Avon, Amway call on Beijing
In the past month, the heads of three of the biggest United States direct selling companies have come to China to make their final pitch on the draft of the country's first direct sales law.
It is part of an intense lobbying effort, in the mainland and in the US, by the companies to position themselves in what they consider the largest single growth market for direct selling in the world. For Beijing, the issue is not only about marketing cosmetics, detergents and health supplements.
It is also about how to balance strong foreign pressure to liberalise commerce with its fears of social instability and nationwide organisations that are not under direct Communist Party control.
In 1998, direct selling was abruptly banned by the State Council, citing 'damage to social stability' and linking US companies like Avon and Amway with pyramid schemes, 'evil cults and secret societies'.
That is why the government has given overall responsibility for the legislation to Vice-Premier Wu Yi, a former trade minister who has played a key role in trade negotiations with the US over the past decade. More recently, he was put in charge of the fight against Sars last April after the dismissal of the Health Minister.
Last year, Amway's China sales reached 10 billion yuan, 20 per cent of its global revenue and making the mainland its single largest market. Avon sold 2.4 billion yuan worth of goods and is aiming for 4.2 billion by 2007. Mary Kay, meanwhile, sold products worth one billion yuan, posting annual sales growth rates of 40 per cent over the past two years.
As direct selling is banned, the companies use standard retail outlets and sales representatives, making China the exception in their global business portfolios.
Direct selling arrived in China in 1990 in the form of a shapely Avon lady offering a box of cosmetics. The business boomed, in a legislative vacuum, as domestic firms raced to set up high-profit businesses.
What has driven its rapid growth is the enthusiasm of tens of thousands of salespeople, mainly women, who want to supplement a modest income. Another attraction is the US get-rich story, typified by Avon chief executive Andrea Jung, daughter of a Shanghai mother and Hong Kong father, who has an annual salary of US$2.52 million.
In 1994, 1995 and 1997, the government passed regulations to regulate pyramid sales. But fraud and abuses continued unabated, leading to the State Council's blanket ban in April 1998.
The law being drafted this year will be China's first comprehensive legislation on direct selling, in line with Beijing's commitments under the World Trade Organisation.
Rarely have foreign firms been so close to the legislative process. Work began last September at a meeting in Xiamen, attended by officials from the Ministry of Commerce, the main drafter, other government agencies, and representatives of Amway, Avon, Mary Kay, Nu Skin and Herbalife.
Also in September, the World Federation of Direct Selling Association held its annual meeting in Hong Kong, to which it invited ministry officials. The federation provided them with a position paper outlining legislation in other countries. In February, a ministry delegation was invited to a meeting of the federation in Washington.
In May, senior executives from Avon, Amway, Mary Kay and Nu Skin went to Beijing to lobby on behalf of their companies. Among them was Richard Holwill, vice-president for public policy at Alticor, Amway's parent company. He is a former US ambassador to Ecuador and deputy assistant secretary of state.
In June, Steve Van Andel, chairman of Alticor, met senior ministry officials in Beijing after announcing a new Amway research and development centre, its second in China, to be built in Pudong.
Amway has been the most aggressive foreign direct seller in China, hiring former government officials with attractive salaries and paying for 60 officials from all over China to study at Harvard University each year.
Last Friday in Beijing, it was Avon chief executive Andrea Jung who met Vice-Premier Wu Yi.
What the foreign firms have proposed is a clear distinction between direct sales and pyramid selling; qualification standards for those who want to join direct-selling companies; an industry association that would help the government regulate the market; and measures to protect the consumer, such as product guarantees and the right to return goods.
Industry sources say the law will contain such a distinction, permitting direct sales, in which a sales person deals directly with the end-user. But it will still outlaw pyramid schemes, in which an agent derives most of his income from sub-agents, not the end-user.
It is expected to require companies in the business to have a minimum paid-up capital of about 100 million yuan and a factory in the mainland that produces the goods to be sold.
The new law probably will allow the foreign firms to go on selling through retail outlets, originally legalised under a compromise agreed in 1998 to let them continue operating.
What remains unclear is whether the law will recognise the legal status of an independent contractor responsible for sales, inventory, financing and marketing, as the foreign firms have proposed. Beijing is uneasy with the concept of an army of independent operators with no affiliation to an organisation it can supervise.
It is not only the big US companies waiting impatiently for the new law.
Dozens of Taiwan, Hong Kong and domestic firms are preparing for the opening of the market, including Chlitina International, the top direct seller in Taiwan which has been operating in the mainland since 1994 and through retail outlets since 1998.