1.

Introduction---Objective and structure of this report

The Chinese fireworks industry has experienced significant change since China adopted "open door policy", moreover, it
has huge market share in the world's fireworks market. But on the other hand, the Chinese fireworks industry also has fatal
weaknesses. Therefore, whether to invest in this industry is still a considerable challenge to most investors. The objective of
this report is to give some suggestions to Jerry Yu on his decision of the investment on Liuyang fireworks industry.
Furthermore, some proposals on how to improve the attractiveness and the competitiveness of Chinese fireworks industry at
a long-run level are worked out; from personal level, there are some strategic options to Jerry Yu in terms of handling an
individual fireworks firm. To achieve this objective, an industry analysis and a market audit are carried out and a gross
conclusion is drawn based on the analyses and suggestions.

2. Industrial analysis
The aim of this industrial analysis is to outline the situation of the Chinese fireworks industry in conjunction with analyzing
the rivalry within this industry through Porter's five forces model (please refer to Appendix).

2.1 The Chinese fireworks industry overview

The general belief was that China-made fireworks actually made up about 80% to 90% of the world's fireworks market. But
although Chinese fireworks account for most of the world's market, it can be said as a relatively messy industry in terms of
its quality, packaging and timing control and distribution channels. As the most popular form in Chinese fireworks industry
is family-run workshop, which is usually poorly funded and lacking of R&D and managerial input, the whole industry is
basically labor-intensive and the technological innovations are also restricted. The competition is intensified by the
emergence of small companies. These private workshops are flexible and quick in responding to market demand. They
would copy any popular product design and sell it for much less prices than government-owned or some collectively owned
factories. This fact results in price drop which has become a serious problem for the whole industry. Besides, foreign
competitors such as Japanese and Korea companies also threaten the Chinese fireworks industry.

2.2 Market trend

The fireworks' market can be divided into domestic and export market. In the past years, the demand of domestic market is
declining while export sales is rising. Since China opened its door in 1979, export market has become a major market of
Chinese fireworks. Figure 1 indicates the growth of export market during the period of 1994-1998.

Figure 1: Export sales of Chinese fireworks industry in 1994-1998

From Figure 1, it's clear that the demand of export market is increasing stably. Undoubtedly it's a beneficial factor for
Chinese fireworks industry. Another market trend is that the demand for display fireworks is increasing at a fast speed due
to the increase of public fireworks shows, whereas the demand for consumer fireworks is expected to decline owing to the
more restricted regulations.

2.3 Porter's Five Forces Model (Appendix).

Porter's five forces model aims at examining the competitive status of the whole industry.
2.3.1 Potential entrants (High)
The opportunity for potential entrants of fireworks industry is high. The capital requirement for establishing a fireworks
firm is very low; the economy of scale is high and the brand identification within this industry is relatively low. All these
facts provide good opportunities for firms to enter this industry.

2.3.2 Bargaining power of suppliers (Low)

Because of the huge number of suppliers of fireworks and little product differentiation among fireworks products, the
bargaining power of suppliers is low.

2.3.3. Bargaining power of buyers (High)

Owing to the large number of choices and low even zero switching costs, the fireworks buyers have high bargaining power.

2.3.4 Substitutes (Low)

The threat of substitutes of fireworks is relatively low. Although there are substitutes such as make-believe "firecrackers",
due to the heritage of tradition and culture, real fireworks are still irresistible to most consumers.

2.3.5Rivalry (High)
Rivalry of fireworks industry is high. The possibility for new entrants is high, while exit barrier is low; a bulk of existing
firms that have little diversity and product differentiation are competing in this industry; buyers are more powerful than
suppliers...... All these forces shape the fierce competition in fireworks industry.

What is indicated through the analysis of Porter's five forces model is that the rivalry of fireworks industry is high.
Therefore, if firms were to survive in competition, they should make great effort to differentiate their strategies to achieve
sustainable competitive advantages over competitors.

3. Market Audit of Liuyang fireworks industry

The market audit focuses on the Liuyang fireworks market's position through the identification of its domestic and foreign
competitors and a SWOT analysis. The goal of this market audit is to assist Jerry Yu to determine whether to invest in
Liuyang fireworks industry or not.

3.1 Competitor analysis

The competitors of Liuyang fireworks industry include both domestic and foreign ones. The competitors and their main
competitive aspects of Liuyang fireworks industry are delivered in Table 1.

Table 1: The competitors of Liuyang fireworks industry

Competitors Domestic Foreign

LilingPingxiang,
WanzaiDongguanOther small establishmentsJapan,
Korea and Spain

Competitive
AspectsPrice competitionBoth price and quality, especially in low- and medium-priced marketsMore sophisticated
management and marketing practicesCopy popular design and sell much lessBetter quality and timing control, better
packaging.

From Table 1, it's clear that the Liuyang fireworks industry has been facing fierce competition from both domestic and
foreign competitors though it's still the largest and most well known place for making fireworks in China. All of them have
their own competitiveness versus Liuyang fireworks. Thus, if Liuyang fireworks industry were to sustain in the intense
competition and "beat" these competitors, it's necessary for it to modify strategy to increase its competitiveness relative to
its competitors. Figure 2 shows the competitive position between Liuyang fireworks industry and its competitors on a
positioning map.

Figure 2: Competitive positioning map of Liuyang fireworks industry and its competitors
From the positioning map, it can be demonstrated that although Liuyang fireworks industry has strong competitiveness in
terms of reputation, it is seriously lacking of management capabilities compared with Dongguan and foreign competitors,
which could be a disastrous factor in the future. Therefore, to improve the management of Liuyang fireworks industry is
crucial for each individual investor's success as well as the whole industry's sustainability.

3.2 SWOT analysis of Liuyang fireworks industry

Liuyang fireworks industry does share certain similar characteristics in terms of Strengths, Weaknesses, Opportunities and
Threats with other Chinese fireworks manufacturers, but it also has its own features.

3.2.1 Strengths
* Long reputation and product variety
Liuyang has been the most well known place for making fireworks in China for a long time. It has the strongest reputation
in China and even in the world market it also occupies an influential position in terms of product variety and reputation.

* Huge market share

As the largest manufacture community of fireworks in China, Liuyang has been enjoying huge market share in both
domestic and export market.

* Liuyang government's offensive strategy

In 1997, Liuyang government adopted offensive strategy responding to the decline of its fireworks sales. This has been
proven to be very useful---one year later, Liuyang fireworks sales increased.

* Low labor cost

Located in Hunan province, Liuyang is a relatively small and less developed city. Furthermore, most of the manufacture
factories are located in rural places, where the labor cost is very low. This is a beneficial factor for manufacturers because
with low cost, they could gain more profit.

3.2.2 Weaknesses
* Poor management input and capabilities
As identified in competitor analysis, Liuyang fireworks industry has little management input and poor management
capabilities. Since most of them are family-run workshops, they have no capital to fund management. What's more, as most
workers are farmers who are not well educated, they have no intellectual resource for marketing capabilities.

* Messy distribution channels

The overall distribution system of fireworks industry is rather fragmented and messy. Neither the old government-run
channels nor the new distribution channels are efficient and effective. On the contrary, they are rather chaotic.

3.2.3Opportunities
* Increasing revenue and demand
As shown in Figure 3, the total revenue of Liuyang fireworks industry increased substantially in 1992-1996. Now the
demand is still increasing especially in display fireworks category. This represents an opportunity to investors.
Figure 3: The total revenue of Liuyang fireworks industry in 1992-1996

Source: Liuyang Firecrackers and Fireworks Exhibition (refer to Exhibit 1 in this case)
* Technological innovation appealing to consumers
Technology development triggers the technological innovations. Fireworks can be combined with modern technologies like
laser beams, computerized firing and musical accompaniment to cater for customers.

* Increased safety of fireworks

Actually, the fireworks are not as dangerous as usually perceived by people. Technological innovation such as smokeless
fireworks makes fireworks safer and as long as people can use fireworks properly, it's not so dangerous. This can be
demonstrated from Figure 4.

Figure 4: The increased consumption(millions of pounds) versus decreased injuries(per 100,000 pounds) of fireworks in
1990-98

Source: American Pyrotechnics Association (please refer to Exhibit 2 in this case)

What is indicated in this chart is that within 1990-98, the consumption of fireworks increased whereas the injuries
decreased. The increased safety can help to build consumers' confidence toward fireworks.

3.2.4Threats
* Intensified competition and local protectionism
As illustrated in competitor analysis, more and more competitors including existing firms and new entrants are competing
with Liuyang fireworks industry. The direct consequence is the price drop which leads to the deduction of profit margin.
Some small manufacturers even copy designs and purchase inferior raw materials to gain profit in competition, which
worsens the quality and reputation of Liuyang fireworks industry. In addition, some local Chinese governments tend to
protect local manufacturers when purchasing fireworks.

* Legal restriction
As fireworks has made some tragedies among users, most countries and Chinese cities more or less inhibit the sell and use
of fireworks. Some places even banned the use of fireworks. This fact is undermining the fireworks industry.

* Credit crisis
Due to the bad debt control and lacking of respect for business contracts in China, the transaction costs are increased while
cash flow are slowed down, which is a serious issue for fireworks industry.

* Poor profit margin and loss of brand identities

This threat exists especially in export market. The importers buy the fireworks at very low price from Chinese
manufacturers and then resell at much higher prices. This is indicated in Figure 5: the comparison between FOB import
prices from China and wholesale prices of four types of Chinese display fireworks in US. There is a huge gap between
them. The American importers enjoy huge profit whilst Chinese manufacturers suffer from low profit margin. Furthermore,
some large western fireworks manufacturers and dealers started to outsource the making of their brand-name fireworks. The
Chinese fireworks manufacturers are facing the problem of losing their brand identities.

Figure 5: The comparison between FOB import prices from China and wholesale prices of four types of Chinese display
fireworks in US

Source: China Sunsong Fireworks Corp. and Websites of fireworks wholesalers in U.S.

4. Suggestions for Jerry Yu

Chinese fireworks industry is a highly competitive industry, however, it still presents opportunities for investors. Based on
the analysis of Liuyang fireworks industry, the suggestion for Jerry Yu is to take the opportunities--to invest in Liuyang
fireworks industry. Nonetheless, to win in the fierce competition, it's also recommended that Jerry Yu should integrate the
advantages he has into the opportunities to create competitive advantages versus his competitors. Therefore, there are some
strategic options proposed for him. Furthermore, some recommendations for Chinese fireworks industry as a whole are also
worked out in order to increase its competitiveness and attractiveness.

5. Proposed strategic options

5.1 Options for Chinese fireworks industry (Options 1-4)
5.1.1 Strategic option 1: Launch an industry-wide advertising campaign to change consumers' perception and attitude
toward fireworks.
As interpreted before, most consumers regard fireworks as a very dangerous product, especially for youth. But in fact, it's
not as dangerous as consumers' perception. Figure 6 shows the comparison of the dangerousness between fireworks and
other products. From the treatment quantities it's rather manifest that the treatment for youth caused by fireworks is the least
among these eleven consumer products. Furthermore, as the technology of fireworks is improving, the dangerousness will
be less than before. Therefore, it's necessary for the manufacturers within this industry to launch an advertising campaign to
change consumers' perception, attitude and to build consumers' positive belief--fireworks is much safer than what they
think.

Figure 6: Estimated emergency room treatment per 100,000 youth (ages 5 to 14)

Source: American Pyrotechnics Association (refer to Exhibition 3 in this case)

Advantages:
► To build consumers' confidence toward fireworks can somehow prevent the decline of demand of consumer
fireworks from consumers' perspective. If consumers know fireworks are virtually much safer than their perception,
probably they will purchase fireworks more actively than before in spite of the restriction of government regulations.
Disadvantages:
▪ To launch an industry-wide advertising campaign requires sufficient capital. But as most fireworks manufacturers
are family-run small workshop, it's hard for them to afford the cost for this advertising campaign.

5.1.2 Strategic option 2: Build TQM at an industry-wide level.

Lacking of quality control is a serious weakness of Chinese fireworks industry. Therefore, it's necessary to build TQM
(Total Quality Management) industry-wide to regulate and guarantee the quality of Chinese fireworks to compete with
foreign competitors and to attain trust from consumers.

Advantage:
►The advantage is obvious--increase Chinese fireworks industry's competitiveness with foreign competitors and in
doing so, to maintain and even increase its market share in the world's market.

Disadvantage:
▪ The only problem TQM might face is the messiness of Chinese fireworks manufacturers. TQM requires fund as
well as regulations, but for small workshops, it's difficult to achieve.

5.1.3 Strategic option 3: To absorb foreign investments actively to improve both hardware (equipment, capital, etc) and
software (management capabilities, etc) of Chinese fireworks industry.

Advantages:
►Foreign investment can compensate one weakness of Chinese fireworks industry---lack of capital. If Chinese
manufacturers have sufficient fund, they can improve their equipment, the products' quality and packaging and their
management resource such as R&D, etc. No doubt that these facets can greatly promote Chinese fireworks competitive
position, through which, Chinese fireworks industry could prosper.

Disadvantages:
▪ There is a latent possibility that these foreign investments might finally control the Chinese fireworks industry. If
this happens, Chinese fireworks industry would lose its identity.

5.1.4 Strategic option 4: Build strong brand awareness and image of Chinese fireworks industry. This can be implemented
by advertising campaign or aggressive promotional activities.

Advantages:
►As mentioned earlier, some foreign manufacturers started to outsource their brand-name fireworks, and some
Chinese manufacturers began to lose their brand identity. Therefore, to retrieve and even strengthen their brand identity is
instrumental for Chinese fireworks industry to sustain in competition.

Disadvantages:
▪ Messy manufacturers place a hamper on Chinese fireworks industry's way to brand building. Small workshops
don't care about brand and they even don't have their own brands. Build brand awareness needs capital and management
resource as well, which small workshops are not able to afford.

5.2 Options for Jerry Yu (Options 5-8)

According to the former suggestion, Jerry Yu will invest in Liuyang fireworks industry. Therefore, These recommendations
are proposed for Jerry Yu for his individual investment.

5.2.1 Strategic option 5: Targeting and Positioning---Target display fireworks market in both domestic and export market.
As analyzed before, since display fireworks market is expanding fast, there are lots of potential in this market. But this
doesn't mean to give up consumer fireworks market. In some regions such as Europe, the regulations are less stringent and
orders are larger quantities and better prices, therefore, European consumer fireworks market should be the company's target
as well. American consumer market is also a huge market for a company to target. It is recommended that Jerry could
position his company's products at high-end level, high quality and relatively premium price.

Advantages:
►Choosing a target market allows a company to better allocate its resources to produce right products to its potential
consumers. In this way, a company can deploy its resources more efficiently and effectively as well as to maximize its
market potential. Jerry has good management knowledge, what's more, as he lives in U.S, he has plenty of technology
experience. Therefore, it can be assumed that he can produce high quality fireworks and position these products at
premium-end market level. As a result, this strategy can generate profit for him.

Disadvantages:
▪ High quality products also require high input, both capital and managerial resources. Thus, this might be a bit
risky for him between the distance of his input and the result.

5.2.2 Strategic option 6: Develop relationship marketing. Create and maintain good relationship with his suppliers; build
CRM (Customer Relationship Management).

Advantages:
►Relationship marketing plays a vital role for a firm's successfulness. Keep goodwill with suppliers can achieve
efficient and cost-effective procurement; CRM enables a firm to better satisfy its customers' needs and wants. Especially in
display fireworks market, as most buyers are governments, to keep good rapport with them is critical for a firm to win in
competition.

Disadvantages:
▪ Cost might be the only disadvantage of Relationship Marketing for a start-up firm. Also, Relationship Marketing
involves both financial and managerial input, yet it can't guarantee success.

5.2.3 Strategic option 7: To form strategic alliance or joint venture with other firms.
It's suggested that Jerry could build strategic alliance with another large- or medium- size fireworks manufacturer, either
domestic or foreign ones. For instance, Jerry's firm can focus on manufacturing display fireworks while his partner puts
stress on consumer fireworks. Another way is to form a joint venture with another firm, i.e. if Jerry forms a joint venture
with a Chinese manufacturer, he can be in charge of management and marketing activities while his partner can concentrate
on production.

Advantages:
►Strategic alliance can create synergy, while joint venture can reduce costs and risk by sharing with partners. Since
Jerry is a "freshman" in fireworks industry, he can take advantage of his own management knowledge and his partner's
manufacturing experience, and finally, both of them can benefit from this. With this synergy, hopefully Jerry can compete
with foreign competitors in terms of packaging, quality control and management capabilities.

Disadvantages:
▪ There might be some possibilities of inequitable share of responsibilities in a strategic alliance or joint venture.
Furthermore, some Chinese manufacturers don't respect contract, which could lead to the unstableness of the relationship.
5.2.4 Strategic option 8: To capitalize on Internet as a tool for the business process. Internet provides "Clicks-and-Mortar"
synergy and great opportunities for firms. Therefore, Jerry can also capitalize on E-business.

Advantages:
►Internet has a significant impact on business process. Some processes, such as procurement and SCM (Supply
Chain Management) become more efficient and cost-effective via Internet. Internet is also a good way for a company to sell
its products directly to its customers bypassing intermediaries in order to increase profit margin and to develop
eCRM(Customer Relationship Management). Conducting on-line research also costs less but more efficient.

Disadvantages:
▪ Price transparency on Internet worsens price competition, which will result in the decrease of profit margin.
Another threat of Internet is the commoditisation of brands. This threatens a company's brand image and markup as well.

6. Recommendations on the proposed strategic options

Corresponding to the judgment of each option, there are some recommendations for both Chinese fireworks industry and
Jerry. For Chinese fireworks industry, it is recommended that options 2,3 and 4 are essential for Chinese fireworks
industry's viability while option 1 is a more selective one because to change consumer's attitude toward an industry is a
complex and tough process which demands great effort of the whole industry, therefore, it's a time-consuming job. For
Jerry, the suggestion is that options 5,6 and 7 are prior to option 8 in the implementation process. As a manufacturer, it's
better for it to become a "clicks-and-mortar" after it has a solid foundation. Therefore, Internet can be utilized when Jerry
carries out other strategies and could acquire profit.

One point should be emphasized is that the strategies for Chinese fireworks industry and recommendations for Jerry Yu are
not absolutely separated but interrelated. If these strategies could be integrated they would be the most efficient and
effective. Moreover, Jerry also can utilize the strategies proposed for the whole industry. Although these strategies can't
ensure success, hopefully it will increase the competitiveness for Jerry as well as the whole industry.

7. Conclusion
What we can conclude from the analysis and suggestions is that although Chinese industry has some huge weaknesses, it
still provides opportunities for Jerry Yu. But the successfulness depends on the extent to which he uses the strategies to
differentiate from competitors. However, as the detail information of Jerry Yu are not provided, the suggestions are based
on a relatively ideal circumstance--providing he has adequate capital to implement these strategies. Another viewpoint to be
addressed is that not only Jerry Yu but also other investors should be aware of the weaknesses of the Chinese fireworks
industry. To increase the attractiveness and competitiveness of an industry, only one individual's effort is not enough.

Market is dynamic and no strategy can guarantee success. Nevertheless, as long as both Jerry Yu and Chinese fireworks
industry can fulfill these solutions, hopefully he can achieve competitive advantages meanwhile the competitiveness and
attractiveness of Chinese fireworks industry will be improved.

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