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American made China a billion-dollar market, now faces a crackdown

The American marketing giant made China a multi-billion dollar market, but it is now under fire from local regulators

Ryan McMorrow & Steven Lee Myers | NYT  |  Lanzhou (China) 

Amway, China, Beijing, US
An Amway presentation in Beijing. Direct selling has been legal in China since 2005, with restrictions that have been unevenly enforced Photo Credits: The New York Times

Feng Gang stood in front of 150 people in a conference hall in Beijing that Amway, the American marketing giant, calls its flagship ‘experience center.’ Introduced endearingly as Big Brother, he pitched the company’s newest product to an audience of recruits, men and women, young and old, one a street sweeper still in his orange municipal jumpsuit. Mr Feng said Amway’s energy drink, XS, could reduce blood-alcohol levels by as much as 70 per cent. It could cure depression, he went on, or help someone who is drunk drive home. His aim: to get the crowd to go out and sell the products. For more than a decade, scenes like this represented a financial salvation for and other that use sales representatives to recruit others below them in what’s called multilevel marketing. Facing declining fortunes in the and elsewhere, they turned to a ballooning consumer class in hungry for new products—and susceptible to promises of the riches to be had by selling them. Now, the future seems less promising. The giants of multilevel marketing have come under a dual assault, from regulators here and in the Two companies, Herbalife and Usana Health Sciences, disclosed last year that they faced investigations in the for their operations in under the Foreign Corrupt Practices Act, which prohibits American from bribing foreign officials. Another, Nu Skin, settled a similar case with the Securities and Exchange Commission in 2016, while Avon Products pleaded guilty in 2014, resulting in a $135 million fine. Amway, which is not public, has not disclosed any inquiries by American regulators. In one Chinese province, however, the conduct of some sales distributors prompted an investigation, one that the victims say was squelched by local officials, including at least one with ties to the company. “This industry is absolute chaos for China,” said You Yunfan, a former distributor who wrote a scathing memoir under the pen name Xiao Fei. Noting that Chinese law prohibits many of the worst practices associated with multilevel marketing, he added, “The root problem is that the government is riddled with corruption and not doing its job.” That may be changing. Four government agencies last year announced a crackdown on the marketing model. Turbulence in the Chinese market could be devastating for Amway, which has relied on for much of its growth over the last decade.

It is now, by far, the largest of the multilevel marketing here, with 1.5 million distributors, more than all the others combined, according to the Ministry of Commerce’s records. is now Amway’s largest market, accounting for $2.6 billion in revenue, or about 30 per cent of its worldwide sales, the company’s president, Doug DeVos, told Reuters last year. In a statement, an vice president, Scott Balfour, said the company welcomed the crackdown, saying it would distinguish pyramid schemes from legitimate direct selling. has not been singled out in the campaign, and it has built an impressive brand here, operating gleaming showrooms in Beijing and elsewhere and sponsoring the Chinese Olympic team. Yet it has been dogged by accusations like those it has faced elsewhere. Former distributors have organised online to warn others of the company’s model. Amway’s name in Chinese, ‘an li’, has entered the vernacular to mean to ‘promote heavily’ or to ‘be brainwashed.’ and others faced skepticism from the authorities nearly from the moment they entered the market in the early 1990s. Multilevel marketing was officially denounced as an ‘economic cult,’ and in 1998 the government banned all direct selling. Only when negotiating entry into the did agree to American demands to allow the in. Direct selling has been legal since 2005, though with restrictions. Enforcement of the laws, however, remains uneven. “It’s a gray area,” said Liu Kaixiang, a professor at Peking University’s School of Law who conducts research at the university’s industry-affiliated direct-selling research center. “The majority of these direct-selling are right on the edge. If they were to completely follow the law, there would be no market at all.” The vagaries of Chinese regulations and an avaricious bureaucracy have already ensnared others, like Avon, once the top direct seller here. In 2014, it admitted to providing $8 million in cash and gifts like Gucci purses to Chinese officials. said in its statement that it had not faced questions from American regulators about its practices in In Amway’s Beijing center, a reporter with The New York Times listened as Big Brother Feng detailed sales tactics that would violate Chinese law if used, promising that new recruits could earn more as they recruited others. A few days later, one of the recruits was out on the streets repeating the pitch as he handed out fliers for the The fliers said new distributors could ultimately earn the equivalent of $75,000 a year. In fact, 96 per cent of direct sellers make less than $750 a year, roughly the average monthly wage for private-sector workers, according to government statistics.

© 2018 The New York Times News Service

First Published: Tue, January 09 2018. 22:25 IST