China Slams Door on Direct-Sales Firms

For now at least in China, Avon is banned from calling, Amway has lost its way, Mary Kay has been KOd and the parties are over for Tupperware: The four giant U.S. direct-sales companies, which have enjoyed phenomenal growth across China, were ordered this week to stop operating under a broad new directive banning “pyramid selling.”

The State Council order for all direct-sales companies to wind up operations by Oct. 31--an order that American officials had protested in advance of its issue--came the day before U.S. Trade Representative Charlene Barshefsky arrived in China for trade talks.

And though it was not originally on the agenda for discussion, Barshefsky’s team spent much of Thursday consulting with American executives and pressing Chinese officials to find a solution that will not harm the companies, which have been officially licensed and have invested millions of dollars in manufacturing and sales networks here.

“We understand China is intent on cracking down on Ponzi and pyramid schemes and their problems,” said Jay Ziegler, a U.S. trade spokesman. “But it’s important to recognize that those problems have never been associated with U.S. companies operating in China.”

The U.S. companies have been swept up in China’s push to rid itself of schemes that have sprouted across the country and have sparked small riots when customers found that they have been duped out of their money. Among the home-grown ploys are door-to-door sales of mechanical foot massagers, cosmetics, water beds, vitamins and elixirs. Perpetrators of such scams “have been behaving badly, getting involved in underworld crimes and preying on innocent people through their superstitions,” the China Daily said in a front-page story.

But the vague definitions in the latest directives affect multinational firms with millions of dollars invested in China, as well as fly-by-night scamsters engaged in pyramid or Ponzi schemes, ploys in which profits are made not from true sales of products but by the rolling recruitment of more and more investors--sometimes the sales force itself--whose money goes into the hands of a cheating few.

“We’re frustrated that this sledgehammer approach gets rid of ours as well as the ones they’re really trying to get rid of,” said Richard Holwill, director of international relations for Amway. “ ‘Shut it all down and sort it out later’ seems to be the attitude.”

The direct-sales conflict is the latest stress point to emerge as China attempts its massive conversion from a command to a market economy. While such grass-roots marketing plans featuring low-cost products are a perfect match for China’s developing economy, they thrive in an atmosphere that also lends itself easily to fraud--as has happened in the similarly evolving economies of Russia and Albania.

In the confusion surrounding the Chinese government ban, distribution centers for the U.S. companies were swamped Thursday by sales agents and representatives returning sample kits and unsold products and demanding refunds.

At the Amway distribution center in eastern Beijing, Yang Lin arrived with her red-white-and-blue starter kit. It was filled with household cleaners, mouthwash and cosmetics marketed here by the Michigan-based company that recorded $178 million in sales in China for fiscal year 1997.

Yang, 24, a native of China’s central Sichuan province who came to Beijing years ago as part of the large migrant population, said she paid 720 yuan (about $90) for her kit--which included a nonrefundable 20 yuan “membership fee.” She did this just as the direct-sales ban was announced. “I’d like to keep going, but because of the edict, I have to stop,” she said as she received her 700 yuan refund.

Meanwhile, Xie Jianhua, 36, standing in line with six boxes of Amway products, illustrated how quickly and deeply the U.S. firms have already penetrated the Chinese market. Dressed in a stylish silk sport coat, Xie said he began selling Amway products in 1996 and now qualifies as a distributor, recruiting an average of 10 new sales agents monthly. He said he earns the equivalent of $250 a month--about one-third of his monthly income--from Amway.

But he said the direct-sales ban’s biggest blow to his family’s income will come from its attack on his wife’s job with rival Avon, where she earns the equivalent of $1,000 a month as a sales supervisor. “Because she was full time with Avon,” Xie said, “she is now going to be effectively unemployed.”

Like others waiting at the modernistic Amway center, Xie was angry about the sales edict. “It’s not a policy,” he snapped, winning nods of agreement from others, “it’s a straight-out ban.” He also predicted that the order could backfire as large, established U.S. firms will comply but indigenous, fly-by-nighters will only “go underground.”

When news of the ban reached overseas markets, it jolted some share prices. Amway representative Holwill said the company’s stock value dropped $150 million in two days, attributable to the Chinese ban on direct sales. Avon shares dropped from $83.88 on April 15 to $79.25 by Tuesday but have since resurged to $82.63. Tupperware shares have shown no discernible change in recent days.

Holwill said Amway has $100 million invested in China, including: a plant that makes detergents and beauty products in Guangzhou; 40 branches in 18 provinces; and at least 18,000 distributors, or salespeople. Amway had earlier postponed plans for a second plant in Shanghai’s Pudong district because of rumblings about the impending ruling.

“I don’t believe a pullout will be necessary,” Holwill said. “We’re talking to the government about their concerns, and we think we’ll be able to address those concerns.”

Since Avon first came calling on China in 1990, direct selling has found an enthusiastic following here among would-be entrepreneurs. Amway, Mary Kay and Tupperware have become models for grass-roots capitalism. They have created jobs for workers laid off from ailing state-owned enterprises.

“We provide opportunities, especially for women in China,” said K.K. Chua, president of Mary Kay Asia Pacific, whose 8,500 “beauty consultants” brought in $25 million in retail sales last year. “They’re extremely productive. It is a real career for them, not a buyers’ club.”

Companies have been widely copied not only for door-to-door sales but also for a system that rewards salespeople for recruiting members--a system that in some firms devolved into pyramid schemes.

But as their popularity grew, so did government concern. Motivational meetings, in which salespeople gathered to sing company songs and shout slogans, drew official suspicion in a country where most gatherings of more than a dozen people are banned.

The focus on “getting rich” also didn’t sit well with Chinese officials intent on promoting “spiritual civilization.” At one Amway recruiting meeting in Shanghai, a “diamond” level salesman showed a videotape of his nine villas in the United States, all with swimming pools and cars. The meeting ended with his being thronged, with the enthusiasts reciting the Amway motto and applauding.

In a critical story on the direct-sales industry, the Beijing Youth Daily described a rally for an unnamed company, at which 100,000 sales agents heard an enthusiastic speaker ask: “Do you want to get rich? Do you want to have a mistress? Do you want to drive a car and live in a villa? Then get into direct sales.” The newspaper described such approaches as harmful to China’s “spiritual civilization.”

In 1995, the government suspended all direct sales for seven months, authorizing only 43 of nearly 200 multilevel marketing companies to reopen. “They were a little concerned that these companies were becoming like cults,” a U.S. consultant said. “They were put off by the revival meeting atmosphere.” Mary Kay had to change its credo, “God first,” to “Faith first.”

Last year, the government issued new regulations for direct selling, and rumors of another shutdown have rumbled since.

Yet another concern is tax evasion: Money made via door-to-door sales is almost impossible to track.

The latest edict, at least temporarily banning all direct-sales operations, had been rumored for weeks. Amway’s Holwill said he and executives from Avon and Mary Kay talked Thursday to coordinate their reaction.

The consensus, Holwill said, was to support the government attempt to clean up the direct-sales business while reminding Chinese officials, who face a growing unemployment problem, of the benefits of legitimate operations. “We will help them prevent fraud,” Holwill said, “but at the same time we want to point out that this can be a legitimate way for unemployed people to go out and make a living.”

Anthony Kuhn of The Times’ Beijing Bureau and Bao Lei of The Times’ Shanghai Bureau contributed to this report.