Since its introduction by Avon in the late 1980s,a total of 2,300 direct-selling firms has risen in China by 1997,employing as many as 20 million Chinese citizens and generating a sales volume of $2 billions.
The investments of Avon,Amway,and Mary Kay alone totaled $200 million in China just before the ban.
The consequences of the sudden ban on direct selling include a turnaround in the optimists’s view and the emergence of a series of related problems .
Salespeople from various affected multimarketing networks,unable to return merchandise to disreputable direct-selling firms for proper refund,grew desperate and angry.Riots broke out in several central Chinese provinces and resulted in more than 10 deaths and 100 injuries.
Direct selling was first brought into China in the late 1980s,when Avon was permitted to establish its venture there.
In practice,some equate direct selling with multilevel marketing,in which a direct-selling firm often uses some form of compensation to enable its distributors or sales personnel to make money on the sales of people they recruit,as well as on those recruited by recruits. In Chinese,these recruited salespeople are often referred to as xia xian,or “downlines” in the sales network of their distributors.
Attracted by Avon’s early success,Amway,Mary Kay,and other U.S. direct sellers began to tickle into China in the early to mid-1990s.
The Growth of Direct Selling in China
Several factors account for the rapid growth of direct selling in China:
First,the country’s logistical backwardness, particularly in rural areas, offered promising opportunities for the development of various modes of direct marketing.
Second,when compared with most local brands, increasingly affluent Chinese customers have been constantly impressed by foreign brands.
A third frequently cited factor in the growth of direct selling in China involves the Chinese people’s cultural characteristics and the country’s unique institutional settings.
Still others point to such factors as close-knit family ties,clan relations,and connections （ guanxi ） as major contributors.
To some enthusiastic Chinese,direct selling holds out not just a job,but also an opportunity to develop and succeed in their careers.
Founder Richard De Vos and Jay Van Andel perfected direct selling
Employs direct distributors , called “independent business owners” (IBOs)
IBO – sell product and sponsor new IBOs
IBOs receive income from their own sales and also from the sales of the sponsored distributors.
Responsibility of proactive IBOs
Perform functions associated with management
Organize meetings and events
Devise incentive programs for recruits
Marketing Amway products and Business Model
Multi level Marketing
MLM structure of Amway similar to illegal pyramid structure
Amway faced problems in USA, France and South Korea
Illegal pyramid structure
Emphasis on selling distributorship rather than products
High entry costs
Amway worked hard to distinguish itself from illegal pyramids
No high entry cost and no emphasis to purchase large inventories
Refunded legitimate claims and repurchased stocks from distributors
April 1992, Amway China – JV between Amway Asia Pacific & Guangzhou Economic Technological Development Zone
Company was required to produce in China as well
Setup a manufacturing plant - $100 million- in Guangzhou - three years
In April 1995, Amway officially began operations in China
Business grew rapidly
By 1997, 80,000 distributors in Amway network in China – sales $178 million
Amway : Indirect competitors
P&G and Unilever
Local Chinese companies
Increase consumer acceptance invited Olympic diving champion Fu Mingxia to endorse the Nutralite line of nutritional products
Amway and MLM in China
Amway had little control over the selling and recruitment practices of its IBOs
IBOs developed their own power base and began marketing unrelated businesses through their original Amway network
Some IBO launched own versions of network marketing model – true pyramid schemes
April 21 1998 – Chinese Government imposed a ban on all direct selling operations
Stop pyramid scheme and other fraudulent businesses in China
Steve Van, Chairman of Amway Asia Pacific discussed with Chinese Government for some sort of compromise agreement
Amway’s was incurring huge losses, millions of dollars a month
Amway China and Changing Environment
Choice – To keep its business model
(since in its 4o years history company had never altered the business model) and give up its investment in China and lose Chinese market forever
Reinvent its business model
Changing Political & Economic Atmosphere
1998 - Chinese economy suffering due to harsh trade policies imposed by developed nations including US
Less orders, low on cash to allocate salaries, large industrial corporations forces to trim labour force.
Doors were open for direct selling business – easy to operate and quick return
Laid off workers drawn to direct selling companies
Distributors seldom used the products
Products used as samples to persuade relatives and friends to join.
IBOs emphasized profits plans - perceived as best way to motivate potential recruits
Focus shifted from selling products to recruiting
Popularity increases - distributors distorted the business Model
Fraud and deception maximum in 1998.
Leaders in Direct selling business mesmerized the peasants during huge rallies– success stories and promises to wealth
Chanting slogans of affirmation and asking them to believe that they will succeed.
Taught skills for developing customers and asked to invite friends and relatives to join business
Most of the business were scams
Recruits to pay high fees
After several days rally organizers will fee with the money – to start in another town
Victims often lost their life savings , fell into depression and often driven to suicide
Situation went out of control in April 1998, when Government announced the ban.
October 31 was deadline to withdraw from the market to register revised plans
To continues operations companies had to open retail or wholesale operations
Company should have invested $10 million and produce goods for sale
Necessary to have customer service and return and refund policies
Impact of Ban on Direct selling companies : Avon
Entered in China in 1990
Negotiated a deal with Government to
operate as Wholesaler to Chinese retail stores
Convert 75 supply branches into retail outlets
Rescue its investment and save its retail force
Avon counters accounts for 75% sales and 25% through retail stores
Impact of Ban on Direct selling companies : Mary Kay
US based company – provider of skin care products
Organizational Structure - Independent sales directors to Independent beauty consultants
Mary Kay operates through combination of agencies and subsidiaries in the country
Each subsidiary is a registered corporation
Mary Kay 48,000 beauty consultants who directly sell its products
Impact of Ban on Direct selling companies : Sunrider
Another US company – household and personal care products
After ban gave up the direct selling model and began selling through retail outlets
Reorganization unfavorable – 3,000 retail stores bring one seventh revenue
Sunrider lags far behind Amway and Avon in terms of reputation
New Regulations : Strategic Response
Amway operations halted after the ban
Agreement with the government and company resumed operations on 21 July 1998
Government accepted the revised plan
Goods will be sold in retail outlets and through sales representatives
Income of sales distributors will be based on direct selling done by them only
Same Distribution centers served as retail outlets for the company
New Regulations : Strategic Response
New Amway China worked closely and positively with Chinese administration
Amway also monitored the size, ticket price, frequency of training sessions and meetings in different cities
March 2001, meetings by Amway distributors in Beijing and Shanghai – high admission fees
Amway China suspended the distributors license
Amway suspended certification to new sales representatives and stopped all promotional and sales meetings
Company retained 310 business managers and 800 business directors
Amway managing its sales representatives with firm hand
New Regulations : Building Political Capital
Amway gave periodic reports to government about company’s operations, including training, accounting and human resource
Yuan 2.3 million in taxes
Yuan 30 million as charitable contributions
13% of the distributors were unemployed and hired and trained by Amway
Since 2002, sales has reached $700 million, four times before the ban
March 2003, sales from China one seventh of global revenue will surpass revenue from USA market
Reasons behind Success
Localization of employees
Localization of Business Model
Localization of production and Raw Material
Localization of R&D – $1.5 million investment in R&D in china
Support for China’s entry into WTO - Chairman of Amway Steve Van Andel – chairman of US Chamber of Commerce – promoted China’s accession into WTO
Active community development - Financial and human support to community development in arenas of human service, education, environment, art, culture and sports
Facing the future
Amway had developed
New competencies with localized business model
Good relations with government
Positive public image
Model for successful Globalization and adaptation to a foreign market
Amway hoped that situation will change after China’s entry in WTO
After entry, Government, began new round of crackdown on illegal business
No impact on Amway due to its new business model
At end of 2003, legislation pending in government al allow return of direct sales in China
Government o reinforce laws to govern the direct selling industry
Amway was successful in China due to its localization strategy
To attain a win-win situation,the government should listen carefully to the opinions of genuine foreign and local direct sellers to derive a mutually agreed-upon set of regulations for the industry.
If officials at various levels of the country can closely observe these regulations and monitor their implementation effectively,China will not need to maintain a blanket ban on direct selling to eradicate pyramid scams.
From another perspective,labor-intensive direct selling complements China’s current enterprise reforms well ； banning it is likely to induce more unemployment or even social unrest.
Perhaps what the Chinese government needs to tackle the abuses of direct selling is more effective regulations and supervision,not a blanket ban.