China - World’s Largest Direct Sales Market

By staff reporter LUO YUANJUN

Amway --- one of the first exploiters of China’s direct sales market.

WHEN introverted schoolteacher Zhang Jian suddenly shot out of his shell, his colleagues wondered what had brought about this u-turn in his personality. The reason, they soon discovered, was Zhang’s foray into the world of direct selling.

Zhang attended a course given by experienced, battle-seasoned members of the direct selling community. Each had a wealth of anecdotal advice to pass on to their newest member. Rather than focusing on any particular product, the trainers spent their time exploring human nature, kindling the attendant’s desire for wealth and success, and infusing Zhang with a feeling of courage and resolve. “In the beginning, I didn’t really have any special impression of the teachers,” says Zhang, “but they soon fascinated me.” After a few classes, Zhang was sold. Spying the opportunity for a better life, Zhang was convinced that he could achieve success through direct selling, if he put in enough effort. Many more, like Zhang, have rejuvenated their personas after taking a direct sales training course.

Few of Zhang’s colleagues, however, supported his decision, knowing that a whole host of direct selling-related scams have surfaced in the Chinese media.

The World Federation of Direct Selling Associations (WFDSA) defines direct selling as a process involving the marketing of products and services directly to consumers in a face-to-face manner, away from permanent retail locations.

Direct selling does have distinct advantages. Customers can get personal, detailed information on the product and have it delivered to their door. It is a cost-effective, efficient marketing channel for small businesses and new products. To some extent, it guarantees quality products, and also creates employment.

Avon’s door-to-door sales mode proved a success in China.

There are two main methods of direct selling – single-layer and multi-layer. Avon is the best known company operating under the former method, while Amway uses the latter. Single-layer direct selling uses a very similar strategy to conventional sales, and is easily supervised. The riskier world of multi-layer selling, however, is a fraudster’s paradise.

General manager of Amway China, Huang Deyin, says fraudulent direct selling is conducted through a pyramid structure. Each “brick” must fork out a non-refundable start-up fee, sometimes as high as tens of thousands of yuan, supposedly covering membership charges, training and the products themselves. To recoup their initial payout, members have to coax others to join the network – the more they entice in, the greater their reward. The scam-artists, meanwhile, laugh all the way to the bank.

Direct Selling in China

Direct selling first emerged in China at the end of 1980s. Early entrants did quite well, and the concept caught on quickly. Its good reputation was short-lived, however, as pyramid-building swindlers moved in, and the government banned the business.

When Zhang Li graduated from university, she left her hometown in Sichuan to enter the “herb business” in Anhui. Acting on advice from a friend she had met on the Internet, Zhang had no idea what she was really getting herself into. Mesmerized by the “opportunity” the pyramid system seemed to present, Zhang put 10,000 yuan into the business, only to see it disappear down the plughole. When her father found her, 1000 kilometers from home, she was still living in fantasyland, convinced that pyramid selling would one day bring her big bucks. “It is clear that pyramid selling is a complete scam,” Zhang’s father lamented. “Even my daughter, with college education, was hoodwinked. I hope that her bad experience will help others to open their eyes.”

Other foreign direct sales companies, such as Herbalife, are poised to enter China.

China’s State Council issued a notice on April 18, 1998, banning pyramid selling activities. Later, the Supreme People’s Court issued regulations on punishing tricksters that bring misery to naive people’s lives. Both documents condemned pyramid selling as illegal. Scam-artists, however, were largely undaunted. They exploited loopholes, devised new tricks and carried on with their illegal business as usual.

Global Direct Sellers Sail into China

As part of its WTO commitments, on December 11, 2004, China removed restrictions on direct selling. However, the government warned that anyone involved in pyramid selling would be severely punished.

Avon China, the country’s first direct selling organization, was founded in January 1990. In 1998, it restructured into a conventional cosmetics company, and began selling its products through both stores and direct sales. Today, it has set up more than 5,700 outlets and 2,000 counters across China. In 2003 it reported sales of 2.4 billion yuan, four times higher than it had before pyramid selling was banned.

Amway first entered China in 1995. The State Council authorized Amway to resume business in 1998, and the company chalked up sales of 100 million yuan that year. In 2003, Amway’s sales volume in China surpassed that of Japan and the U.S. for the first time, accounting for one fourth of its world total. In the five years from 1998 to 2003, Amway China’s business volume has increased 120 fold, achieving awesome growth of 50 percent in 2004. This year, it plans to add another 40 stores to its 140 outlets around China.

These two early birds in China’s direct selling market have now become full-fledged competitors. Meanwhile, newcomers such as Nu Skin and Herbalife are searching for their own nesting site.