Selling, Beijing's Way
Never seen an Amway store? There are 200 in China
After the rules took effect, Amway sales plummeted nearly 50 percent in the country. The Michigan company had begun operating in mainland China in 1995 and sank more than $200 million into a Guangzhou factory. After the 1998 restrictions, Amway spent $29 million more to set up 200 stores, its only ones in the world. It kept an army of 180,000 sales staff and rewarded salespeople who brought friends to the stores. The moves helped Amway hit $2 billion in 2004 China sales-a third of total company revenues.
New York cosmetics company Avon took another approach. It blanketed China with 5,700 stores, but the ranks of its sellers plunged from 250,000 to 20,000, according to a 2005 Morgan Stanley report, and its sales suffered.
Unlike other network marketers, Nu Skin didn't have established Chinese operations. It had been researching China when the 1998 restrictions hit, so shoppers didn't know its skin care products. Undeterred, Nu Skin eventually set up four plants in the country, the only factories it owns anywhere. Progress has been slow. The company's China sales hit only $70 million last year.
Late in 2005, four years after China joined the World Trade Organization, the government said it would let network marketers back in. The new rules don't allow companies to mimic sales models they follow internationally, says Christine Chung, a China tax partner at KPMG. China bans chain selling, meaning that sales representatives can sell only to customers and not to other salespeople. Sales reps must attend a government-run training program. Commissions are capped and tied to the end-product price. And the rules allow companies to sell only five categories of products: cosmetics, healthcare equipment, cleaning goods, health food, and small kitchen appliances, Chung says. Companies must secure government licenses. So far 13, including Amway, Avon, and Nu Skin, have gotten them.
Pink Cadillacs. Companies are celebrating the added wiggle room. "The China hype is real," says the Morgan Stanley report, which predicted Avon China sales will top $650 million in 2007. Hunt estimates that Nu Skin China will become profitable by next year. Amway wants to add more sales staff in rural areas. Rather than tear down stores, Hunt says, Nu Skin will add hundreds of locations so that consumers can pick up and return products in person, another Chinese requirement. By the end of 2006, Avon was training its 350,000 Chinese salespeople to meet new requirements. By playing by the rules, Hunt says, direct sellers hope that China will lengthen the leash.
Meanwhile, direct sellers should have less trouble signing up Chinese salespeople. About 7 percent of consumers, especially young women and rural dwellers, say they are strongly interested in such work, according to the Morgan Stanley report. Even if only a quarter elect to join network marketers, that would still make 13 million salespeople, about the same number as in the United States. Ten top Mary Kay Chinese sellers have already earned pink Cadillacs.
The Sungs won't be able to share in the Chinese wealth. The Chinese-born couple moved to the United States from Taiwan in the 1960s and began selling Nu Skin products in 1988. Eventually, Pat and Marguerite quit their jobs as a lawyer and computer programmer, respectively; they were making more selling Nu Skin. They've taken advantage of Nu Skin's global reach, signing up salespeople in 30 countries, including Canada, Japan, and Brazil, as well as Hong Kong, which operates under different rules than mainland China. They won't receive a commission, however, for signing up Marguerite's sister in Nanjing or her cousin in remote Urumqi. Asked if the Chinese restrictions frustrate her, Marguerite exclaims, "You can say that again!" Still, she is pleased her family can pocket some extra cash: "It's nice to be able to help people."
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