Once-barred Amway becomes booming business in China

AP, Mar. 12, 2003
http://www.sfgate.com/
LESLIE CHANG, The Wall Street Journal Wednesday, March 12, 2003

Beijing — On a freezing morning, shoppers line up outside a shop here ready to dash in the moment it opens for business. Their quarry: dishwashing liquid, toothpaste and other home and personal items made by Amway Corp.

“I first learned about Amway in 1994 when a friend introduced it to me, but of course I prefer to buy in the stores,” says Zhang Hui, a middle-age woman who works at a printing factory and is planning to spend about $40 this shopping trip. “It’s more trustworthy that way.”

The store — and about 100 other Amway outlets across China — is part of a strategy the company has used to bounce back from the business-world equivalent of a death sentence: Its longtime sales model, which relies on independent sales representatives selling door to door and deriving income from their recruits’ sales, was declared illegal five years ago by a Chinese government directive that lumped direct sellers like Amway with illegal pyramid schemes.

“Never take for granted that people will understand your business model,” says Eva Cheng, chairman of Amway (China) Co. Ltd. “You need to be in aggressive communication mode all the time.”

Toward that end, the company began building close connections to government officials. At the same time, Amway made highly visible changes to its sales operation. As a result, with government approval, it racked up $700 million in sales here last year, almost four times what they were before the ban. Today, China is the company’s No. 4 market world-wide, with China profits funding all its expansions here.

But a close look at Amway in China before and after the direct-sales ban indicates its changes haven’t altered the fundamentals of its sales operation here all that much — government edicts and new stores notwithstanding.

From the time it opened a factory in Guangzhou in 1995, Amway grew quickly in China. Its emphasis on building sales networks through friends and relatives was a perfect fit for Chinese society, where recommendations through personal relationships carry a lot of weight. Its sales pitches — elaborate demonstrations to show the effects of a drop of laundry detergent on a smudged white towel, for example — are old hat in other markets but new in China and helped to create a mystique around Amway products as something requiring expert knowledge to deliver miraculous benefits.

That system came into question in 1998, when Chinese officials cracked down on pyramid schemes and tarred direct-sales companies with the same brush. Though companies like Amway say their model is vastly different — their revenue comes from sales of real products, among other differences — officials saw no distinction. The State Council, China’s cabinet, banned all forms of such sales in a harshly worded notice that accused some companies of promoting “evil cults, secret societies, and superstitious and lawless activities.”

In the months following the ban, the company bled $120,000 a day; sales for all of 1998 were $36 million, one-fifth the previous year’s. Then Amway went into proactive-communications mode, initiating meetings with central government officials to discuss its plight.

The efforts soon paid off. After negotiations with Amway and other companies, the government issued a directive allowing foreign-invested direct-sales companies to continue selling door to door through an independent sales force. In return, companies had to open shops and sign labor contracts with all their salespeople, whose income would be based solely on their own sales rather than those of people they recruited.

Amway invested $29 million to set up 100 stand-alone stores — something it has nowhere else in the world. It started to run advertisements three years ago, another first. But some of the changes are less than meets the eye. The bustling stores, for example, double as convenient distribution centers for the company’s sales force; Amway says two-thirds of store sales are not to customers but to its own sales representatives.

Amway has also adroitly maintained the essence of its pay arrangement here. Last year, the company invited its top sales representatives to either apply to become formal employees or to apply to the government for individual business licenses. According to sales representatives, each option allowed them to collect income calculated from both their own sales and the sales of people they had introduced to the company. Amway says about 15 percent of its 90,000-strong sales force, or about 13,500 people nationwide, took one of those two routes.

Amway executives, who remain in close contact with government officials, maintain this is different from past practice. “We pay them based on services they perform, not because they blindly recruit people,” says Ms. Cheng. “Amway should have the right to pay people for services performed.”

Among those services is what the company calls work training. Example: At a “Leadership Training” class for about 60 recruits sales representatives in the port city of Tianjin, a sales representative in a slender skirt and maroon sweater offered an inspirational tale of a grandmother who helped a small group of colleagues sell $7,200 of Amway goods in a month. “How can one be a leader? You must help everyone in your small group to develop,” she urges.

The “small group” operates in similar fashion to the now-banned recruiting networks: The bulk of the income for many group leaders comes from commissions and other bonuses based on all their partners’ sales. Amway says it temporarily stopped recruiting new salespeople since January 2002, but thousands continue to benefit from existing networks.

“When you have the ability to teach your group, the company will give you a reward,” says Li Wenxiu, who quit her job as a bank executive last year to sell Amway full-time. “If they didn’t, you wouldn’t share your experience with them.”

An official in the news department at the State Administration for Industry and Commerce said the practice of salespeople benefiting from sales of those recruited by them is illegal but did not comment on Amway’s individual case. Officials at the Ministry of Foreign Trade and Economic Cooperation and the State Economic and Trade Commission declined to comment.

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