The Falun Gong Shadow Over Direct Marketing in China

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.