Category Archives: Trading

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).

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).

Brief History of Business in China

For anyone interested in getting a slice of the giant moon cake available in China’s economy right now, there are a few things you may want to consider.


China has an estimated population of 1.3 billion, and a per capita GDP of approximately $5,600 (purchasing power parity) (CIA, 2005). In December of 2001, China was inducted as a member of the World Trade Organization or WTO, something once conceived as nearly impossible. Theoretically, this membership should allow unprecedented access and international comparability to China’s markets. Although many critics still argue about the positive or negative effects that will come from participation in the WTO, both optimists and pessimists agree that change is eminent (“A Dragon Out of Puff,” 2002, par. 2). Beijing officials claim that China’s economy has been growing at 7%-8% in recent years. China’s large population and relatively strong purchasing power parity helped it to become the world’s second biggest economy in 2002, with no immediate signs of slowing down (“Business Environment,” 2005).

Figure 1


In 2004 alone, China attracted an estimated US$60b dollars in direct foreign investment (“Business Environment,” 2005). In the 2005 CIA report on China, “Foreign investment remains a strong element in China’s remarkable economic growth” (p.8) As of 2001, nearly 400 of the top 500 multinational companies had already invested in Chinese operations. Two decades of incredible growth gives China the fastest growing economy in the world (Luo, 2001, p. 18). With a labor force of over 761 million and a current industrial production growth rate of 17.1%, China dominates the world in terms of production and growth (CIA, 2005).


A very important aspect of Chinese business is the concept of special networking and leverage of relationships known as guanxi. Although the concept of networking has existed in one form or another within all of the earth’s societies, it has evolved in Chinese society to become a calculated and consuming science. According to Yadong Luo (2001, p.53), a former associate of the Ministry of Foreign Economic Relations and Trade, China; “[Guanxi] binds literally millions of Chinese firms into a social and business web.”

Chinese culture has stressed the importance of relationships and social order since as early as the 6th century B.C. The Chinese philosopher Confucius delineated the importance and responsibilities of relationships within society. Although traditional Confucian society is no longer commonly practiced in its entirety in today’s China, modern day guanxi continues to help define the importance and responsibilities of various relationships. The two types of relationships that serve as a basis for guanxi in China are familial and social. Although the value and leverage associated with different types of guanxi is a dynamic variable and adapts to the changing environment of China, family guanxi remains as the most important basis for guanxi. Social guanxi is not to be discounted in importance; however the traditional and practical roots of family clearly have first priority in China (Luo, 2001, p.54).

Extending beyond solely social dynamics, the establishment and maintenance of guanxi in Chinese society is mandatory for the success and vitality of any business (Luo, 2001, p.54).

Man Makes the Law

China’s laws come from the ‘top-down legislation’ of the central government. Without the checks and balances that arise from opposing political parties and the general public, regulations and policies from the central government are subject to rapid change (Blackman, 2000, p.170). The speed and accompanying lack of transparency allowed among bureaucratic leaders creates an environment conducive to bias and corruption.
In the book, China Business, The Rules of the Game (2000, p. 33), Carol Blackman shared a story about a partner-invested firm that did not possess the titles to both the equipment and land they needed to use for their business:

    Unless something was done…the joint venture would collapse, as [a] title was required to borrow working capital. The vice mayor said simply, ‘In China we have rule by man. Man makes the law.’ His unspoken implication was: ‘Man can change the law.’

The lack of uniform policy is strong evidence of this system. The sweeping legislation of the national government must adapt to the myriad of different local leaders and ethnicities. Carol Blackman stated, “Exceptions are allowed to almost all Central government regulations” (2000, p.177). The relative nature of these policies and regulations creates a system where adaptation and understanding are mandatory for success.

Business and Government

Business and government bureaucracy are inseparable. Although in recent decades China has begun privatizing many of its state-owned industries, managers and representatives of businesses continue to confront the power of Chinese bureaucracy. In 1998, in a survey conducted by the United States-China business council, government interference was identified as a key problem for foreign invested firms (Blackman, 2000, p.170). Government interference in business remains a primary criticism of foreign investment policy (Naughton, 2004).

The mixture of bureaucracy and business should not be perceived as an obstacle or weed to be exterminated. Rather it is an integral part of Chinese business. Mr. Shawn Hu, a private consultant to the Chinese government, offered his advice about doing business in China when he said, “Many Western companies think they can come into China and do only business—they are wrong. You must work with both government and business if you want your company to be successful” (personal communication, October 19, 2003).

Media and Social Ideology

Chinese nationalism and social ideologies are major components of modern Chinese society. The campaigns of Mao and his successors have a strong history of using excessive political propaganda. For more than 60 years, the Chinese Communist Party has retained all rights to censorship in the media and press in China.

Media control and censorship was a major tool of the government to instill the Maoist ideology into the people. As of today, China has more than 3,240 television broadcast stations. Of these stations, the largest 209 television broadcast stations are owned by the central government, China Central Television (CCTV). Thirty one stations are provincial stations and nearly 3,000 are local city stations (CIA, 2005). China’s efforts towards communication development within its network of more than 280 million television sets (Mcdonald, 1998, par. 35) demonstrate the staggering potential and influence of the government in terms of national communication.

Utah State Taxes and other things to look out for…

These last two weeks has been a rush to prepare one of my small online retailing companies to move into a warehouse and split into its own entity. After doing international trade for the last two years, some interesting things regarding state tax were brought to my attention, which I thought might be helpful to know.

According to Utah Law, (and most states I believe) State tax needs to be paid on the sale of every item that is shipped to someone in Utah. These taxes are only paid on the cost of the item and not the shipping and handling of the item. In addition, each city and county may have its unique tax rate and requires tracking and paying the necessary sum… Of course you could pay more just to be safe and Uncle Sam won’t mind :)

From my experience and from my friends and associates who have been in business for themselves for more than 10 years, Employee withholding tax and sales tax are two things you just screw up on.

If you’re an entrepreneur starting out, include these taxes and payments in your spreadsheets and proformas. Chances are pretty good that it’s not going to break the bank, but it could save immensely in crippling fines and heartache in the future.

Trading… What is it? Why is it so complicated? How can it be simplified?

What is trading? Most often when people think of trading, they think of stocks and bonds. At least, that’s what I used to think until just about a year ago when I got involved with my first international trading company, RigidFlex Plastics International. The definition of trading is broad and simple. I like the definition that wikipedia gives which pretty much says, trading is the general term used to describe the interaction between two parties that exchange goods, (most often something for money). Anyone who is directly involved in wholesale, retail, brokering and anything that goes on in Amazon, Ebay or similar sites–is a trader.

Marco Polo is probably one of the most popular traders in history. Some of the biggest and most successful companies in the world right now are nothing more than trading houses, MitsubishiHyundai andAmerican Trading International to name a few. A kinda fun example can be found in traders that are out of this world as well. Let’s look at Star Wars for bit. Hans Solo was a trader and had totally equip the Millenial falcon with hidden cargo bays to smuggle goods and avoid the federation tarriffs. Jabba the Hut was a trader. Every now and again I think about the scenes in Star Wars where everyone is hanging out at Jabba the Hut’s lair and these different traders from all over the galaxy are eating and talking. The funny thing is, these guys (and women) are probably talking about the different prices on the plates and napkins for all the intergalactic canteens that Jabba franchises, not to mention the going rate and existing supply scrap metal and old robot parts and which planets have an excess or shortage… Okay, you get the picture.

To trade you just need a buyer and a seller and a product. Unfortunately all of that can get pretty complicated when you look at all of the different players involved in getting a product from the manufacturer in one country to a converter or end-user here in the states. A few of the different factors you need to take into consideration include the following:

      L/C (letters of credit)

ocean freight

land freight

bunker fees

gas surchage

shipping bond

entry fee

merchandise processing fee

harbor maintenance

customs and tarrifs

and a few more

Fortunately, you can simplify things a lot by having a reliable Import Broker and Export Broker. At RFPI we use Copper Smith for all of our import, and Adora Intnernational for all of our export. Coppersmith is a huge company with affiliates just about everwhere that can handle even some of the most complicated shipments. Adora is a trustworthy, small town establishment out of Houston Texas that has been in the business for three decades and has followed through on everything we’ve ever needed from them.

Keeping track and updates on the different shipping prices and tarriffs can get distracting from the real meat or your trading. I haven’t yet found a software or website that manages all of the different aspects of it, but I can imagine it would be pretty helpful. I’m certainly open for suggestions.

The risks and stress can be pretty high in this business, but then again, so can the rewards.