At the Crossroads of Distribution Reform: China’s Recent Ban on Direct Selling

1. At the Crossroads of Distribution Reform:China’s Recent Ban on Direct Selling 高等直銷管理課程 指導教授：陳 得 發 作者：Ricky Y.K.Chan 報告人：李君玲

2. Introduction • The gradual liberalization of China’s distribution system since the adoption of its open-door policy in late 1978 has introduced a new dynamism to the country and reshaped the channel structure of its domestic market. • New players, particularly multinational companies,have been lured to invest feverishly in a multitude of direct and indirect modes of marketing activities in China. • This development encountered a major setback when China’s State Council issued a blanket ban on all forms of direct-selling activities on April 21,1998. • The edict ordered all the direct-selling firms in china to convert to standard retail distribution or go out of business by October 31.

3. Introduction • Since its introduction by Avon in the late 1980s,a total of 2,300 direct-selling firms has risen in China by 1997,employing as many as 20 million Chinese citizens and generating a sales volume of $2 billions. • The investments of Avon,Amway,and Mary Kay alone totaled $200 million in China just before the ban. • The consequences of the sudden ban on direct selling include a turnaround in the optimists’s view and the emergence of a series of related problems. • Salespeople from various affected multimarketing networks,unable to return merchandise to disreputable direct-selling firms for proper refund,grew desperate and angry.Riots broke out in several central Chinese provinces and resulted in more than 10 deaths and 100 injuries.

4. The Growth of Direct Selling in China • Direct selling was first brought into China in the late 1980s,when Avon was permitted to establish its venture there. • In practice,some equate direct selling with multilevel marketing,in which a direct-selling firm often uses some form of compensation to enable its distributors or sales personnel to make money on the sales of people they recruit,as well as on those recruited by recruits. In Chinese,these recruited salespeople are often referred to as xia xian,or “downlines” in the sales network of their distributors. • Attracted by Avon’s early success,Amway,Mary Kay,and other U.S. direct sellers began to tickle into China in the early to mid-1990s.

5. The Growth of Direct Selling in China Several factors account for the rapid growth of direct selling in China: • First,the country’s logistical backwardness, particularly in rural areas, offered promising opportunities for the development of various modes of direct marketing. • Second,when compared with most local brands, increasingly affluent Chinese customers have been constantly impressed by foreign brands. • A third frequently cited factor in the growth of direct selling in China involves the Chinese people’s cultural characteristics and the country’s unique institutional settings. • Still others point to such factors as close-knit family ties,clan relations,and connections（guanxi）as major contributors.

6. The Growth of Direct Selling in China • According to Forney and Fang(1998),one anthropologist describes the development of direct selling in China as a phenomenon of “Confucius-meets-capitalism”or “wringing profits from one’s social networks”. • From another perspective,the growth”comes from a hunger born out of years of boring work at state-owned factories and 50 years without the freedom to choose jobs. • To some enthusiastic Chinese,direct selling holds out not just a job,but also an opportunity to develop and succeed in their careers.

7. The Blanket Ban • Indeed,the government had tried once before to crack down on such schemes by suspending direct-selling firms activities for seven months in late 1995 and early 1996,and by requiring all direct-selling firms to re-register. • In January,Chinese authorities also issued a decree to prohibit high school and university students,communist party members,and government official from participating in any of selling activities. • In 1997, the amount involved in major fraud cases related to direct selling exceeded $130 million, whereas the corresponding figure in 1996 was only $36 million.

8. The Blanket Ban • According to the Chinese government, the ban is aimed at “ protecting interests of consumers,market order and social stability” （O’Neill and Miller 1998）. • It further maintains that because of China’s weak regulatory system,many unscrupulous multilevel marketers have been able to resort to various selling tricks to lure relatively naive Chinese consumers into buying expensive yet inferior products. Case Company • Suzhou International Cemetery Company ,which sold storage space for funeral urns in Shanghai. • A Multilevel marketing scheme –Water purifiers.

9. The Blanket Ban • The first noneconomic concern probably revolves around political ideology. • As noted by the president of Asian Marketing Consultants Inc.,”The Chinese consider companies such as Amway to be like a religion” （Ligos 1998）. • And the Chinese government is highly anxious about any forms of unorthodox religious sects sprouting up in the country.

10. The Blanket Ban • To keep sales personnel inspired, direct sellers usually resort to motivational meeting and inspirational rallies at which people are encourage to shou or cry. • In the eyes of the Chinese Communist Party these evangelical-style gatherings constitute a menace to social stability and represent something vaguely revolutionary. • With their admirable sales records and sensational presentations, charismatic direct sellers are often perceived by their followers as heroes or even gods. • The editor of Direct Selling Review,an internal Chinese official publication,also commented that “「direct selling」leaders are like religious leaders” （Forney and Fang 1998）. • One direct-selling firm organized an inspirational rally on the June 4 , a date about which authorities are hypersensitive. It reminds the public of the Tiananmen Square incident,which happened on that day in 1989.

11. The Blanket Ban • Still another underlying concern relates to the erosion of Chinese cultural values. • The Chinese have long been characterized as highly collective and relation-oriented. To maintain social harmony with members of their social networks,the Chinese often willing to sacrifice their personal interests for the welling-being of the group,trying hard not to jeopardize the interests of their acquaintances.If they are unable to refrain from doing so,they feel extremely ashamed and regard themselves as having”lost face”. • This cultural characteristic has greatly helped the Chinese people to develop and strengthen mutual trust and connections with their clan members and friends.

12. The Blanket Ban • When this cultural value is considered in the context of the deception associated with various pyramid schemes, the problem of potential cultural erosion becomes apparent. • As observed, the crux of successful multilevel marketing lies very much in the trustful relationship that has been established between the seller and buyer. • One who lures one’s relatives or friends to purchase some overpriced yet shoddy products for personal consumption is clearly an abuser of such a relationship. • By the same token, it is also an abuse of trust if a distributor bilks his relatives and friends to become down-lines of his sales network and to pay for some unmarketable inferior merchandise.

13. The Blanket Ban • As a centrally planned market economy,the Chinese government probably will not be too annoyed to see its citizens reaping profits from those with whom they are acquainted,provided that the deal is free from deceit and will not lead to social disharmony. • What really bothers the parental Chinese government is that its citizens are no longer ashamed of trading mutual trust and human relationship for pure economic gain. • In the eyes of Chinese policy makers,this is exactly the wicked side of capitalism that causes the serious spiritual pollution of human being. • They are also worried that social disharmony within numerous smaller social circles will eventually lead to the outbreak of large-scale social unrest across the whole country.

14. Effects of the Ban • Before its wholesale proscription,an estimated 20 million Chinese were reportedly engaged in direct selling in China. • With annual sales of $2 billion, the industry has able to lessen the country’s deteriorating unemployment problem in the course of its（state-owned）enterprise reform. • With the presence of direct selling,more opportunities were provided for those who were laid off to earn at least part of their own living and in a few cases, to make a good fortune.Even for those still employed,direct selling has also given them an opportunity to further improve their financial well-being. • Reduced unemployment and improved financial status are certainly some essential ingredients for advancing social stability. But ironically,concern over social stability has also driven the Chinese government to ban the industry.

15. Effects of the Ban • At an international level,Beijing’s wholesale ban may have a chilling effect on foreign investment and make government pledges seem unreliable. • Indeed,many bona fide foreign direct-selling firms did obtain all the necessary permits to run their businesses in China. • The ban will thus make foreign investors suspicious of China’s determination and sincerity to open its market. • The government has long worked hard to uphold the principles of fair dealing and mutual trust,but its blanket ban greatly afflicts foreign investors’s confidence in doing business in China and puts the country’s gradually improving international reputation at risk.

16. Effects of the Ban • When judged against the amount of investment multinational direct-selling firms have already made and the amount of sales they will likely forgo,the diverse impact of the ban on their confidence becomes even more obvious. • Avon had invested more than $90 million in China and had recently attained annual sales of $75 million；Amway’s corresponding investment and sales amounted to $100 million and $178 million,respectively.Indeed, Amway had recently committed itself to building a second factory worth $30 million in Shanghai. • In the absence of any proper arrangement for these innocent foreign firms to recover their economic loss,it is hard to see how and when their confidence in the host government can be fully restored.

17. Conclusion • Although the Chinese government is eager to absorb foreign investment to accelerate its economic growth,it is invariably determined to preserve the political and social stability it considers indispensable for advancing the long-term survival of the whole nation. • The implication is that government is willing to sacrifice growth if such pursuit conflicts sharply with preserving stability. • Such a ruling philosophy is reflected in the Chinese Communist Party’s modernization model:tight political and ideological control along with economic liberalization. • Chinese leaders’s strong belief in the appropriateness of this model has been further reinforced by the experience of the USSR. In their eyes,the dissolution of this superpower was due to the simultaneous liberalization of its economic and political systems.

18. Conclusion • Clearly,what bewilder and frustrates foreign direct-selling firms is that they were only the scapegoats for the wrongdoings of other,mostly domestic players. • Even if they did their best to avoid being perceived as threatening the political and social stability of the host country they could not prevent other unscrupulous copycats from doing devastating things. • For a government that has only limited experience in market economy practices,one should not be surprised by its reliance on central command to copy with crises. • No mater how unreasonable this pro-stability and pro-command mentality may be in the eyes of Westerners,there seems to be very little foreign investors can do if they still consider the Chinese market too big to ignore. • The mentality of Chinese authorities is part of the operating reality foreign investors have to face in doing business in China, at least in the foreseeable future.

19. Conclusion • To attain a win-win situation,the government should listen carefully to the opinions of genuine foreign and local direct sellers to derive a mutually agreed-upon set of regulations for the industry. • If officials at various levels of the country can closely observe these regulations and monitor their implementation effectively,China will not need to maintain a blanket ban on direct selling to eradicate pyramid scams. • From another perspective,labor-intensive direct selling complements China’s current enterprise reforms well；banning it is likely to induce more unemployment or even social unrest. • Perhaps what the Chinese government needs to tackle the abuses of direct selling is more effective regulations and supervision,not a blanket ban.