Category Archives: MLM in China

Multilevel Marketing Companies in China: The Full Report

For the past few days I’ve been posting excerps from my Honors Undergraduate Thesis. Things have been changing very quickly in China recently, especially for MLM.

Often considered a cult by the Chinese Government, (like the Falun Gong), the Chinese government is departamentally trying to deal with the 10 Billion dollar industry in China.

In the meantime, MLM companies are doing what they can to catch up with Amway and take advantage of the situation before anything else changes.

If anyone is interested in my full thesis and references, let me know. I’d be happy to see what I can do to make that available.

Forecasting the future of Multilevel Marketing In China

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.

Research Questions
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 Interview
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.)

Identifying Obstacles
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.
Overcoming Obstacles
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.
Future Predictions
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.
Suggested Strategies
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.

The Next Step for Multilevel Marketing in China

With the tumultuous past behind, multilevel marketers look to the future for real returns on their investments.

Companies such as Amway and Mary Kay have demonstrated that there is a significant amount of profit to be made through MLM and retail sales in China. Newcomer Nu Skin is eager for involvement in this market and has already committed more than $US80m of investment for a position in the market (Anderton, 2002, par. 7). As the leading MLM companies increase their momentum in the Chinese-marketplace, they must spend large amounts of money and time to push past the learning curve and obstacles that must be overcome to successfully pioneer the industry. These pioneered paths create a trail that can be more efficiently utilized by other companies that wish to pursue a similar course. Large companies have already done the majority of the work and are now positioning themselves for greater payoffs. Now is the time for emerging MLM companies to join in the Chinese MLM market.

Signs of Opportunity 
The changing economic climate in China and the major investment positioning of leading MLM companies are clear signs of pending opportunity and profit in China. For years China has been working toward a more open market. Within the past year, two of the greatest milestones in China’s market history have occurred. The first was China’s accession in the WTO in December of 2002. As part of WTO accession, China must open its banking, insurance, telecommunications, agricultural sectors and more (“A Dragon Out of Puff,” 2002, par.2, 6). The second major milestone included the successful transfer of congressional and presidential power in 2002 and 2003 (“A Dragon Out of Puff,” 2002, par.3, 9, 11).

Major player investment is another indication of the ripening situation. In June, 2003, Amway announced an additional US$100m investment in their Chinese operations (“US Businessman,” 2003, par.1), and in January 2003, Nu Skin announced their investment of US$80m dollars in their China operations. Nu Skin also announced expected yearly revenues to reach US$300m by 2007.

Accession into the WTO was seen as a major step towards lifting the ban on MLM companies in China. “As part of China’s pact with the World Trade Organization, restrictions on direct selling will be decreased by December, 2004” (“Nu Skin China,” 2002). Unfortunately the announcement of those revised policies did not meet the Chinese government’s original December 11, 2004 deadline, and MLM companies were forced to continue operating under the strict conditions of the 1998 policies. In more recent developments, however, it was announced in September 2005 that China was soon to lift its ban. “The State Council, Cabinet, of China has approved in principle new draft rules on direct selling management and banning pyramid selling, lifting the countries 7 year ban on direct selling” (“Breakthrough in Direct Selling,” 2005 par.1).

Although this policy remains to be approved, it does offer good indications for reduced investment costs and change in the marketplace. This recent policy indicates a higher allowed commission payout, 30% as opposed to the previous 25% and an end to a requisite number of fixed stores, at least one, as opposed to one in each active province. Also advantageous is a new limit to registered capital, raising the limit to approximately US$10m. (“Breakthrough in Direct Selling,” 2005 par.1). These changes have signaled a slowdown in investments from major companies such as Amway and Nu Skin, “We will not be obliged to open shops in every city.” (Li, 2005, par.4) The policy is expected to be approved by the end of the year, although no one is holding their breath.

Let the money itself speak for the opportunity in this market. By the end of August 2005, Amway reported to have reached US$2b in sales and Nu Skin predicts its year-end sales to reach over US$120m. If the ban on MLM companies is lifted, numbers are expected to be much higher (“Direct Sellers May Get a Foot in China’s Door;” 2005).
Balanced Approach

To maximize the probability of success in China, a firm must use both Western and Chinese methods in its business strategies. The Chinese government and its people are eager to learn more about Western business marketing strategies and management. Likewise, Western firms that wish to succeed in China must actively learn and implement Chinese social and cultural factors into their strategies (“Who Will Help Her Find Her Way in China?,” 2003 p. 5).

The Balance of Economic, Political and Social Systems

Effective penetration into the Greater Chinese Market for any company, though especially MLMs, requires a balanced approach.

Aside from direct incentive and leverage of political guanxi, a strong government relationship is made possible through obtaining positive support of the people. This public image can be obtained through direct public contact or the influence of newspapers, television and other forms of media. When relationships with the public are supported by the media, marketing channels that exist from the present bureaucracy become useful—of course permission to use these marketing channels requires cooperation and assistance from the Chinese government. Middle Kingdom Group (MKG) LLC, a marketing company comprised of experienced Chinese and Western business and government consultants, makes the point that by efficiently balancing these interdependent relationships, efficiency in business will result. In MKG’s business proposal for market penetration into China, four key components are recognized: strong government relations, cooperative use of media, cooperation with social culture and synergism with existing marketing channels (“Who Will Help Her Find Her Way Around China?” 2003, p.4). In meeting with representatives from a Utah-based MLM company, Dan Mabey, former Director of International Economic Development for the State of Utah and member of MKG, recognized that existing MLM companies are making use of the previously mentioned key aspects of successful business in China, but very few, if any, are doing a very good job of it (personal communication, November 21, 2003).

Government Relations
The inseparable relationship of business and government in China places government relationships at the forefront of importance. The mounting pressure from the WTO and the growth of retail based MLM companies in China are creating an environment in which the government may respond with additional legislation and direction. Although the Chinese-MLM environment has drastically changed in the past 22 years, the government’s role has not. To secure product registration, product protection and operation expansion, support from the government is imperative. These relationships can be built by direct government interaction or indirect leverage of guanxi.

Media have tremendous influence in China. To gain a positive image in the public eye is extremely helpful. Negative press was one of the key factors that led to the ban on direct selling (“When the Force is Against You,” 1998, p.5). Positive press could have helpful effects. An example of helpful media coverage can be found in one of China’s most prominent papers, Xinhua. Recent articles highlighted Amway’s successful social-improvement donations programs and praised a publicly announced US$120m increase in their China operation’s investment (“Amway Supports Welfare Causes in China,” 2003, par.4; “US Businessman Values China’s Investment Environment,” 2003, par.1). This type of media hype is excellent for gaining positioning and placement of public support in the Chinese marketplace. Media are especially effective when used to highlight the less ostensible characteristics of a company, such as the number of employees, their attitudes towards the company and products and the help of the company itself to its immediate community.

Social Culture
China is losing its anticapitalist sentiments of the past and now opening to Western capitalist ideologies and culture. Companies that can be perceived by the people as being a benefit to society will help to create an image of cooperation and progressiveness. This mentality is in conjunction with words of Deng Xiaoping, Mao Zedong’s influential successor, “It doesn’t matter whether the cat is black or white, as long as it catches mice.”(“Who Will Help Her Find Her Way Around China,” 2003 p. 5) This expression can be applied to the role of capitalism in helping society (i.e. it does not matter whether one uses communism or capitalism, but what does matter is that society is helped).

Amway has been very active in demonstrating its benefit to China. In 2002 Amway sponsored more than 246 public welfare programs, totaling over US$1.8m. One of Amway’s more recent programs includes a simple program where donation boxes will be set up in nearly 100 of its national branches. The donations are distributed toward children’s education and other welfare programs (“Amway Supports Welfare Causes in China,” 2003).

Marketing Channels
China’s communist government relies on extensive hierarchy and committees to function. Geographic and ethnic differences in the Chinese system require a unique network of administration throughout the country. The close relationship of government and business, coupled with the practice of guanxi, create several exclusive networks throughout China. Many of these quazi-business/government marketing channels provide a strong and well-defined foundation to be utilized in the market.

These market channels can be illustrated in the distribution of cellular phones in China. China now claims to have over 250 million mobile phone users (“China’s Cell-phone Users,” 2003, par. 1). Dan Mabey, former Director of International Economic Development for the State of Utah, is keen to point out that the price of phones and service is far more than even the above average Chinese citizen can afford. Rather it is through the ministry of communication and the budgets of other budgets of government ministries and large firms that such pecuniary consumption is possible. The citizens do not buy the mobile phones; the government does (Dan Mabey, personal communication, November 21, 2003). Tapping into other markets that have strong ties to government ministries provides a large market base with enough capital to purchase the products.

Present Strategies Of Nutraceutical Multilevel Marketing Companies in China

Multilevel marketing companies have worked hard to adapt their business practices to meet the Chinese market demands.

The Retail/ Single Level Switch
The conversion from MLM to retail required a serious shift in MLM thinking and practice. At the time of the ban, Amway had already invested more than US$100m, Avon US$70m and Mary Kay another US$20m (“When the Force is Against You,” 1998, p. 5). This ban put hundreds of millions of dollars worth of equipment and liabilities at risk. The jump to retail sales was meant to protect investments and also to diversify revenue stream. Some of the specific changes in the Chinese-MLM strategies are listed below (“When the Force is Against You,” 1998, p. 5):

• Avon. Distribution branches were converted into retail and wholesale stores. Kiosks were opened in partnered-national retail chains and sales promoters and customers were allowed special customer discounts. Avon has more outlets than any other nutraceutical MLM company in China with 6,300 beauty boutiques and 1,700 beauty counters (“Still Off the Doorstep,” 2005, p. 2).
• Amway. Product distribution centers were converted into retail stores. Small fees allowed up to 15% special customer discounts on all purchases. Sales promoters can do product demonstration and customer follow-up. Sales promoters deliver items to customers homes and receive payment on commission. Amway has around 130,000 sales representatives selling some 180 products. It also operates more than 130 retail stores (“Still Off the Doorstep,” 2005, p. 2).
• Mary Kay. Practices will change very little. Whereas Mary Kay sales transactions were mostly done in their “beauty centers” before the ban, their new policy required all sales transactions take place in their specified sales locations and sales promoters work on a commission-only pay. Mary Kay continues to hold beauty education classes to promote their products (Hulme, 2001, p. 43).
• Nu Skin. Arriving late into the market in 2003, Nu Skin has since invested more than US$100 and is operating approximately 115 outlets. Nu Skin has announced their plans to increase the number of its retail outlets to 200 by the year 2006 (“Still Off the Doorstep,” 2005, p. 3).

Effect on Revenues
Transition of business models was not a smooth ride for the big MLM firms. Months of no sales revenues, extensive employee retraining and internal restructuring took a toll on the recovering giants. As a result of the ban, the big companies’ yearly sales were cut nearly in half for the first year (“When the Force is Against You,” 1998 p.5). Since then, however, revenues have seen strong growth for many companies. In 2002, revenues from China’s total sales volume brought Amway RMB$6b, approximately US$750m. In August of 2005, Amway reported to have already met $2b. These revenues accounted for nearly one fourth of Amway’s total global sales (Li, 2005 par.11; “World Consumer,” 2003). Other companies such as Mary Kay and Avon also reported very strong growth (Hulme, 2001 p.43; Ui-Hoon, 2001 par.3). Mary Kay’s 2002 sales numbers exceeded US$120m), Avon’s exceeded US$220m. Such phenomenal growth is what initially attracted other global companies such as Nu Skin Enterprises to try for a share of the industry. Nu Skin Enterprises obtained over US$100m in sales for 2004 (“Still Off the Doorstep,” 2005, p.3).

Adapting to Chinese Business
Making the jump to retail sales is only one of the big steps that MLM companies are doing to adapt to business in China. The learning curve associated with pioneering a business in China requires time, resources and an extensive amount of learning. When commenting about doing business in China, Blackman wrote,

People are unable to start doing business in China as if they were in the developed West. A business [firm] must learn how the local scene works and then decide to what extent he or she will adapt to local ways (Blackman, 2000, pp.14-15).

Making Connections.

Using guanxi to effectively maneuver within Chinese business has quickly become a top priority among many of the leading MLM companies. By establishing strategic relationships with the government and other companies that operate in China, MLM companies open doors to many opportunities, both transparent and inconspicuous. In August of 2003, a recent program brought over 60 top Chinese mayors and officials to Utah and Boston for a leadership training seminar (“Chinese Government Officials Visit Utah to Study American System,” 2003, par.1) Shawn Hu, a major organizer of this project, stated that this program was largely sponsored by MLM companies in China (personal communication, November 16, 2003).

Avon, the fastest company to recover from the ban of 1998, used special relationships to gain acceptance from the Chinese government when faced with a problem in establishing their manufacturing operations. After initially failing to convince the central government of its direct marketing program, Avon acquired the assistance of David Li, the head of the Hong Kong’s Bank of East Asia. Li used his cordial guanxi with the Chinese government to successfully introduce Avon to the appropriate industry in southern China (Luo, 2001, p. 56).

Initial Strategies of Nutraceutical Multilevel Marketing Companies In China

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).

Government Actions
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).

MLM Companies In China: Introduction


Multilevel or direct marketing is arguably one of the most effective available systems of marketing a unique product with low overhead costs. The largest multilevel marketing or MLM firms are based in the nutraceutical or health industry. Although many MLM firms earn revenues of tens of billions of dollars annually, for many the phrase ‘multilevel marketing’ carries the strong negative connotations of pyramids and Ponzi-schemes. Unfortunately for many MLM firms, these negative perceptions are shared by the government and social institutions of one the biggest potential markets in the world: China.

In 2005, with its 1.3 billion people and a gross domestic product (GDP) of approximately $5,600 per capita, China stands as the third-largest economy in the world after the European Union (CIA, 2005, p.7). Initial attempts at multilevel marketing in China were met with bitter setbacks when bad press, ignorant management, lack of political cooperation and socially contrary marketing closed all legal MLM operation in China by 1998.

Today’s movement of rapid globalization continues to emphasize the need for balance in our world of complex systems. The necessary balances of political, economic and social institutions in China are not very well understood by most MLM companies. Although the difficult obstacles that previously inhibited multilevel marketing are beginning to give way, the past experiences of the pioneering leaders in China leave several clues for a more efficient method of penetration and maintenance in the Chinese marketplace. With further study into the relationships of business and government in China, an effective balance of political, economic, media and social institutions can be established. This balanced approach can thus help companies avoid many of the problems MLM companies face in the beginning stages of doing business in China.