Making a Case – Direct Marketing in China is there a West Michigan Connection?

Recently I read an interesting article in The Economist.  In the story, “A Tale of Two Expats” expatriates from Western countries working in China are compared to Chinese expatriates working in the West.  The article follows a couple of ex-pats currently working in China, and immediately the following line from Mr. Smith (a pseudonym for the executive interviewed ) jumped out:

His firm operates through a network of locals who knock on doors and pester their acquaintances to buy lipstick and shampoo.

Very interesting start, and now that my interest has been peaked, I would like to find out who this firm is.  Almost immediately,  a couple of companies come to mind. (I like how the writer inserted his own feelings on this business model by using the word “pester”).

Reading further, I cam across this telling statement

These salespeople also recruit other salespeople.  Such “multi-level” marketing (also known as direct selling) is controversial in many countries…

There we have it, Mr. Smith works for a Multi-Level Marketing (MLM) firm, and controversy seems to swirl around these types of companies. This is no different in China, in fact the controversy was intensified.

MLM companies in China, were allowed to operate in their normal business model up until 1998, when MLM companies were banned from selling in China.  The reason for the this ban was a large increase in pyramid schemes in which many people lost their life’s savings, which caused widespread riots.  This ban included both pyramid schemes and MLM companies since Chinese officials viewed them as one in the same.

The Chinese government was also concerned about MLM’s becoming a substitute for the Communist Party, and how they might even sway away loyalty.  The government went so far to label MLM’s as “evil cults, secret societies and superstitious and lawless activities”, though this statement is probably not limited to only China.  Even now the government keeps a close eye on large MLM gatherings as evidenced by this quote:

Large meetings organized by the company, by contrast, are viewed with suspicion. Direct-sales firms like to hold big pep rallies for their salespeople. In a democracy, this is no big deal. If throngs of herbal-diet-supplement peddlers want to get together and wax euphoric about their herbal diet supplements, the government could not care less.

Later in 1998 MLM firms were able to come to a compromise by negotiating with the Chinese Government.  MLM firms were no required to operate retail shops throughout the country, the direct sellers had to be direct employees of the MLM, and their wages were based on what they sell and not on how many people they recruit to sell their products.

Multi-level marketing companies are allowed to operate only under tight conditions designed to keep out scammers. For example, they must maintain bricks-and-mortar shops, so that disgruntled staff and customers have somewhere to go to make complaints.

The ban was further eased in 2005 when the Chinese Government began to allow some home to home selling by MLM firms, and they also eased other restrictions.  While the companies were allowed to operate in China again, there was still a huge gray area, as evidenced by Mr. Smith:

But when some of his employees started recruiting on a university campus, the students’ parents complained furiously and the government took their side, making it plain that Mr Smith’s firm had crossed an invisible line.

Although Mr. Smith would not allow the author to disclose sales information.  An impressive number is stated.  Apparently the “taipan” is a snake, but the reference is still lost on me.  But Mr. Smith provides a valuable clue about his employer and their current prosperity in China.

Mr Smith cites a figure for his firm’s annual sales growth that would make a taipan raise his eyebrows.

Based on all these juicy quotes, can you think of any West Michigan company that may fit this description?  Of course Amway/ Alticor, comes to mind.  I can’t say with certainty that the company Mr. Smith works for is Amway, but it is a prime suspect.

The biggest and most well known direct marketing firms that sell cosmetics are Mary Kay, Avon, and Artistry (the Amway brand).  All three firms are present in China, and operate physical stores in China, which was a provision of the compromised that MLM made with the Chinese government during the ban.

The main distinction between these companies is that Amway also sells other items like shampoo and “herbal-diet-supplements” with their Nutrilite brand.  If you remember herbal-diet-supplements was mentioned in The Economist story as an example rally, even though a majority of the article focused on cosmetics.  Was this an attempt of the author to provide an additional clue or to throw the curious readers off-track?

I feel confident that we can eliminate Avon as Mr. Smith’s possible employer.  Sales for Avon in China are slumping (in 2009 sales rose less than 1%), and four of their high level executives in China were suspended on bribery charges.  I doubt that one of their executives would be dumb enough to put himself out there and disclose this information.

So that leaves us with Mary Kay and Amway.  Mary Kay is going gangbusters in China by evidenced by this article in the New York Times, where Paul Mak, head of Mary Kay China, states that revenue at the end of 2009 has doubled to $600 million in the last three years, and revenue is projected to grow another 20%, next year.

Amway has done quite well in China.  Out of a global sales number of $8.4 billion, China, Amway’s top market had over $3 billion in sales.  Which had increase by 12% from 2008.  According to Eva Cheng, chairwoman for Amway China, they are forecasting double-digit revenue growth again in 2010.  I would imagine any executive would be quite happy with those numbers, but is it enough for a “taipan” to raise his eyebrows?

A couple of clues might help solve this case.  First, Mr. Smith is a high level executive has a Chinese wife.  Second, the firm in question once had an issue with the Chinese government when they tried to recruit university students to sell their products.  I searched the internets and could not find any information about Mary Kay or Amway having issues with China over approaching university students to become sellers.  Do you have any thoughts or theories on Mr. Smith’s employer?  Or do you wish to share your stories with MLM firms?  Perhaps you feel the China was onto something with their ban, share your thoughts below or email me.

Update: Amway’s 2010 results were released, here are some highlights

  • 2010 record sales of $9.2 billion
  • 9.5 percent increase in sales
  • Growth was fueled by strong results in China, which is Amway’s largest market
  • China accounted for more than one third of its global sales in 2009

One response to “Making a Case – Direct Marketing in China is there a West Michigan Connection?

  1. Pingback: Making a Case – Direct Marketing in China is there a West Michigan … | Business, Trade, Import, Export in China

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