• IDENTIFICATION
• LEGAL CLUSTERS
• GEOGRAPHIC CLUSTERS
• TRADE CLUSTERS
• ENVIRONMENT CLUSTERS
• OTHER FACTORS

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I. Identification

1.The Issue

2. Description

Amway (China) Co., Ltd., Amway Asia Pacific Ltd.'s (APP) China affiliate is making changes in their distribution methods in order to work with China's unique regulations. This is because Amway faces political challenges from the Chinese government. On April 21, 1998, the Chinese government ordered an immediate ban on direct marketing, causing Amway stocks to plummet. Amway faces the challenge to interpret the very different cultural and political implications of their presence in a changing communist country. All these events and uncertainties will definitely affect Amway's sales and trade opportunities in China. Their sales will also effect the environment. The products introduced in China may increase waste and create new environmental concerns. They have already built eight plants in Southern China that may contribute to air pollution. Amway mostly produces cleaning agents, personal care, and home tech products in China. If the Chinese government continues to put up protective barriers, this will indeed affect Amway's business.

Amway entered China in April of 1995. The huge country of 1.2 billion people is amidst a unique economic revolution, transforming itself from a rigid communistic environment into thriving social capitalism. Big companies such as Amway help this revolution. Amway has already invested over $100 million in eight distribution outlets in Guangzhou city, located in the southern province of Guangdong.

In just three years of sales, Amway-China has earned over $178 million in sales. But the government's sudden decision to stop direct sales effects the heart of the Amway business. The government's sudden decision slammed the door on the lucrative Chinese market.

The Chinese government's concern involves Amway's system of independent networks and door to door sales techniques. Amway's emotional motivation meetings scare Chinese officials of possible uprisings and social chaos. Beijing wants to control abuses they claim can stem from direct sales such as scams, frauds, and black market racketeering of goods. They claim "criminals have used direct marketing to spread heretical religion and start secret societies; to swindle, seek exorbitant profits and sell smuggled and fake goods" (http://members.tripod.com/~nomorescams/chinaban.htm).

The pyramid and recruiting method which Amway distributors use has been branded for cultic recruitment. Distributors are people who sell Amway products, and look to recruit others to become members of their pyramid. The Amway system works like this: You are an Amway distributor and sell products family, friends, and acquaintances. Then you, as the distributor explains the Amway business opportunity to people to see if they want to become an Amway distributor themselves. This is called sponsoring. Then those newly recruited distributors in turn will try to sponsor other people. Amway claims distributors who sponsor others generally have higher sales than those who don't. This system creates a "group" which is a team of distributors that was started by one person. This group gets together for motivational meetings and seminars to promote new business ideas and opportunities. As more and more people enter the group, the higher "pin" level you can qualify for. The more pins you earn, the higher achievement level you can elevate to. So it is in everyone's interest to recruit more people into the circle.

It was this pyramid scheme that caused Chinese officials to panic and order the immediate ban of direct selling. After widespread lobbying from American businessmen and several Chinese government officials, the government accepted Amway's revised business plan to sell products in retail outlets instead of direct selling on July 21, 1998. Amway executives were not too happy with this change in their business strategy. Richard Holwill, Amway's director of international affairs said "We will not compete with distributors in retail shops but we will make modifications to our sales plans to help meet China's concerns" (http://members.tripod.com/~nomorescams/chinaban.htm). Unfortunately, Amway was left with little choice.

The new plans include combining retail locations operated by the company with a strong team of non-employee sales representatives to promote Amway's products and services. Amway President Dick DeVos said, "While we have to make a number of changes in how we operate, in all of our discussions with the Chinese government, it was essential that we retain the foundation of an independent sales force to service our customers." (http://www.amway.com/InfoCenter/pressrel/pressrel42.asp)

It is essential for Amway to reiterate their independent sales technique that is the heart of their business. The change is this: Customers now pay a nominal fee to become privileged customers who are eligible to buy products at a discount. They must physically go to a retail outlet where all Amway products have a retail price marked. Amway's existing product distribution centers are located in 14 provinces with four direct municipalities that will be converted into stores where customers can shop.

There is a cultural gap between an American company trying to use American sales tactics in a foreign country. Amway has to bridge this cultural hiatus in order to win the approval of the Chinese government. Before the concept of direct sales hit China in the early 1990s, no one could have imagined such a lucrative market of product hungry customers. In the Chinese society where "face" is almost everything, a business that relies on connections or "guan xi" can be tricky. "Guan xi" means connections or relationship in English. These connections in Chinese culture is an intricate part of the livelihood of the Chinese people that effects almost every aspect of life. The Chinese basically coined the phrase, "It's not what you know, it's who you know." Amway's pyramid scheme is based on personal connections in order to recruit new salespeople. It is not surprising the Chinese government became frightened of the potential chaos Amway's direct selling technique could cause in China. Due to the fact connections and personal relations serves such an intricate part of Chinese culture, it could explain why China's officials took such drastic actions in April of 1998 by cutting off all direct Amway sales and recruiting methods.

Over the years, Amway claims the only way to do business is through distributors. These are independent agents who rely on close connections such as family, friends, and co-workers as customers. To move up the hierarchical ladder, a successful agent will sell more and more products through this web of people. The circle gets bigger and bigger as one distributor is suppose to recruit others to join Amway.

There have been severe criticisms of Amway's pyramid schemes. Pyramid schemes almost destroyed the Albanian economy in 1997. With an estimated 30 million direct marketers in China, employed by 2,300 home-grown companies, scams are unavoidable. China is making a difficult transition from decades of planned economy to a market economy. Perhaps the Chinese government is just trying to avoid the abuses of fraud and corruption that pyramid schemes can bring. Maybe they are afraid that these direct selling methods is the way pro-capitalist and pro-democracy sentiments will penetrate into Chinese society.

This dispute is causing new trade problems between the United States and China. Other direct marketing giants such as Avon and Mary Kay have also entered the Chinese market. Their futures also rely on gaining cooperation with the Chinese government. China has designated that new direct-sales companies invest at least $10 million in China. This is a huge trade barrier for smaller companies who do not have an enormous sum, but still want to penetrate the China market.

There are definitely risks and uncertainties with respect to operations in China. According to Amway's press release on July 21 at http://www.amway.com/InfoCenter/pressrel/pressrel42.asp, it states the following risks involved:

• The ability of the Company to manage effectively transition issues associated with the modification of its distribution system under the new government directive

• The regulatory environment at the national, provincial, and local levels (with three supervisory agencies) as the Company implements its new plan of operations

• The possibility of governmental action (China) restricting the ability of the Company to sell existing inventory not manufactured at the Guangzhou facility and to import additional products on a test market basis.

  It is too early to tell if Amway's modified sales technique will result in continued high profits or cause major losses in China. It is interesting to analyze why Amway was shut out in the first place, and the great lobbying efforts that brought them back into China's market. It is clear that there are cultural and trade implications in this case that will have major monetary repercussions. The results of this case remains to be seen.

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Key words: China

Manufacturing

Business

4. Drafted by Katie T. Do, November 1998

American University, School of International Service

II. Legal Cluster

5. Discourse and Status:

6. Forum and Scope

Forum: China

Scope: Unilateral: Chinese Law

7. Decision Breadth:

8. Legal Standing:

III. Geographic Clusters

9. Geographic Locations

a. Geographic Domain:Asia

b. Geographic Site:East Asia

c. Geographic Impact:China

10. Sub-National Factors:

11. Type of Habitat:

China is such a massive country, temperatures obviously varies from province to province. The Southern region of Guangdong Province where many of Amway's manufacturing plants are located has a temperate climate.

IV. Trade Clusters

12. Type of Measure:

Amway is taking steps specific towards China. They do not plan to extend measures to other countries. The directive made by the Chinese government on April 22, 1998 required immediate cessation of direct selling activities, and required all direct selling companies modify their mode of operation. Amway-China resumed business operations on July 21, 1998 after Chinese officials approved modified plans of selling operations. Nevertheless, Amway is the player that had to respect the Chinese authority's wishes to cease direct selling efforts and use revised business plans to sell only in retail outlets.

13. Direct v. Indirect Impacts:

Amway is directly marketing their products within China. Selling activities began on April 10, 1995. Amway's direct investment in China is approximately $100 million, that includes IS 09002 artified manufacturing plant in the Guangzhou Economic & Technological Development District of China.

14. Relation of Trade Measure to Environmental Impact

a. Directly Related to Product: Many

There are 40 product service centers nationwide in China. Facilities that make the products are in the cities of 14 provinces and four direct municipalities. http://www.amway.com/InfoCenter/pressrel/pressrel39.asp

b. Indirectly Related to Product: No

c. Not Related to Product: No

d. Related to Process: Yes

15. Trade Product Identification:

16. Economic Data

17. Impact of Trade Restriction:

18. Industry Sector:

Standard Industrial Code (SIC) Chemicals, Services, Non-durable Manufacturing

19. Exporters and Importers:

V. Environment Clusters

20. Environmental Problem Type:

21. Name, Type, and Diversity of Species

22. Resource Impact and Effect:

23. Urgency and Lifetime:

24. Substitutes:

VI. Other Factors

Amway Corporation Statement Regarding China

Sales Scams

Beijing Ban is a Blow for Direct Marketing Firms

See a Site on Chinese Culture