Multi-Level
China Part 1 — The Long Road Traveled
by Gobala Krishnan, IAHBE Staff Writer
To the network marketing entrepreneur, China seems like the promised land of endless opportunity, where within its great walls, you will find more than a billion enterprising,
eager, and increasingly modern minds ready to latch onto any viable opportunity
that will be approved by its cautious, socialist government. Yet as thousands
of network marketers around the world await the Chinese government’s ultimate
decision on network marketing or MLM as a sound, feasible source of income for
her people, the majority fear that this time the axe may definitely fall on
them.
(The final verdict will be passed early December 2005, and in Part 1 of this
exclusive IAHBE report, we examine the long road already traveled by marketers
in China. In Part 2, we will examine the reverberation and implications in detail,
whichever direction the axe falls. Stay tuned!)
A Brief History Of MLM In China
MLM began to grow roots in socialist China in the early 90’s, when the usual suspects such as Amway, Avon and Mary Kay began to introduce the concept of free enterprise to a suppressed people, starved of any real opportunity to realize their own dreams and maximize their potential. In the beginning, the Chinese government closed an eye on the new business model that was rapidly gaining popularity, but this policy proved to be costly. Because of the lack of regulations, many illegal pyramid schemes also grew, and it became increasingly difficult to distinguish the real ones from the scams.
In 1998, the collapse of one of the pyramid scams sparked a riot and deaths in at least one city, and the Chinese government reacted by completely banning all forms of multi-level direct selling business models. What started out a promising new world ended with a quick death, and the people were furious. Caught in unfamiliar territory between an unsettled population and the political power of large US multinational MLM companies, the government quickly amended her earlier decision by providing an interim solution - direct selling companies could continue to operate, provided that they only offer their products through fixed locations. Customers must be able to come to these fixed locations to purchase the products, to get refunds or to get technical support.
Existing leaders were employed into their respective companies as store managers or sales representatives, and the structure of their organizations was maintained. Stores
started accepting two kinds of customers, retail customers who paid regular
prices, and wholesale customers who paid a yearly membership fee to buy at wholesale prices. Recruiting by individuals was strictly prohibited, and stores could only take orders from customers who visited their physical locations.
In short, MLM was allowed to live but with broken arms. For a brief moment, though, it kept everyone happy
Waiting For The Right Time
Even though China decided harshly on network marketing, investors were not ready
to leave. American companies had dumped in huge amounts of capital in terms of factories, plants and training. With a potential US$50 billion market yet to be fully explored, this was probably the last frontier for explosive growth, and there was simply no way they were going to just pack up and leave. They simple played a different game, seeking to expand their network of retail stores throughout the country. China Daily reported recently that Herbalife International, one of the ”Big Five” direct selling enterprises in the United States (Avon, Amway, Mary Kay and NuSkin are the others) will open 30 stores by the end of 2005. When the time finally came, these could easily be converted into distribution centers for their network marketing business model. Amway has been in China for more than a decade, with 180,000 active SRs - sales revenue, according to company sources, went from 6 billion yuan in 2002 to 10 billion yuan in 2003.
It hit 17 billion yuan in 2004. In the gray market area, many of these network
marketing companies were still operating with a somewhat multi-level business
model, taking advantage of a time when the government is reluctant to take action
until a final verdict has been passed.
Just
like in a game of chess, it became crucial for them to anticipate the next three
moves of their opponent before they made theirs. The name of the new game was
to “wait and see” and they were getting better and better at it,
but they were not alone.
Made
In China
Although the first to enter the Chinese market were American-based companies,
they were by no means the largest or most popular. As the enterprising Chinese
mind caught on to the idea, a whole new wave of Chinese MLM companies were born,
some of which gained astounding success in a very short period of time.
One
such company is Tianshi Health Products of Beijing and Tianjin, China. Founded
by Mr. Jinyuan Li, a highly respected business leader in China, Tianshi started
out selling dietary supplements and traditional Chinese herb products. With
2,000 employees and state-of-the-art equipment, Tianshi managed to grow to an
amazing 3 million distributors in China at its peak, before 1998.
When
the iron curtain fell in 1998, its operations were converted to 1,000 stores
throughout China. They then established bases in Asia and Europe, as well as
an American headquarters near Seattle, Washington, and Tianshi gained success
measurable success elsewhere, notably in the Russian market and established
bases in Asia and Europe.
As
an added bonus, China has within its 4000-year-old treasure chest an amazing
amount of health and medical knowledge, traditional healing techniques, rare
and sought-after herbs, and an overall sense of mystique and awe. Health and
beauty products from China are hot not only in Asia, but in may parts of Europe
and America as well. The recent push towards modernization by the Chinese government,
and the consumer reality of seeing “Made in China” on the label
of most electrical goods and other items meant that Chinese products were becoming
a brand name fast.
And
her people were getting smarter too. According to MLMWoman.com, “Chinese
people are learning fast “what is an opportunity, and what is not. They
are comparing compensation plans—and prefer the ‘hybrid plans’
that do well in the USA.”
A
massive population of smart people with an entrepreneur spirit, a land previously
barren of real opportunities for personal benefits, an abundance of unique products
and services, and a period of rapid changes for what is probably the last source
of explosive growth for e-commerce and the Internet. It seems like the Promised
Land for all network marketers, yet it may never be so.
What
Will Change?
Researching various sources, I have found a few key areas that will be addressed
by the Chinese government. Most of these are still unofficial, and some of them
are but mere rumors:
Direct
sales could be approved as a valid business model, but the compensation plan
may only be single level. This would mean that existing network marketing companies
could once again venture outside their retail stores, but recruiting will probably
be strictly prohibited. By this the government would also effectively rule out
the possibility of MLM in China forever.
To do business in China a network marketing company must have 10 million in
capital invested locally, and a $200,000 insurance deposit. This would effectively
rule out start-ups and the smaller, second-tier companies, and could only be
applicable to foreign multinationals.
Stiff penalties for illegal violators, and those that operate without legal
approval will become blacklisted. This would effectively address any gray market
activities.
These are just speculations, and the actual changes may be much more complicated
and intensive. Although the situation may seem to disfavor network marketing,
it’s important to note that throughout its 40-year history, this has always
been the case. Governments have always misunderstood network marketing, and
in most countries today it is merely “accepted” but not legally
or publicly endorsed.
But
times have changed since Nutrilite, mostly by mistake, designed the first-ever
multi-level compensation plan that would change the world. Proof and case study
data are easily obtainable today, and pressure is mounting on the Chinese government
to provide its citizens opportunities to live a better life. She is struggling
to police the Internet, which could her provide its citizens access to Internet-based
MLM opportunities. Her people, after years of being told to work for the country,
now also want to work for themselves. The final verdict just may, with the slightest
of hope, go in the opposite direction.
We’ll
cover the latest update on MLM in China in Part 2 of this article, so make sure
you look for it at the IAHBE next month.
References
Babener,
Jeffrey A. “MLM In The New China.” 2000. http://www.mlmlegal.com/newchina.html
MLMSurvivor.com. “People's Republic of China Bans All Direct Sales: Amway
Reopens as a Retailer.” 12th August, 1998. .
Nuo,
You. “Face To Face.” China Daily. 12th September, 2005. .
Shanghai
Daily. “Direct Sellers Come Knocking.” 22nd September, 2005.
Gobala
Krishnan is an IAHBE writer, author and home-based entrepreneur in Kuala Lumpur,
Malaysia. He helps ordinary people who hate selling and recruiting to make a
guaranteed monthly paycheck from the Internet. Find out more at http://www.paid-autosurf.com/.
He can also show you how to use Skype and VoIP to create "on-demand"marketing
campaigns, perfect for any small business, at http://www.internettelephonysecrets.com/.
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