Draft of direct selling law weighs options

China Business Weekly/September 30, 2004
By Jiang Jingjing

Enterprises kept their mouths shut after a seminar on the draft framework of the direct selling law, but experts believe the companies will have an "extremely" hard time over the uncertainty before the law takes effect.

The seminar was not ordinary. Rather, it was thought to be the place where the fate of many enterprises would be decided.

Altogether 22 companies were invited to the three-hour closed-door seminar in Xiamen earlier this month, including 16 foreign funded and six domestic ones. Only two seats were assigned to each enterprise, and all of them sent their highest officials. For example, Avon sent two senior officials, the president and vice-president of China.

The world's top two direct sellers, Avon and Amway, declined to comment on the draft law.

Sun Changqing, vice-president of Avon Products (China) Inc said the firm will support the Chinese authorities on the law, while a public relations official with Amway expressed exactly the same attitude.

The seminar did not reveal what selling modes will be carried out, but insiders say whatever the result, either or even both of the two giants will spend large amounts of money to meet the requirements of the law.

"If taking the Avon mode, Amway will make huge efforts to establish boutiques; whereas Avon would go back to use its sales representatives if Amway's is used," said Sun Xuanzhong, professor with the College of Commerce under the China University of Political Science and Law.

Experts believe China is more likely to take the Avon mode, rather than that of Amway's, at the initial stage of the promulgation of the law.

"Avon's mode is easier for the government to supervise when China's direct selling orders are not mature," said professor Sun.

He explained that authorities will find it easier to supervise the fixed beauty boutiques rather than the floating "sales representatives."

Avon currently sells products through boutiques, while Amway uses "sales representatives" to carry out their business.

Niu Haipeng, a professor with Renmin University of China agreed.

The differences between Avon and Amway are not only in the sales method but also the distribution of profits.

Avon uses a one-leveled method, in which the income of sales personnel depends on the sales volume. Amway, however, takes the multi-leveled way. The sales people make money not only from sales volume, but also gain commissions from the achievement of the sales people on the lower levels.

"Such a method could easily become the notorious 'pyramid sales,' when sales people only focus on developing lower leveled representatives rather than improving their sales achievement," Niu said.

But from the prospective of consumers, professor Sun said, Amway representatives will offer more direct service to its customers.

He pointed out that too strict control over the selling mode would hinder the development of direct selling, which has many advantages over traditional retail methods, due to the lower costs and more direct service.

He suggested the draft law should take use of both methods, "in large cities, Amway's mode can be tested, meanwhile in the country's vast areas, Avon boutiques can be maintained."

Compared with international firms who worry about their future, domestic companies were relieved by the government promise at the seminar: Foreign and domestic firms are equal on the business.

The promise has ruled out the long-time rumour that domestic firms will have no chance to taste the cake of direct selling.

However, much of their optimism was dashed by the news of the high requirements for direct sales: US$10 million is registered capital; 500 million yuan (US$60.39 million) revenues in the past three years; manufacture facilities in China, sales of its own products; and a 20-million-yuan (US$2.42-million) guarantee fee, said Deng Zhan, vice-director of the Foreign Investment Administration under the Ministry of Commerce.

Insiders believe very few domestic firms can meet the requirements.

It is necessary to set up high threshold in terms of company scales, said professor Sun, "but the threshold of credit and distribution network should be included."

The direct selling law will be introduced before December 11, meeting the deadline for China's commitments to the WTO (World Trade Organization).

China imposed a ban on direct sales in 1998, saying it was hard to differentiate direct sales from so-called "pyramid sales," which had led to widespread fraud, consumer losses and social disorder.

Ten foreign-funded direct selling companies were allowed to continue operating in China after the 1998 crisis, but they had to change their sales mode to selling goods through retail outlets and "non-employee" sales representatives.