New regulations in December 2005 will pose further modifications to the Amway business model in China. Despite the uncertainty, ACCL performed admirably, said Steve Van Andel, Chairman of parent company Alticor. We continue to examine our future options in China in light of the new rules, which have yet to go in effect. We are very optimistic that China will continue to be our strongest performing market.
The Company Profile
Founded in 1959, Michigan-based Amway Corporation is a large direct selling company of personal care, home care, nutrition and commercial products. It is a wholly owned subsidiary of privately-held Alticor, Inc. that operates primarily through Amway Corp; Quixtar Inc.,a North American Web-based business opportunity; and Access Business Group LLC, a product development, manufacturing and logistics provider to Amway, Quixtar and other companies. Alticor Inc. and its family of companies reported sales of $6.4 billion for the performance year ending August 31, 2005. Amway operates in more than 80 countries in Asia, Africa, Europe and the Americas. Products offered include brands such as Nutrilite vitamins and food supplements, Artistry skin care and color cosmetics, eSpring system, Magna Bloc therapeutic magnets and SA8 laundry system. Access Business Group manufactures Amways brand products in facilities in Ada (Michigan), Buena Park (California) and Guangzhou (China).
Amways products and services are marketed through more than 3 million independent business owners (IBOs) and sales representatives worldwide through a multilevel direct selling model. Direct sales, as defined by the World Federation of Direct Selling Associations, is a process involving the marketing of products and services directly to consumers in a face-to-face manner, away from permanent retail locations. Annual worldwide sales in this sector are nearly US $90 billion, half of which are in the United States and Japan. In the United States, approximately 80% of direct sales are by multi-level marketing organizations, where salespeople are paid not only on their own personal sales, but also on the sales of other salespeople whom they recruit and train through up-line and down-line relationships.
History of Involvement in China
Amway (China) Co., Limited incorporated as a joint venture in 1992 and opened a 152,000 square foot manufacturing plant in the Guangzhou Economic and Technical Development Zone on January 18, 1995. The Amway operations in the Peoples Republic of China are part of Amway Asia Pacific Ltd., a publicly traded company until becoming privately owned in 2000, that encompasses Amway businesses in Hong Kong, Macau, Malaysia, New Zealand, Taiwan and Thailand. Initial manufacturing for the Chinese market included five homecare household cleaning products, with personal care products introduced throughout the year.
Amway China commenced sales operation in the Guangdong and Fujian provinces in April 1995. Following the multilevel direct selling model of Amway, a minimum monetary investment of approximately US$85 for married couples and individuals was required to establish their own business. New distributors received training and support from their sponsors and were encouraged by motivational programs and incentives. The total sales to the network that the distributor helped recruit, train and motivate was considered in calculating bonuses. Thousands of sales representatives registered during the first years, bringing Amways net sales in China to $178 million for fiscal year 1997.
Until the 1990s, direct selling was not an established method of distribution in China. Chinese officials interpreted the term for direct selling, chuanxiao, as passing products from one layer of participants to another layer of participants, with the product price increased at each layer which is not a factual representation of the business model of most direct selling companies. Meanwhile, illegal smuggling of imported products, mass meetings to recruit salespersons and get-rich-quick schemes generated attention of Chinese officials, resulting in the first national regulation on direct selling in 1994. These regulations focused on preventing fraudulent activities and set limits on advertising for recruits and compensation for introducing new sales representatives. In 1998 after numerous attempts to address violations of the chuanxio regulations, and two highly publicized scams in Huizhou City and Xingsha the State Council ordered all direct selling companies to cease operations, disband distributor networks, clean up debts, and modify its sales method.
Response to restriction on direct selling
Forced to restructure the business, Amway worked with the Chinese officials to implement a model that would allow sales representatives to continue participation in the business. While we will have to make a number of changes in how we operate, in all of our discussions with the Chinese government it was essential that we retain the foundation of an independent sales force to service our customers, said Richard DeVos, president of Amway Asia Pacific.
Under the approved plan, Amways product distribution centers throughout China became retail locations with Amway branded products marked at retail price. Once a Chinese consumer bought Amway products for two consecutive, they became privileged customers who buy Amway products at a 15 percent discount for their personal use. These privileged customers could apply to Amway to be sales representatives to buy Amway products directly from the retail stores at the full price, paying with the customers money and delivering the products to customers. They received a 15 percent commission on sales to their customers.
By establishing 180 company-owned retail locations by 2005, the plan allowed an estimated 180,000 direct sellers to continue to operate within what the company terms a mode of selling through shops, plus the use of sales representatives. However, the approval to continue business stipulated that sales representative income was based on individual results, not those of the team a move intended to limit the attraction of forms of direct selling that might lead to pyramid frauds. In anticipation that the regulations may change, sales representatives continued to introduce others to the business while not receiving commission from their sales. Through obtaining appropriate business licenses, approximately 80,000 sales representatives became authorized agents whose compensation included both team performance and their own sales.
Amway continued its tradition of involvement with the community through corporate sponsorships that enhanced its reputation in China. By the end of Aug 2005, Amway China supported over 1,800 charity projects in the areas of children, health and environmental protection. These projects resulted in earning over 1,200 honors and awards. The China Charity Association granted the company the award of Exemplary Benefactor to Social Welfare in 2002.
For environmental initiatives, the Chinese Ministry of Land and Resources awarded Amway China the title of Model Enterprise for Protecting Earths Resources in 2002. Other rewards include: Star Enterprise to Contribute to the Public Welfare by China Children and Teenagers Fund, Advanced Enterprise for Excellent After-Sales Service and Product Quality by China General Chamber of Commerce in 2003. In 2004, Fortune (Chinese Edition), listed Amway China as one of the Most Admired Companies, Most Influential MNC, and Most Influential Brand.
According to John Parker, Chief Marketing Officer of Amway Corporation, Amway views their product portfolio in terms of the way in which products support the business opportunity to enable the independent business owners to recruit, to retail, and to qualify for higher award levels. Without multilevel direct selling in China, the focus is on creating a portfolio of products and brands with a price/value relationship that allows sales representative to succeed in developing customers. Amway China produces and markets more than 160 products, including Nutrilite( food supplements, Artistry( skin care and cosmetics, personal care and home care products.
To make the brand more visible and make it easier for the sales representatives to sell products to the customer, Amway China invested over 30 million US dollars for advertising in 2005. Amway broadcast films of Artistry cosmetics and Nutrilite nutrition products in 1,500 business buildings throughout China and more than 4,000 liquid crystal display televisions in Shanghais underground carriages. Artistry was the title sponsor bringing The Phantom of the Opera to Shanghai. Sponsorship of the first health runs to take place in China has coined the term Nutrilite Health Runs for what most countries would call 10K or marathons. For the Chinese, the Nutrilite brand has become synonymous with fitness and activity.
According to the Euromonitor, Amway China was the fourth largest company in cosmetics and toiletries sales in 2005 with a 5% market share overall. The cosmetic brand Artistry was second in overall cosmetic brand share, with 4.3%, closely following Procter & Gambles, Olay brand with 5%. It is the second largest in Color Cosmetics with 7.5% market and brand share in all regions of China. In the over-the-counter healthcare category, Amway held an overall value share of nearly 19%, far exceeding that held by the next closest competitor.
Amway was the top performing player in vitamins and dietary supplements in China, capturing over 25% of vitamins and dietary supplements in 2004. Nutrilite, was the leading brand with value share of more than 13%, including the best selling brand Nutrilite Protein Powder, and its multivitamins and other dietary supplements, such as calcium and fish oil. In the home care products, Amway China is not a major player, with 0.1% of the overall market, however have brand recognition and share in laundry care and dishwashing products. The laundry detergent, SA8, is ranked ninth in the nation with 0.5% brand share and Dish Drops is ranked eleventh with a 1.1% brand share.
Commitment to product development for the Chinese market includes seven laboratories for quality assurance and two research and development centers in Guangzhou and Shanghai. The Company has been awarded the Advanced Technology Enterprise for three times from 1996 to 2002. In 2004, Amway increased its investment in China by US$120 million to set up a research and development center in Shanghia to explore introducing herbal medicinal elements to its products. Continuing lobbying for resumption of direct selling in China
Recognizing the large potential of direct selling in China, Amway participated in efforts of the American Chamber of Commerce, the US-China Business Council, and the World Federation of Direct Selling to lobby for Chinese participation in the World Trade Organization (WTO). Most importantly, Amways chairman Steve Van Andel addressed the U.S. House Ways and Means subcommittee to urge Chinas accession, in order to normalize trade relations with China on a permanent basis as well as to gain trust from Chinese government. Chinas accession into the WTO in 2001 was expected to help improve the environment for direct sales in the country. China committed in their WTO agreement to allow market access for wholesale or retail trade services away from a fixed location, requiring China to fully open up the direct sales market by December 11, 2004.
After much delay, the new regulations announced in September of 2005 permit direct selling in China with a number of restrictions. The most detrimental to the multinationals in the market is that the new law defines all multi-level marketing compensation structures as illegal chuanxiao. The new regulations also impose training restrictions that all salespersons will be required to pass an examination and be certified, as well as limit sales representative compensation to 30% of personal sales. Three other requirements to obtain approval include 1) three years of foreign operating experience before being allowed within China 2) service centers in every province where product is sold and 3) a minimum bond of 20 million RMB plus 15% of monthly sales up to a maximum of 100 million RMB.
Amway China admits that the transition to comply with the new regulations will take time given their position as the largest direct selling company in China, with 50% of the market and more than ten times the sales volume of competitor Avon. The company can continue operating under its current approval while evaluating changes needed to meet the expectations of the Chinese government and therefore are not concerned that Avon was first to receive approval from the Ministry of Commerce to engage in direct selling in China. Under the new legislation, sales representatives may sell products outside of a fixed retail location, providing Amway representatives further opportunities to generate sales. Additionally, lifting restrictions on imported products may allow Amway China to access over 450 kinds of goods from its parent company.
The continuing ban on multilevel direct selling will be the most challenging aspect of Amways response to new regulations. Amways success worldwide relies on a motivated sales force through multilevel compensation. One authorized sales agent of Amway in China is quoted as saying We still face a huge challenge in China, because multilevel marketing is where the real profits lie. The 180,000 Amway sales representatives in China look for the company leadership to consider their interests while pursuing solutions that meet the new regulations. Eva Cheng states We will review the nature of the authorized agents jobs and make whatever modifications are necessary to ensure the companys marketing activities are not open to allegations of chuanxiao.
Questions for Discussion
1. Who are the stakeholders for Amway in China? How would a stakeholder analysis help in developing a communication strategy? What is your recommendation for a communication strategy during this transition period?
2. Why is it important for Amway to be good corporate citizen in China? Can doing good overcome negative or inaccurate perceptions of the direct selling industry in China?
3. To what degree has Amway standardized its brand globally? How has it adopted its promotion strategy to local conditions in China?
4. What options does Amway have to address the new regulations on direct selling in China? What are the advantages and disadvantages associated with each?
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