After the reform towards a market economy started in 1979, most of the fireworks factories are broken up and become family-run units of production. This move, however, restricts innovation in Chinese fireworks industry. The technology and element of making fireworks has not changed for several decades. Further, low-cost entry makes this industry even worse: more and more workshops join in the market, thus over capacity squeezes out the incumbent’s profit margin. Competition in most regions, therefore, raises a bloody price war. Even though government has already taken some initiatives to regulate fireworks price, the competition is still very fierce.
Liuyang, a city known as the hometown of firecrackers and fireworks and located in Hunan Province in China, has also struggled with such a harsh market situation: impressive pool of skilled labor, over-met demand, and serious pricing deterioration. In addition, safety is an ongoing concern during the production process of fireworks. Air pollution of fireworks is also another headache for Liuyang. By 2009, however, more than 1/3 of all firms and 60% of Chinese productions remained in Liuyang. Jerry, who is an America-Born-Chinese, is invited to invest in a fireworks factory that is owned by a village. Jerry is going to determine how attractive the Chinese fireworks industry is before he even looks at the financial details of the factory.
When analyzing a certain industry, it is essential to understand the competitive forces and their underlying causes. It reveals the roots of an industry’s current profitability while providing a frame work for anticipating and influencing competition and profitability over time. Here we are going to use Porter’s Five Forces of Competition Framework (see below graph), which is developed by Michael Ports of Harvard Business School, to analyze Chinese fireworks industry. Industry structure grows out of a set of economic and technical...