The future of MLM in China is a complicated scenario, best understood when described through the experience of seasoned professionals.
Initial research identified a number of specific obstacles faced by nutraceutical MLM in China. Although these obstacles were identified in the literature, the relevancy of these findings in regards to those actually involved in the industry was questioned. Are the major obstacles and solutions the same as identified through my initial search of the literature? What are the real concerns for industry experts? What can we expect for MLM companies in China in the upcoming years?
To make a reliable analysis and prediction of the market requires a keen understanding of the complex variables of the industry. Existing literature may often be the result of looking for a persuasive angle and may put unfair emphasis on some variables while ignoring others. For this reason it was decided that open-ended interviews with industry experts would be extremely useful to identify what they felt were the most relevant concerns of the industry itself. Interviews with these experts would help to identify important themes, future expectations and proposed methods of how to deal with those themes and future expectations.
To explore these questions, it became important to identify qualified industry experts who could provide useful insight on the subject. Some of the necessary elements to make educated analysis and prediction of the industry include a strong understanding of the history of MLM companies in general and, more specifically, the history and dynamic of MLM companies in China. To obtain a balanced representation, it was important to have a representative American-Sino business perspective, a representative perspective from a company that is working to emerge as a successful MLM company in China and a representative of Sino-American business perspective. Although representative perspectives from well-established companies were considered for this part of the study, they were not included due to fact that their performance is well documented and the results of their decisions can already be seen. The emphasis of this research is the adaptation of the new companies that expect to enter China after the passing of the Direct Marketing Law; therefore a representative response from a company that has been in China for less than year was considered to be more relevant.
To obtain these perspectives my research required a minimum of three respondents. The first respondent needed to be very familiar with the American culture of business and regulatory business processes of nutraceutical MLMs entering into China. This respondent should be a native-born American who has a keen understanding of the dynamics of Chinese history and the MLM industry in China.
The second respondent needed to be familiar with the inner workings of an MLM company moving into China. This respondent needed to be the key decision maker for a nutraceutical MLM company that has penetrated into China within the past 18 months.
The third respondent needed to provide a Sino-American perspective, as counterpoise to respondent one. This respondent represents the native Chinese, or Sino-American perspective. This respondent should be very familiar with the Chinese culture of business and regulatory business processes of nutraceutical MLMs entering into China. This respondent should have significant experience and a strong understanding of the history of MLM companies in China and the current programs of successful and failing MLM in China.
Bios of Selected Respondents
Dan Mabey. Dan Mabey was the Director of International Business Development for the State of Utah for 14 years. During his tenure, Mabey helped numerous MLM companies penetrate into international markets. These companies included Nature’s Sunshine, Usana, Nu Skin, and more. Mabey has worked closely with a number of trade companies and organizations such as China Council for the Promotion of International Trade (CCPIT), that deal specifically in China. Under Mabey’s coordination, the international business development during the 2002 Winter Olympic Games was one of the most successful games in recent history. After leaving the state in the summer of 2002, Mabey established an international consulting firm, where he works with large companies who are trying to penetrate the US markets. He also works with US companies that intend to penetrate international markets. China remains one of Mabey’s major focus regions.
Dan Zhu. Dan Zhu is the Vice President of Chinese Operations for Tahitian Noni International. Originally from the People’s Republic of China, Zhu came to America nearly 15 years ago. Zhu has worked with Tahitian Noni International for more than 7 years and was one of the primary engineers behind the development of their payout and commissions model. Zhu currently oversees all operations for Tahitian Noni International in the People’s Republic of China.
Shawn Hu. Shawn Hu was born in Beijing, China. Hu is a political strategy consultant for a number of large institutions in the People’s Republic of China and the US. In addition to serving on a number of academic and Beijing Olympic appointments, Hu remains an active player in the Chinese MLM industry. Hu has been involved in advising MLM companies about the Chinese market for more than 10 years. As a major player in the MLM policy talks in 1998, Shawn helped to push policy through that allowed certain companies the ability to continue with modified operations.
After identifying the individuals who would be the best respondents for this study, the next step was to obtain an interview. Coordinating schedules with these industry experts required patience and flexibility. These individuals are out of the country for many months at a time or are residents of China. By contacting these individuals far in advance (months in some cases), I was able to coordinate schedules and interview them in their homes or offices.
I first recorded the interviews on audio tape and digital format. Afterwards I typed up a transcript of the interview for more thorough analysis. To assist in the process of summary and review I compiled the interviews together in a single document according to the interview question. After compiling each of the interviews from the respondents I studied the interviews and summarized them into a single simplified format with a paragraph for each interview question. I then proceeded to analyze the summarized interviews for emerging themes from the interviews. These themes help to illustrate what issues are most important to MLM companies and what we can expect for the future regarding MLM companies in China. I have included the questions and the summarized responses in this research paper, to provide a strong basis for the conclusion of my research paper as I compare it with my original research of the literature and identify emerging concerns and predictions of nutraceutical MLM companies in China.
These interviews were designed to allow relavitely smooth transitions to help answer the following questions:
• What is the biggest obstacle for nutraceutical MLMs in China?
• What are the more specific obstacles in terms of government, media, social perceptions and existing marketing channels?
• What are the best strategies for overcoming these obstacles?
• What are your predictions for the future of nutraceutical MLM companies in China?
• What should nutraceutical MLM companies do to be successful in China?
The following is a summary of the interviews with these industry experts. These industry experts were briefed on the purpose of the interview and were given the freedom to not answer any question with which they did not feel comfortable. Because of the nature of the interview, I found it was necessary to meet with Mabey and Zhu in their offices. In the case of Mr. Shawn Hu, the only available time he had to meet was in between making house calls with his different clients and so I met with him at his home. For simplicity and ease of review, I compiled the responses together with the correlating questions. Below is the complete list of questions with the summarized responses. (For a complete transcript of their interviews, please see the attached interviews in the Appendix.)
Q: What is the greatest obstacle for nutraceutical MLMs and their penetration into the Chinese market?
The Chinese government and its policies are recognized as the greatest obstacle for nutraceutical MLMs. The entire regulatory process is difficult to comply with. In addition to the nature of the policies themselves, the inability for the central and provincial governments to agree and keep policy announcement deadlines has remained an ambiguous target for companies to comply with.
Q: What is the specific obstacle limiting government relations (government to private business relations)?
Building the proper relationship between MLM companies and the government is a problem. It may be seen as a dissonance of culture and values. Americans do not seem to want to take the time and commit the resources the Chinese feel are necessary to build the proper relationships. Correlating policies and actions among the myriad of different provincial and central government figures is a problem. The government wants stability and the nature of MLM seems to threaten the government’s perspective of peace and harmony with the communist directives.
Q: What do you recognize as the biggest obstacle for (traditional news and public relations) media and nutraceutical MLMs?
It is a new industry with a bad beginning in China. The government still has very strong control of the media. Because of heavy abuses, the government and subsequently the media have had a very bad perception of MLM companies. As long as the government’s perspective of the media is negative it can be assumed that media will continue to have a wary eye as well. Companies such as Amway have worked diligently to change this image. Amway has strategically sponsored a number of programs for renowned academic organizations and nonprofit groups. Amway is helping to improve the public image MLM but there are still negative effects that linger.
Q: Can you identify any obstacles in using existing distribution channels such as retail stores and other structures and hierarchies such as work groups and governmental organizations as a form of distribution?
Existing distribution channels are not nearly as efficient for existing MLM companies. Normal retail distribution does not provide the education and differentiation that these products thrive from. Using existing outlets or distribution chains provides a more stable system for the Chinese government to keep tabs on the MLM companies and their compliance with regulations. Without that, the government is uncomfortable.
Q: Can you identify any specific social obstacles for MLM in China?
MLM is a misunderstood industry in China. The Chinese are not used to an MLM system. Culturally speaking, the Chinese tend to think very big, and in MLM companies not everyone can be big. This competition can lead to problems. Even in America, MLM companies have trouble keeping people from making untrue claims; these same problems exist in China, only in an exponential way. This creates a trust issue, which is a compounded problem when one takes into account the pressures that are involved in having friends and family as the customer base.
Q: What do you feel is the best strategy to overcome obstacles of dealing with the government?
Create partnerships and strong relationships with the people involved in the regulatory issues of the marketplace. It is important to educate the government about MLM companies. This is what the Direct Selling Association (DSA) is doing. MLM companies need to recognize the importance of using a fully developed political strategy that identifies licenses and key political figures. It is helpful to use advocates who can manage and overlook the political relations side of China.
Q: What can a company do to overcome obstacles in dealing with the media?
Understand that China is a country that uses propaganda, that is, the open use of media to directly or indirectly benefit the sponsor. Understand propaganda. Use propaganda. Make sure you are consistent in your story with the media. Get good external affairs managers. Companies should everything possible to educate the public and the media. Identify how MLMs help society. Develop the proper strategic relationships with the appropriate media and publicity contacts. Amway has more than 400 representatives countrywide who focus primarily on relationship management of the political and social culture of China.
Q: What do you feel a company can do to overcome obstacles of using existing distribution channels?
MLM companies are not really trying to overcome those obstacles right now. They are trying to separate themselves from them. Going retail would cause MLM companies to lose the competitive edge that comes through a direct sales network. In addition to losing the ability to direct sell the product, the expenses and overhead of stores are a very difficult thing to carry. Companies that are trying to pursue that route, need to identify the current players, especially those that are government-owned. Teaming up with those would provide quick and effective penetration. Also identify new channels that are being created and be able to flow into those channels. It is important for MLM companies to differentiate themselves as much as possible.
Q: What are some steps a company might take to overcome the obstacles of social perception regarding multilevel marketing?
To the degree the government influences social perception, a company should work to overcome the stigma of being an outsider by partnering with some of the more traditional aspects of China. It is important to educate the individuals about the reality behind any get rich quick schemes. It is important to be involved in charity work and building schools. Companies need to focus on building their image for the government and individuals. Remember to give back to society. Companies should work to be recognized as a legitimate and upright company. It is important to recognize that the Chinese government views MLM much like a religion. A company should work to make sure their model is not perceived as a religion. A company would be wise to invest the time and money into a fully developed political and social game plan with an accompanying manager.
Q: What are your predictions for the next 5-10 years for MLMs in China?
It is nearly impossible to predict more than 2 or 3 years. China will continue to become a more affluent marketplace. There will continue to be a greater disparity between the wealthy and the poor. China will continue to progress rapidly in terms of its academic and manufacturing capabilities. The next few years will remain turbulent and dynamic for MLM companies as the government tries to solidify its plan. It will take some time for the government and its people to accept MLM as a legitimate model for doing business. MLM companies should brace themselves for very restrictive policies while China’s market continues to ripen and become more attractive. The policies will continue to open more and more over the next 3 to 5 years, though they certainly will never be wide open. It is likely companies will see types of regulation that include the number of representatives for a certain area of space or number of people. It is very likely companies will see a limit on the people who can attend training meetings. Companies need to expect the government will maintain a good amount of control. There may be one or two other companies that make it up there, but Amway will certainly continue to dominate the market in 5 years. Anything after 5 years is pure speculation. After 10 years the sky is the limit. It is possible that it might be more standardized and accepted, similar to other countries such as Taiwan.
Q: What do you predict will be the policies of FDI and MLM’s ability to market in China?
Restrictions on activity based on FDI are expected to lighten up significantly. In addition to the continually improving MLM company to government relationships, other macro events are affecting things. With all of the pressure from foreign governments to float their currency, China will progressively slow down in its consumption of FDI. Unionization and increased difficulties managing investments in China will likewise discourage foreign companies from investing at their current levels.
Q: Can you identify any specific landmarks or milestones that will have an effect on the development of MLM in China?
The first would be the introduction of MLM into China in the first place. The next would when the government shut down MLM operations and then reopened, allowing only 10 companies to operate in a very modified fashion. The acceptance of China into the WTO was a very big event. Another event would be December 11th, 2004, when the policy that was supposed to come out did not come out. Some predict the 2008 Beijing Olympic Games will indirectly impact the perceptions of MLM in China. The actual announcement and acceptance of the complete regulations will be a very big deal.
Q: How do you feel the Olympics will affect multilevel marketing in China?
There are mixed feelings as to the level of influence the Olympic Games will have the MLM industry in China. It is very possible that having the games in Beijing will speed up much of the construction and policy development that needs to happen to prepare them for the games. Many industry professionals feel that with increased global exposure and pressure, the 2008 Olympics will become a leverage point for the US government and other government’s agencies to increase the flexibility and openness of the Chinese market even further.
Q: Can you see any major setbacks in the future for MLM companies in China?
Any bad actor could foul up the marketplace for the rest of the companies. Companies should do what they can to police and regulate the industry on their own. If the government is forced to do it, it could be very detrimental to the industry. After the first big wave of MLM companies begin to operate in China, the government will need to adjust to this business. This period will probably produce some negative feedback and will require some restructuring, and it will pick up again. We can expect a similar cycle to occur after the Beijing Olympics. There will certainly be some fallbacks, but the industry is expected to continue to develop and climb.
Q: What do you feel well established nutraceutical MLM companies are doing to help them be so successful in China right now?
Tremendous investments of time and money have been the key. Successful companies have been there for at least 10 years. Amway is perhaps the best example of a company that hung in with the most to lose when other companies backed down to hedge their risk. Successful companies have really looked at this as a long-term proposition. They have built good relationships with central and provincial government players. Successful companies have worked hard to build their image and their strategic positioning for when the direct selling laws applicable to MLM companies are announced. In addition to those issues, the most successful nutraceutical MLM companies have really tried to stick closely with that which they do best, that is, network marketing. Companies that have drastically changed their model, such as Avon, have not done nearly as well.
Q: If you were to suggest a simplified penetration strategy, what would you suggest?
Understand what it is that other companies are doing—what works and what doesn’t work. Perhaps one the easiest models would be to ride the coat tails of other bigger companies that have already forged a path. Invest in a facility in Beijing. Do what can be done to locally produce the product. Locate in a specialty zone to qualify for 15% taxes. Create favorable relationships with local government and drive taxes down even lower. Companies need to study their model very carefully and make sure it is adapted to the Chinese market. Develop a business model that gives political relationships as much stress and planning as the financial numbers.
Q: Can you identify a few specific penetration points?
Beijing, Shanghai, Shenzhen. Most companies will want to set up in Shanghai because it is considered to be China’s window to the outside world; however, Beijing could offer some very strategic benefits by developing the right relationships with government officials. Shawn Hu stated, “If you know how to play Chinese politics, then you go where the Chinese government is really encouraging the type of growth and interaction that MLM companies can provide. That way, you can get into still relatively large cities and you can have the full backing and even additional support of the government.”
Q: Are there any words of wisdom that you might have for other MLM companies to prevent them from falling into any setbacks?
Don’t underestimate—it is a big market worth the investment. Be prepared to spend the time and money necessary. At least 40% of a company’s budget should be spent on PR alone. Have a team in place that can help adapt to the political and social climate in China. Take the time to develop a strategy that covers relationships with government and social perception and media resources and existing or developing distribution channels. A company should do what they can to demonstrate real staying power and long-term investment. Be prepared to ride out the hard times for the long term benefit.
Q: Is there any specific type of public relations strategy that you feel would be most effective in dealing with China?
Do not hire an outside Chinese. Hire a Beijing Chinese. Hire someone who has actually been in the market who knows both sides of the market. Remember to localize your campaigns. The most recognized PR efforts right now involve building schools. Focusing on helping the growing problem with unemployment is another important angle. It is important that MLM companies begin to develop a more centralized focus and have the ability to dig deeply into the social fiber of the society.
Q: Any additional suggestions or comments?
Be patient! MLM is very new in China. It will take some time for the government and society to assimilate and adapt. Once the government sees how much it can trust MLM companies, it will develop more tolerant policies. China wants people to have jobs, but more importantly, the government wants stability. MLM is a rapidly growing industry in China.