MLMs have been working to get into China for a long time. Here’s an abbreviated description of the obstacles and initial strategies…
Business as Usual
Like many businesses, nutraceutical MLM companies first penetrated China’s market using the same marketing strategies that had brought them strong success in their previous markets. After only 2 years of normal operations, Amway reached reported yearly sales of RMB1.5b. [approximately US$180m] in 1997 (Gee, 2002, par.3). Other companies reported high earnings in 1997; Avon reported sales of US$75m (“When the Force is Against You,” 1998, p.5) and Mary Kay reached approximately US$25m (Roberts & Kerwin, 1998, par. 5).
The low cost of effective labor and the market responsiveness to network MLM combined for great business success of MLMs in China. These factors proved to be a strong incentive for leading companies to invest millions of dollars into developing their Chinese operations. Avon, the first MLM company in China (Xu & Tian, 2000, p.1) invested US$70m to build a factory in Conghua and 75 nationwide branches. Amway entered the market in 1995, and invested approximately US$100m in a new factory in Guangzhou and 40 product distribution centers in 33 cities. In the same year Mary Kay invested more than US$20m in a factory in Hangzhou and 10 beauty centers throughout the north and east (“When the Force is Against You,” 2000, p.5).
The combined successes of manufacturing and MLM in China created a concern for the Chinese government. Recognized by the people as an entity whose responsibility is to maintain order and protection (Xu & Tian, 2000, p. 76), Chinese leadership had to choose between benefits and costs of MLM presence in China. On one hand the new industry introduced large influxes of foreign investment, helped alleviate unemployment, stimulated tax revenues and contributed to the growing economy. At the same time, by 1998 MLM networks had reached between 1.5 and 2 million distributors, thus creating some large, “uncontrollable sales network[s]…[and incentive for] a series of unethical and illegal activities” (Xu & Tian, 2000, p. 4). Chin-ning Chu, president of Asian Marketing Consultants, Inc., is reported to have said, “The Chinese consider companies like Amway to be like a religion, because they make people passionate about new ideas…. The Chinese government is very afraid of that” (Ligos & Cohen, 1998).
MLM Ideology. Many of the problems with MLM are a result of the inherent conflict of MLM ideologies and traditional Chinese socialist ideologies. Since the late 1940s, Western economic practices have been a topic of vehement criticism among Chinese government officials and media sources. Under the influence of Chairman Mao and the Communist Party, these ideologies penetrated into the Chinese socialist structure and policies.
MLM companies thrive from a campaign on financial freedom and self-employment (Amway, 2003, par.1). The emotional basis for involvement is expressed through small private gatherings in distributor homes and larger public assemblies. When asked how the government viewed MLM recruitment methods, Shawn Hu, a private consultant for the Chinese government, stated, “Private gatherings which spout financial independence and self actualization echo among government officials like the propaganda of Tiananmen Square and the Falun Gong” (personal communication, November 16, 2003).
Although contrary to many of the Chinese Communist principles, Chinese-mercantilism, guanxi, high unemployment and 50 years without freedom to choose jobs have all contributed to the high success rate of many MLM companies in China. Lyn Jeffery of the University of California points out that, “Multilevel marketing is perfect for China—it combines solid individualist urges with the ability to exist in an extended family” (cited in “Born-again marketers,”1997, par. 5).
Fear of Pyramid Schemes. MLM companies can appear to be pyramid schemes. In obtaining commissions and percentage of revenues from new promoters, even legitimate MLM’s can take on pyramid-like qualities. According to Xu and Tian, the World MLM Association reported that among all MLM members, 85% bought products for their own consumption, 15% intended to sell the products and only 1% really achieved success and chose MLM as a career (2000, p.4). By appearing to get the majority of revenues from inside the organization, Xu and Tian label all MLM companies as being synonymous with “Pyramid sales” (2000, p.9).
Abuse of Relationships. MLM uses the connections of distributors for recruitment and sales. In the Chinese culture, this system can be seen as exploiting the important guanxi and family relationships. Taking advantage of such special relationships is perceived as a detriment to Chinese society, brought about as the result of MLM companies in China (Xu & Tian, 2000, p. 6).
Imitators. As in any industry, the rapid success and large profits experienced by the MLM industry in China attracted hundreds of additional companies. By 1998 there were more than 500 registered MLM companies, with the estimated number of companies in actual operation reaching approximately 1,500 (Xu & Tian, 2000, p. 2). Legitimate MLM companies aside, the Chinese press published reports that accused many companies of using religious and revolutionary campaigning as a means to secure money and new distributor recruits for illegal and manipulative purposes (McDonald, 1998, par. 3; “When the Force is Against You,” 1998, p.5).
Negative media coverage continued and memories of Tiananmen Square and the Falun Gong made the Chinese government very cautious of MLM. In response to the huge influx of network marketers and the high number of reported frauds and media coverage on scandals, the government intervened to take action. On April 18, 1998, the government released the State Council Circular No. 10, which targeted MLM companies and banned direct sales companies in China (“When the Force is Against You,” 1998, p.4).
Specifics of the Ban. State Council Circular No. 10 identified direct sales operations as damaging to society and a deterrent for future social progress. This tightly drafted document prohibits companies from conducting any type of direct sales operations that is not government approved (“When the Force is Against You,” 1998, p.4). Companies were given until October 31, 1998 to comply (McDonald, 1998, par .5). The basic structure was outlined for existing firms to convert into a special retail-wholesale chain store while new companies were required to obtain a regular retail license. The responsibilities of qualified companies included many of the following key points (“When the Force is Against You,” 1998, p.4).
• Converted stores must sell only their own merchandise and only through their own retail or wholesale stores.
• Qualified companies must be approved by the appropriate government committees—Ministry of Foreign Trade and Economic Cooperation (MOFTEC) and Shanghai Administration of Ministry and Commerce (SAIC).
• Companies must decide if they will use nonstaff sales promoters or employed sales promoters. Different rules apply for each.
• If companies employ sales promoters, they must be partnered in a joint venture and have a minimum investment of US$10m.
• Companies with employed sales promoters must have labor contracts and take full responsibility for the actions of the promoters.
• Sales promoters must sell their items at the same price in all locations and must show their government issued promoter ID card when involved in direct or door-to-door selling.
Reactions. This policy decision caused an immediate response from the public and leading MLM companies. This action by the Chinese government strained business relations with the US and the watchful WTO, illustrating the arbitrary power of the government to control businesses in China. At the time of the ban, more than 20 million Chinese were already involved in direct sales and the MLM industry. Enforcement of the ban broke into public protest (Roberts & Kerwin, 1998, par. 3). The protest turned into riots and resulted in the deaths of ten people and injuries to an additional 100 (Hengyang, 1998, par. 1).
By the end of April, 1998, all major US MLM firms stopped recruitment and sales in China (Ligos & Cohen, 1998, par. 4). MLM experts tried to downplay the ban by offering to help crack down on illegal MLM activity and publicly declaring their trust and support in China’s market and its leadership (Madden, 1998, par. 7; O’Neill, 1999, par. 7,17). Behind the scenes, intense negations were underway. By agreeing to convert their 75 distribution outlets into retail stores, on June 5, 1998, Avon was the first to obtain a new business license for their converted retail-wholesale model. Within a month Amway followed suit and Mary Kay re-entered the market by September 2 of the same year (“When the Force is Against You,” 1998, p. 5). By October of 1998, there were only 41 licensed direct sales/MLM-quasi-retail-wholesale companies in China (“Corporate strategies: Amway Profits from Wide Appeal,” 1997, p. 1).