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

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 Amway and other companies that use sales representatives to recruit others below them in what’s called multilevel marketing.

Facing declining fortunes in the United States and elsewhere, they turned to a ballooning consumer class in China 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 United States.

Two companies, Herbalife and Usana Health Sciences, disclosed last year that they faced investigations in the United States for their operations in China under the Foreign Corrupt Practices Act, which prohibits American companies 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 Amway 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 Amway 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 China for much of its growth over the last decade. It is now, by far, the largest of the multilevel marketing companies here, with 1.5 million distributors, more than all the others combined, according to the Ministry of Commerce’s records. China 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 Amway vice president, Scott Balfour, said the company welcomed the crackdown, saying it would distinguish pyramid schemes from legitimate direct selling. Amway 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 Amway 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.’ Amway 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 World Trade Organisation did China agree to American demands to allow the companies 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 companies 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. Amway said in its statement that it had not faced questions from American regulators about its practices in China. 
 

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 XS energy drink. 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