The Liuyang Fireworks Factory as an Investment
Jerry Yu is an American born Chinese man with an MBA who runs a small family chain of businesses in New York. He is faced with a decision to invest in the Chinese fireworks industry. Jerry must assess the attractiveness of the fireworks industry along with the risks involved. Throughout this paper we will analyze the pros and cons of entering the market of Chinese fireworks. In our opinion, Jerry Yu should not invest in the Liuyang fireworks factory. While there are many factors that could give Jerry the opportunity to be successful, the low profit margin and the high instability of the market outweigh the chances of success. The regulations throughout the fireworks industry varies from market to market. For example, China’s domestic market has deregulated since 2005, while the American market remains regulated. The high competition paired with the low selling prices due to undercutting has caused the profit margin to decrease, especially for new entries. The reason for this is that the established fireworks companies have long term contracts with suppliers, causing Jerry to sell his fireworks at a lower price. Established companies also cause a problem because of their relationships with the raw material suppliers. Due to their longstanding relationships, these companies have a right to supplies before the new entries. This results in the new entries receiving lower quality materials, leading to a worse product and less safe working environment. Even though technology is involved in the production of the fireworks, the cheaper quality materials cause a greater risk of an accident during the manual mixing of powders, which is the most dangerous step. The risk of an accident is so high that most factories are built in rural areas near a water source with separated departments in case of an explosion. Another factor that should be considered is the environmental hazards of fireworks production and use. With an...
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