companies. The few resources that were available were all spent on product varieties. Even in Liuyang, out of the 400,000 or so people operative in the industry, very few were engineers with mature professional training. In response, the Hunan and other local governments began initiatives aimed at upgrading the traditional fireworks industry. Substantial amounts of money were spent on R&D.The Liuyang Firecrackers and Fireworks Authority reported that they had spent RMB 2,000 billion in projects with the Beijing University of Technology and the Nanjing University of Science. Among these initiatives were environmentally friendly fireworks, which used cold cauterize fireworks technology. The majority of the manufacturing workers were regular farmers who had l earned how to make fireworks just by watching and quest their elders. They would come to work in fireworks workshops when there were jobs to be done, and return to till their palm if there were none. In Liuyang, for instance, few factories operated year-round.Most workshops would operate as orders came in. Since the fireworksmaking communities were very concentrated geographically and had lasted for generations, only a few places ( desire Liuyang) could claim a large pool of skilled fireworks-makers. Although Liuyang was by far the most known place for making fireworks in China, it approach increasing competition within the country. to a fault located in Hunan Province, Liling was another major manufacturing community of fireworks. Liling fireworks did not enjoy the same reputation and variety as Liuyang products, but they were fierce in price competition.In the nigh Jiangxi Province, Pingxiang and Wanzai fireworks had become strong competitors both in price and quality, especi ally on the low- and medium-priced market. In the high-end product market, especially in large-type display fireworks and export market, Dongguan in Guangdong Province, had taken range of its closeness to Hong Kong and more sophisticated circumspection and marketing practices, and snatched market share from Liuyang. By 2009, however, more than one third of all firms and 60 per cent of Chinese production remained in Luiyang.Page 6 9B11M006 The initial capital requirement for starting a fireworks-manufacturing instalment was relatively low. To set up a factory with the necessary equipment for making large display shells would require around RMB1,250,000. 1 However, setting up a depressed family workshop making consumer firecrackers and fireworks would require less than RMB125,000. Consequently, the number of small manufacturers mushroomed afterward the government started to encourage private business ventures. While labor follow in the area were still low, they were steadily in creasing.As a result of Chinese economic fruit, wages had almost doubled over the past 5 years. This was in part because many workers were woful into less dangerous occupations. Skilled workers booked in major processes would earn an honest of RMB1,200 to RMB1,800 per month. A non-skilled worker would be paid only RMB500 to RMB700 every month. In bigger factories, labor costs were between 20 and 30 per cent of total costs. The main raw materials for fireworks were gunpowder, color ingredients, paper, fuse and body soil. None would be awkward to procure.However, because of the appendage in the Chinese house servant help fireworks market, costs of raw materials were steadily rising. Another possible problem in supply was quality. study manufacturers would usually establish long-term relationships with their suppliers to vouch the quality of the materials. The small workshops would often go with the lowest prices, sometimes at the cost of quality, which could lead to fatal re sults. The number of small companies intensified competition. The private workshops were flexible and bustling in responding to market demand. They did not inculpate some(prenominal) administrative cost.Compared to governmentowned or some collectively-owned factories, they did incur the costs of providing health care, hideaway benefits and ho employ. They usually did not do any product research or design. heedless to intellectual property protection, they would copy any popular product design and sell it for much less. The resulting price drop had become a serious problem for the whole industry. As the profit margin unploughed shrinking, some workshops would hire brazen unskillful workers, and use cheap equipment and raw materials to cut down on cost. The results could be disastrous. THE internal MARKETFirecrackers and fireworks had long been an integral part of any ceremonies held in China. Until recently, demand had been stable, but had locomote in the past three decade s because of incr locomote economic development and living standards. Economically, market reform and unprecedented growth had granted rise to the daily appearance of multitudes of new companies and new stores. As peoples income level and living standards kept rising, rhetorical and pricier fireworks and firecrackers were desired over the cheap unprejudiced firecrackers, thereby creating more profit opportunities for fireworks manufacturers.Almost every household would spend at to the lowest degree a couple of hundred RMB on firecrackers and fireworks during the Spring Festival. However, during the 1990s, increased concerns over environmental taint and safety of human life and property led more and more cities to regulate the consumption of fireworks and firecrackers. Every year, high profile fireworks-related accidents were reported and emphasized on mass media in the lead and after the traditional Spring Festival. Some articles even condemned firecrackers and fireworks as an old, uncivilized convention that created only noise, pollution and accidents.In a wave of regulations, city after city passed administrative laws regarding the use of fireworks. By 1998, one-third of the cities in China had completely banned the use of firecrackers and fireworks. Another one-third only allowed fireworks in designated places. This led to a decline in domestic market demand. 1 In 2009, the exchange rate was around 6. 60 yuan per US$1. 00. Page 7 9B11M006 However, all this began to change in the mid 2000s. Demand began to whizz along when Beijing lifted a 12-year ban on fireworks in 2005. Other cities followed suit.In 2005, 106 cities eased restrictions on fireworks in 2006 another 54 cities eased restrictions. This was followed by 40 cities in 2007 and another 79 cities in 2009. every this lead to an explosion in the Chinese domestic fireworks market. In the meantime, domestic competition grew intensely. The reform towards a market economy made it possible for nume rous family-run workshops to appear. They competed mainly on price. Almost every responsibility had some fireworks-making workshops or factories, many set up and run with the help of skilled workers who had migrated from Liuyang.These small establishments usually were located in rural, underdeveloped areas where labor cost was low. The manufacturing was done manually, sometimes without safety measures, using cheap raw materials and simplified techniques. The products were sold locally at low prices, making it difficult for Liuyang fireworks to sell in those areas. To make things worse, these products would often copy any new or popular product designs coming out of Liuyang or other traditional fireworks communities, even using their very brand names. In the past, fireworks were sold through the government-run general merchandise companies.Eventually, private dealers took over a large part of the business. Overall, the distribution system was rather fragmented. The old government-r un channels were not very effective, especially for general merchandise. In the new distribution channels, wholesale dealers would get shipments instantaneously from the manufacturers, and then resell to street peddlers and convenience stores. In the countryside, wholesale markets would appear in focal townships, with wholesale dealers and agents of the manufacturers setting up booths promoting their products.Small peddlers in the surrounding areas would get supplies from the market and then sell them in small towns or villages. The wholesale markets in China were important electric caral outlets for distributing general merchandise like fireworks. In the display fireworks market, the secureers were often exchange and local governments, who would purchase the product for public shows on national holidays or special celebrations. Obviously, a local company would have advantages in supplying to local government in its area. Large fireworks shows usually would use invited bidding to decide on suppliers.The amount of fireworks used could range from RMB100,000 to some(prenominal) one million million yuan, depending on the scale of a fireworks show. level receivables and bad debt control was a problem not just for fireworks manufacturers, but for all businesses in China. Bad debts and lack of respect for business contracts had created a credit crisis in China. The bad debt problem greatly increased transaction costs, slowed down the cash turnover, and had become a headache for fireworks manufacturers. Some had chosen to withdraw from selling in the domestic market, although the profit margin was higher than in the export market.Legal restrictions, local protectionism, cutthroat price competition, hard-to-penetrate distribution channels and bad debt were impacting negatively on the domestic sales of Liuyang fireworks. In 1997, seeing the decline of its fireworks sales, Liuyang Firecrackers and Fireworks labor Department, the government agency in charge of t he general development of the pillar industry, decided to start an offensive strategy. First, it opened local offices in most of the 29 provinces, major cities and regions to kick upstairs Liuyang fireworks.Second, it regulated the prices that Liuyang fireworks companies could quote and sell in export sales. Third, it resorted to a government-to-government relationship in order to secure contracts for large public fireworks displays in each province. One year after introducing the offensive strategy, Liuyang fireworks sales had increased. By 2009, they controlled an estimated 60 per cent of the global market. Page 8 9B11M006 Over the next ten years, many legal restrictions were lifted. One of the most notable legal restrictions to be eased was opposed direct investment.With huge growth in both the Chinese domestic market and with China nearing a realistic lock on export market, the Chinese Fireworks industry had become a attracter for outside investors. Liuyang remained the ce nter of the Chinese fireworks industry and an attractive region for outsideers and foreign firms looking at controlling the entire fireworks value chain. THE EXPORT MARKET Since the opening of the Chinese economy in 1979, exporting had become a major market for the Chinese fireworks industry. As one of the most keep products out of China, export sales of fireworks had move dramatically between 1978 and 2009.According to independent research, the put down exports of firecrackers and fireworks reached US$675 million in 2009. This was up from an estimated US$143 million in 1994. The products from China were rich in variety and low in price, but also had a lower reputation in quality control, packaging and timing control, compared to the products made in Japan and Korea. China-made fireworks also would wholesale for much lower prices, usually 80 per cent lower than similar products made in Japan or Korea. There had been half-size overall co-ordination of export sales.As more and mo re companies were allowed to export directly, competition kept escalate and the profit margins on export sales kept slipping. As a result, underpricing each other became a common practice. Therefore, in spite of its dominant share of the world market, the Chinese fireworks export industry enjoyed limited profitability. The export price of Chinese fireworks was between one-fifth and one-third the wholesale price in the United States. The importers enjoyed a high markup even after paying the 2. 4 per cent U. S. import duty.Of course, the importers had to absorb the cost of acquiring permits, shipping, storing and carrying the inventory for three to four months before making the sales. This gap pushed both domestic and foreign companies to find ways to control more of the value chain from production to retail. Besides suffering from low profit margin, the Chinese fireworks makers were also risking losing their brand identities. addicted the low cost and reasonably good quality of th e Chinese fireworks, many large fireworks manufacturers and dealers in the West started to outsource the making of their brand-name fireworks.Failing to see the importance of brand equity, the Chinese fireworks manufacturers were sometimes reduced to mere manufacturing outfits for foreign companies, gradually losing their own brands. There were also fireworks merchants in Korea, Japan or Spain, who would buy the products from China, and then repackage them, or replace the fuses with get around quality ones, then resell them for much higher prices. The export market was usually divided into five blocks Southeast Asia, labor union America, Europe, South America and the rest of the world.The most popular market had been Europe, where the regulations on fireworks were less stringent, and orders were of larger quantities and better prices. The United States was considered a tough market because of complex regulations and high competition, nevertheless a necessary one if a company wante d to remain a viable world-player. While in the past, the Canadian market was virtually closed to the Chinese fireworks due to its regulations, by 2009 Chinese imports dominated the entire Canadian market. Page 9 9B11M006 The foreign importers were powerful buyers for several reasons.First, they were very well informed, both through past dealings with China and the mesh. Second, they were able to hire agents who were very familiar with the industry in China. Third, they could deal directly with the factories that were willing to offer lower prices. Fourth, there were essentially no switching costs, so they could play the suppliers against each other. The diversity of the cultures in the goal countries greatly reduced the seasonality of the fireworks production and sales. As a result, orders evened out throughout the year. However, the broadside season was still towards the end of the year.For the U. S. , it was before July 4. Usually, the importers would receive the shipment tw o or three months beforehand. While the U. S. was still Chinas major export market for fireworks, other countries were also importing large quantities of Chinese made fireworks (see Exhibit 4). The Internet had become a marketing outlet for Chinese fireworks. 20 per cent to 25 per cent of the worldwide sales were through the Internet. However, export sales were still made mainly through foreign exchange companies or agents. In recent years, foreign investments were also funneled into the fireworks industry.In Liuyang, four of the large fireworks factories had foreign investments, made mainly by the fireworks avocation companies in Hong Kong. In 2009, the Liuyang Fireworks Company was listed on the Toronto Stock Exchange (TSE), a first for a Chinese fireworks manufacturer. The Future of the Fireworks Industry in China The managers of the Chinese fireworks companies that Jerry talked to express mixed feelings towards the future outlook of their industry. One pessimistic view was th at fierce competition and more stringent safety regulations were cleansing the industry.As the Chinese economy advanced, the government was forcing more manufacturing regulations onto firms that were driving up costs. Moreover, as people became more environmentally-conscious and more distracted by the endless diversities of modern entertainment, traditional celebrations using firecrackers and fireworks would die a gradual death. As to the function of attracting public attention for promotional purposes, fireworks also faced challenges from new technologies, such as laser beams combined with sound effects. In fact, make-believe firecrackers already appeared as substitutes in China.These were made of red bendable tubes strung together like firecrackers with electric bulbs installed inside the tubes. When the power was turned on, the lights would cast sparks, accompanied by crackling reports that sounded like firecrackers. These were being used at weddings and terrific openings in cities where firecrackers and fireworks were banned. More interesting substitutes were spotty at some weddings in Beijing, where people paved the road with little red balloons, and made the limousine carrying the bride and groom run over the balloons to make explosive crack sounds as well as get by behind red bits and pieces of debris.Also, more and more young couples were getting married in western styles, in a church building or a scenic unripened meadow outdoors, where serene and quiet enjoyment prevailed over the traditional noisy way of celebrating. Therefore, some managers believed that firecrackers and fireworks were doomed to fade off into history. The more optimistic view, however, was that the industry would not die at all. If the right moves were made by the industry, it could even grow. Some said that tradition would not die so easily. It was in their national character for the Chinese to celebrate with an atmosphere of noisy happiness.Moreover, even in the West, th e popularity of fireworks was not suffering from all the regulations. No real substitutes could Page 10 9B11M006 replace fireworks, which combined the sensual pleasures of visual, audio and emotional stimuli. For instance, the U. S. Congressional resolution in 1963 to use bells to replace fireworks in celebrating Independence Day never really caught on. Fireworks were also being combined with modern technologies like laser beams, computerized firing and musical meeter to make the appeal of fireworks more irresistible.The safety problem was not really as serious as people were made to believe, and would only improve with new technological innovations like smokeless fireworks. With the success of the fireworks displays at the Beijing Olympics, Chinas brand as a world class fireworks producer was on the rise. With better focusing practices, perhaps margins could be increased. However, both sides agreed that the Chinese fireworks industry would have to change its strategy, especially in international competition, to stopover a viable and profitable player. THE DECISIONWhile the Liuyang fireworks industry dominated the worldwide industry, Jerry had to decide whether he should invest in the industry. If he did invest, what was the best way to capitalize on the capableness that remained unexploited in this industry? He wondered whether he could apply the industry depth psychology framework he had studied in his MBA program. Page 11 9B11M006 Exhibit 1 CHINA & LIUYANG FIRECRACKERS AND FIREWORKS TOTAL tax revenue (US$000) 2007 2009 Total revenue enhancement Domestic (estimated) All China 742,395 1,009,757 Liuyang 450,000 757,500 Total Revenue ExportsAll China 494,930 673,171 Liuyang 300,000 505,000 Total Revenue (estimated) All China 1,237,325 1,682,928 Liuyang 750,000 1,262,500 ascendents International Fireworks tie-in ICON stem Ltd The World Market for Fireworks A 2009 global Trade Perspective Notes 1. Domestic Revenue estimate based on a 64 domestic to e xport ratio as reported by http//www. articlesbase. com. 2. Alternative sources put the Chinese domestic market much higher. 3. 2009 data and 2007 data are from different sources. Caution should be used when making comparisons.Growth rates of 15 to 18 per cent per year have been reported by other news show sources (especially http//www. newsreelnetwork. com) Page 12 9B11M006 Exhibit 2 TOTAL FIREWORKS CONSUMPTION AND ESTIMATED FIREWORKS-RELATED INJURIES IN U. S. 2000 TO 2008 Year Fireworks Consumption, Millions of Pounds Estimated Fireworks-Related Injuries Injuries per 100,000 Pounds 2000 152. 6 11,000 7. 2 2001 161. 6 9,500 5. 8 2002 190. 1 8,800 4. 6 2003 220. 8 9,700 4. 4 2004 236. 2 9,600 4. 1 2005 281. 5 10,800 3. 8 2006 278. 2 9,200 3. 3 2007 265. 5 9,800 3. 7 2008 213. 7,000 3. 3 Source American pyrotechnics Association. Exhibit 3 ESTIMATED EMERGENCY style TREATMENT PER 100,000 YOUTHS (AGES 5 TO 14) FROM OUTDOOR ACTIVITIES (JUNE 22 TO JULY 22, 2008) Source American Pyrote chnics Association As cited from the CPSC National Injury data Clearinghouse 5,244 13,501 14,258 6,349 21,040 15,268 18,365 21,032 68,553 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 Fireworks Skateboards Fishing Swing Sets travel 4 wheel ATVs Sof tball Baseball Bicycles Page 13 9B11M006 Exhibit 4 FIREWORKS EXPORTS FROM CHINA, 2009Country of finis Rank Value (000 US$) % appropriate Cumulative % United States 1 301,500 44. 8 44. 8 Germany 2 83,553 12. 4 57. 2 United Kingdom 3 33,645 5. 0 62. 2 The Netherlands 4 32,586 4. 8 67. 0 Japan 5 26,764 4. 0 71. 0 Russia 6 16,157 2. 4 73. 4 Italy 7 15,967 2. 4 75. 8 France 8 13,574 2. 0 77. 8 Spain 9 13,009 1. 9 79. 7 Denmark 10 9,935 1. 5 81. 2 Canada 11 9,817 1. 5 82. 7 Poland 12 9,580 1. 4 84. 1 Taiwan 13 8,130 1. 2 85. 3 Finland 14 6,002 0. 9 86. 2 South Africa 15 5,623 0. 8 87. 0 Austria 16 5,488 0. 8 87. 8 Ukraine 17 5,445 0. 88. 7 Sweden 18 4,868 0. 7 89. 4 Albania 19 4,835 0. 7 90. 1 genus Argentina 20 4,793 0. 7 90. 8 bomb calorimeter 21 4,592 0. 7 91. 5 Belgium 22 4,583 0. 7 92. 2 Norway 23 4,336 0. 6 92. 8 Czech Republic 24 4,312 0. 6 93. 5 Venezuela 25 4,257 0. 6 94. 1 New Zealand 26 4,024 0. 6 94. 7 Switzerland 27 3,316 0. 5 95. 2 South Korea 28 3,104 0. 5 95. 6 Thailand 29 2,720 0. 4 96. 0 Indonesia 30 1,925 0. 3 96. 3 Other 31 24,731 3. 7 100. 0 Total 673,171 100. 00 100. 00 Source Professor Philip M. Parker, INSEAD, copyright 2009, www. icongrouponline. com