TED Case Studies

Case Number: 502

Case Mnemonic: Amway

Case Name: Amway in China



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I. Identification

1.The Issue

Amway, Inc. is a distribution giant that expanded to Mainland China in April 1995. Founded in 1959 in Ada, Michigan in the United States, Amway is one of the largest direct selling companies worldwide. Amway has establishments and distribution networks in Europe, Latin America, Africa, and Asia. They entered China only three years ago in April, 1995. Their entrance into the Chinese market has earned big profits, with more potential to grow. In just three years of sales in China, Amway earned over $178 million in sales. But on April 21, 1998, Chinese officials issued an immediate ban on direct marketing that threatened a multi-million-dollar market for Amway and other potential direct marketing companies. Chinese government officials claim the ban was absolutely necessary because the direct-selling operations functioned as a base for criminal activity. Amway's direct-selling techniques scared Chinese officials for fears of spreading heretical religion and the start of secret societies. The ban was lifted three months later on July 21 due to heavy lobbying from American businessmen and Chinese government officials. But Amway was forced to revise their business plans to only sell products in retail outlets, not through direct-selling. These new guidelines are very different from Amway's selling technique, which is based on Amway's pyramid building and selling system. The question now is: Will Amway China be able to make profits using this new system in a country whose leaders can decide to impose another ban on their sales? What is it about Amway's system that scares the Chinese government so much? Perhaps the Chinese government is afraid of Amway's pyramid scheme that encourages salespeople to recruit other members. Amway has to break cultural barriers. Amway is trying to introduce American sales techniques to a country wary of fast changes.

2. Description

Amway, Inc. is a distribution giant that sells everything from soap detergents to fruit juice drinks. They are an international corporation with affiliates in 45 countries and penetrates more than 80 countries and territories worldwide. Amway recorded global sales of US $7 billion at estimated retail on August 31, 1997. Global sales have tripled since 1990. (http://www.amway.com/InfoCenter/i-mediIC.asp). Amway Corporation has two publicly traded sister companies: Amway Japan Limited and Amway Asia Pacific Ltd. Amway's affiliation in China falls under the jurisdiction of Amway Asia Pacific. Amway's recent entrance into China has earned them big profits, with even more potential to grow.

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:

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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:

Agree and In progress

6. Forum and Scope

Forum: China

Scope: Unilateral: Chinese Law

7. Decision Breadth:

Number of Parties affected: 1

8. Legal Standing:

Standing: Law

III. Geographic Clusters

9. Geographic Locations

a. Geographic Domain:Asia

b. Geographic Site:East Asia

c. Geographic Impact:China

10. Sub-National Factors:

No

11. Type of Habitat:

Temperate

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:

License

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:

Direct

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:

Product Type: 34 Personal care and Home Tech Products

16. Economic Data

Industry Output ($) $178 million so far since 1998 Employment: 80,000 Chinese Sales Staff

17. Impact of Trade Restriction:

Loss of Trade: High Cost ($) Amway has over $100 million in investments, as well as $178 million in potential profits of over the span of 3 years. Coverage (%) Price Effect (%) Competitive Effect (%)China might restrict Amway products if they are not produced in China.

18. Industry Sector:

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

19. Exporters and Importers:

Case Exporter: USA Case Importer: China Leading Exporters (US$):$178 million

V. Environment Clusters

20. Environmental Problem Type:

Enviromental Problem Type: Culture/Air Air Pollution Land Pollution

21. Name, Type, and Diversity of Species

22. Resource Impact and Effect:

Impact: Low Effect: Regulatory

23. Urgency and Lifetime:

Urgency: Low Lifetime of Species: Hundreds of years

24. Substitutes:

Biodegradable

VI. Other Factors

25. Culture:

Yes

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 "guang xi" can be tricky. "Guang xi" means connections or relationships 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 very scared 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.

26. Trans-Boundary Issues:

Yes

27. Rights:

No

28. Relevant Literature

Amway Corporation Statement Regarding China

PRC Bans All Direct Sales: Amway Reopens as a Retailer

Sales Scams

Beijing Ban is a Blow for Direct Marketing Firms

Joseph Kahn, "In a Renewal, China will Allow A Resumption of Amway Sales," New York Times, 21 July 1998, D20


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