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It looked
like direct selling, and quacked like direct selling, so Chinese
authorities decided that direct selling and Falun Gong were the same
thing
 For the
global giants of direct selling, China represents the last great
opportunity in the world. China has overtaken the United States as
Amway’s largest market. It offers ideal conditions — an
economy growing at over 10 per cent a year, a market with niches
unfilled and, most important, tens of thousands of people eager to
become agents.
These are
also an upward trigger to Beijing’s paranoia, which equates
direct selling with Falun Gong, the banned qigong meditation sect.
Since the
foreign giants entered the market in the early 1990s, the road has
been anything but smooth. Beijing issued a blanket ban on direct
selling in 1998. When it lifted it in 2005, it left in place a ban on
agents recruiting and collecting royalties from other sellers, the
‘multilevel marketing’ which the companies use in the
rest of the world and is one of the main attractions for new
recruits.
The
reasons for these restrictions are not economic but social and
political. To some extent, the direct sellers are collateral damage
in a collision between the government and Falun Gong. In 1999, Falun
Gong claimed more than 70 million members on the mainland in all
walks of life, including the government, the military and
inside direct sales firms.
The
direct-selling firms were well organized and well funded, used high
technology and had links to major western corporations, although
there was also considerable fraud associated with unethical direct
selling in the mid 1990s. Nonetheless, it was their bad fortune that
they developed at exactly the same time as Falun Gong and were tarred
with the same brush. Without Falun Gong the party might well have
been more tolerant, not only toward them but to many other parts of
civil society.
The police
called the multi-level marketers “evil cults, secret societies,
guilty of superstitious and lawless activities.” Said Gao
Feng, a senior officer tracking economic crimes: “Pyramid-selling
activities in China have developed into a serious crime.” And
in fact unethical companies and wildfire sales schemes in which too
many people were promised too much caused considerable economic
damage to consumers.
The
crackdown on Falun Gong involved the imprisonment of thousands of its
members, the death of some in prison and labor camps and, according
to human rights groups, the harvesting of their organs. It has been a
disaster for the growth of civil society in China, setting it back
for years.
Certainly,
the ban on direct selling was in part due to widespread fraud and
malpractice. Last year, the Ministry of Public Security announced
that between 2001 and 2005, it had arrested 20,500 people involved in
fraudulent pyramid schemes involving about 4.2 billion yuan.
But Falun
Gong prior to the crackdown shared common features with the direct
marketers – a nationwide body outside the control of the state
and the Communist Party that held regular meetings with a high level
of internal organization aided by computers, mobile phones and the
latest telecom equipment. Their members were enthusiastic,
disciplined and highly motivated – not far from the members of
Mary Kay Cosmetics or Amway.
Using
tactics reminiscent of the Communist Party when it was underground,
Falun Gong was able to mobilize thousands of people to assemble at a
given place without the knowledge of the police. In its most
spectacular operation, on April 25, 1999 thousands of members
surrounded Zhongnanhai, the compound in central Beijing where the
party leaders live and work. Enraged, party chief Jiang Zemin is said
to have fired the chief of the secret police in Beijing.
During the
crackdown, the authorities discovered indeed that a top salesman of
one of the foreign direct sales firms was also a Falun Gong member,
raising Beijing’s level of paranoia considerably higher.
In the
wake of the 1998 ban, the foreign direct sales firms lobbied hard to
have the restrictions lifted. Later that year, Beijing agreed to let
10 resume operations, but through retail outlets and on the condition
that all sales agents belong to a particular branch and that their
names be available to the authorities.
When
Beijing joined the World Trade Organization in 2001, it agreed to
allow direct selling but did not publish the enabling legislation
until late 2005. The new rules reflect the continuing concern about
independent organizations: the firms have to go on using retail
outlets, from which their agents buy products and sell them to
customers. They need official approval for each type of product they
sell and the location of their sales networks.
Team
payment, a key feature of the direct selling business elsewhere in
the world, is not allowed. An agent earns a commission only according
to his sales and cannot be paid for bringing in other agents and
earning a commission on their sales: this is where the highest
profits lie.
Direct
sellers are not allowed to “spread superstition, sell erotic
materials or encourage violence.” They cannot conduct training
in government, military or school buildings.
This
model, requiring heavy investment in shops and lengthy approval
procedures, reduces much of the profit margin of direct selling.
According
to its website, Amway has since 1998 spent 670 million yuan on 188
retail outlets in 155 cities, in addition to the more than US$220
million in a state-of-the-art plant in Guangzhou that makes 160
products in four main categories.
Building
the plant was a condition that Beijing imposed on Amway to enter the
Chinese market. “Since we came to China, we have been told to
shut down five times and to change our way of doing business four
times,” said Eva Cheng, executive vice president of Amway in
Greater China and Southeast Asia.
To stay
open, Amway, Avon, Mary Kay, Nu Skin and the other direct sellers
have also invested millions of dollars in lobbying Beijing about
their good intentions, even while their sales agents are pressing to
work according to the American model.
They have
to stay because sales are too high to walk away. In 2006, China was
the biggest single market for Amway, although sales fell to 12
billion from 15 billion yuan in 2005 because of the regulatory
changes.
“The
resolution of the China issue gives us great optimism and we expect
Amway in China to continue to lead the direct selling market place in
China,” the company said.
For the
other direct sellers, China also represents a large and growing
market. The global direct-selling market is worth US$102 billion a
year, of which over US$40 billion is in Asia. China, Japan and South
Korea are three of the five biggest markets in the world.
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