Election 2006/Governor: DeVos' run puts Amway in spotlight

How he led company is scrutinized

Detroit Free Press/September 24, 2006
By John Gallagher

On the campaign trail, Republican gubernatorial candidate Dick DeVos touts his business experience as an antidote for Michigan's economic ills.

"I speak business," he tells voters. "I'm a job maker."

In 1989, he founded Windquest, a privately held manufacturer of closet-organizing furniture in western Michigan that employs 145 workers. From 1991-93, he ran the business side of the Orlando Magic basketball franchise; during the 1990s, he was among the civic activists who pushed a downtown revitalization in Grand Rapids.

But the centerpiece of DeVos' business resume is the 25 years he spent with Ada-based Amway -- which he renamed Alticor in 2000 -- the home-products company his father, Rich DeVos, and business partner Jay Van Andel founded in 1959. DeVos was Amway's president from 1993-2002.

Gov. Jennifer Granholm and other Democrats have relentlessly attacked Dick DeVos for two things he did at Amway: investing in China in the mid-1990s and, a few years later, cutting at least 1,000 jobs in Michigan. DeVos and others, including former Gov. John Engler, have responded that the attacks are bizarre because pursuing international business -- which now represents 80% of Alticor's revenues -- has saved jobs in Michigan.

Almost off the campaign radar has been what some critics say should be the larger question about DeVos: his unabashed promotion of Amway's system of selling what it calls "soap and hope," recruiting ordinary Americans with no sales background to sell products with the promise that hard work can produce great wealth.

DeVos touted the Amway distributorships in a 1998 speech in California as "the best business opportunity in the world," even as the average active distributor grosses very little -- just $115 a month, according to promotional material given to new distributors. In the United States and Canada, Alticor's 370,000 distributors shared $345 million in bonus and incentive payments in 2005, the company said.

The Federal Trade Commission investigated Amway in the late 1970s and concluded that the company was not an illegal pyramid scheme, but the FTC also found that it misled potential distributors and ordered the company in 1979 to spell out how much money distributors earn. As a result, current promotional materials say that only 2 of 1,000 distributors will earn $47,000 a year and 3 in 10,000 will earn $72,000.

"This is an extremely contentious, controversial business model," said Robert FitzPatrick, a business consultant and consumer advocate based in Charlotte, N.C., and the author of "False Profits," a critical examination of Amway and similar so-called multilevel marketing companies.

"If you go to work for Hewlett-Packard, you don't walk in the door saying, 'Hey, I wonder if this is a scam?' But anybody who gets into multilevel marketing will have to deal with that question."

The company says it doesn't mislead anyone and that people become distributors for many reasons, including just to buy discounted products.

Dick DeVos declined to meet with the Free Press, but his brother, Doug DeVos, now president of Alticor, said of distributors: "If they're willing to do the work, they can be very successful. We have families in the second and third generation who are still actively building that business. They're still generating income. They're still generating sales."

Alticor spokeswoman Kate Makled added last week: "We need to tell our story better." That's why Alticor has been running TV commercials featuring employees praising the company. One commercial ends with several workers proudly proclaiming, "I am Amway," and a middle-age man asking: "You got a problem with that?"

The company under Dick DeVos

As the eldest son of Amway's cofounder, Dick DeVos seemed destined to run the company.

DeVos, 50, joined Amway in 1974, when he was in his late teens. While taking night classes at Northwood University in Midland, he spent five years in Amway training.

"I did every job there was to do at Amway," he said in 1993. "That included working on all three shifts, that included working in all the major production areas -- producing, packing bottles, loading skids, loading trucks, driving trucks, working in the marketing, the research areas, the accounting areas -- all of the elements of the Amway business that make it work."

As the heir apparent, he moved quickly into executive positions. He spent six years as head of Amway's international division. In what became a hallmark of his career, he rapidly expanded the company's business to other nations as the company's U.S. revenues stagnated under pressure from new retailers and he saw opportunity in virtually untapped markets overseas.

Amway operated in 11 countries when DeVos took over the division, and foreign sales accounted for about 10% revenues. By the time he left the division, Amway was in 18 countries and international sales pushed 50% of total revenues.

Today, more than 80% of Alticor's estimated $6 billion in annual revenue is from foreign countries. One-third of all revenues come from China.

Doug DeVos, the candidate's younger brother who took over as company president when Dick DeVos left in 2002, told the news media that year, "We're mostly an Asian company now."

In the mid-1990s, Dick DeVos was among the first U.S. executives to push deeply into the Chinese market. The Chinese government required the company -- as it does of other foreign firms that want to sell in China -- to make the products it would sell there in China. Over several years, the company invested about $200 million in manufacturing facilities and offices in China, an Alticor spokeswoman said.

Supporters say that, in an age of globalization, manufacturers must do business overseas. General Motors Corp. and many other companies have followed a similar strategy. Many companies outsourced manufacturing to countries with low labor costs to produce products sent back to the United States.

In that sense, DeVos was unusual. He didn't use China as a source of cheap labor to make goods for sale in the United States. Alticor's China manufacturing operations make goods for sale there.

"What we manufacture in China, stays in China," Steve Van Andel, Alticor's chairman and the son of the cofounder, said last month. Servicing the China operations requires about 400 employees at the Ada headquarters, according to the company.

Under Dick DeVos and other leaders, Amway also was investing about $700 million in its western Michigan facilities between 1992 and 2005, a company spokeswoman said. Most of that was for upgrading production lines. DeVos has said in campaign ads that this investment helped save the company's 4,000 jobs in western Michigan.

In 1998-2000, with discounters taking an increasing share of the market for home products, Amway's sales slumped, and DeVos led a company-wide reorganization. He created Alticor as the new parent company, started an Internet-based selling model called Quixtar that replaced the Amway name in the United States and Canada, and put all the manufacturing operations into a subsidiary called the Access Business Group.

As part of the reorganization, DeVos eliminated 635 jobs in 1998, including 400 in Michigan, mostly with voluntary buyouts. Another 1,300 jobs were eliminated in 2000, including at least 900 in western Michigan.

Overall, the western Michigan workforce was reduced to 4,000 from about 5,000 before the reorganization, the company said. The company produces its line of vitamins at farms and manufacturing plants in California.

Downsizing has long been a way of life in corporate America. Michigan has lost more than 1 in 4 manufacturing jobs since 2000, as Ford Motor Co., GM, DaimlerChrysler AG and other firms have reduced domestic workforces, partly because of productivity gains, partly because of foreign competition and partly because they could make parts for less in Mexico and Asia.

DeVos has said the reorganization helped save many more Michigan jobs than were lost.

As a privately held company, Alticor doesn't release detailed sales and earnings reports, so judging the impact of DeVos' tenure is difficult, said William Schmitz, an analyst at Deutsche Bank Alex Brown in Greenwich, Conn., who follows Alticor competitors such as Procter & Gamble and Avon.

"They're so locked down over there, it's almost impossible to get any information," Schmitz said of Alticor.

Business model criticized

As company president, DeVos also had to deal with continuing fallout over Amway's sales and recruitment tactics.

Under the compensation system the founders invented, Amway's independent distributors make money not only by selling soap, vitamins and cosmetics, but also by sharing the income from sales from their downline -- people they have recruited.

Among the critics is former distributor Eric Scheibeler, who wrote a 2004 book "Merchants of Deception," which outlines his case against the company. Next month, a new independent movie, "Believe," a satirical look at a company based on Amway, will be released across the state.

Like many critics, Paul Bortell of Plymouth, a former distributor who said he lost money for four years while in the business, said the system is designed to send most of the wealth to those at the top.

"If I knew what DeVos knew, I couldn't sleep at night," Bortell said late last month.

While many distributors have filed lawsuits against the company, they've had little success because of a clause included in their contract that requires disputes to be resolved in arbitration.

In late August, Doug DeVos, the candidate's brother and Alticor president, and Steve Van Andel, the company's chairman, defended the company.

Van Andel explained the business model.

"Some people will get in to make a couple of extra dollars and that's their goal, and if they accomplish their goal, great, we're happy for them," Van Andel said. "Some people get in to try to make a career change and they'd like to earn a living in the Amway business, and if they're successful there, great. We like to see that as well."

Power player tries new things

Dick DeVos left Amway in 1989 because, as his father, Rich DeVos, told an Amway audience later, "He got a little impatient, quite frankly, with us. He wanted to move on, and we wanted to kind of hang on."

After leaving Amway, DeVos started Windquest, a privately held company that manufactures a line of shelving, closet organizers and other home and office products. He owns the company and remains its chairman. It is a private venture and sales figures are not disclosed.

Eric Wolff, president of Windquest, said the company, which employs 145 people in Holland on the west side of the state, has benefited greatly from DeVos' leadership.

"He's a great mentor, pushing us to do different things," Wolff said. "We've been on a nice growth path, and he really supports and understands those things."

Meanwhile, after DeVos' father bought the Orlando Magic basketball team, DeVos ran the team as president and chief executive from 1991 until 1993. The highlight of his tenure came in 1992, when, on what the franchise has called the most important day in its history, the team won the first pick in the NBA Draft Lottery and selected Louisiana State center Shaquille O'Neal, the most coveted player to come out of college in years. O'Neal once named DeVos among his "all-time power top 5," along with coaches Pat Riley, Phil Jackson, Hall of Famer Jerry West and himself.

DeVos left the Magic after his father, the long-serving president of Amway, suffered serious heart problems. He became president in 1993.

Changes expand business

During his 10 years at the helm, DeVos embraced e-commerce as a selling tool as other companies were realizing its possibilities, too.

He also revamped the product line, emphasizing higher-margin products such as cosmetics and vitamins and downplaying the company's better-known soaps and cleaners, which today account for only about 10% of sales. The company's catalogue came to include computers, cameras, vacuum cleaners and other products, many manufactured by other firms.

One DeVos move into new products flopped. In 1999, Amway teamed up with Columbia Energy Group, a Virginia-based company, to sell natural gas in Georgia, the first state to deregulate the sale of natural gas to consumers. But the alliance collapsed amid skyrocketing prices and widespread consumer complaints.

DeVos also nudged the company into more contract manufacturing for other firms. Today, Alticor collects about $100 million a year in contract manufacturing for other companies. The company is a major producer of sunscreen lotions.

Much of what Alticor makes in Ada gets shipped overseas. Products running off the production line may be labeled in Japanese and other languages.

A downtown is revitalized

While company president, DeVos became a player in civic efforts to revitalize downtown Grand Rapids. He was one of a handful of leaders who headed up a civic group called Grand Action that spearheaded the 1996 construction of Grand Rapids' downtown sports arena and the 2004 expansion of the downtown convention center, as well as downtown waterfront attractions.

DeVos' campaign literature says that those efforts created 4,060 downtown jobs, including 650 in bars and restaurants, 55 at the arena and convention center, and 2,800 at Michigan State University's planned downtown medical campus.

Those claims have stirred controversy. The MSU health campus isn't built yet, so those 2,800 jobs don't yet exist.

As for the convention center, the Grand Rapids Press quoted DeVos' father this spring as saying that an ad in which his son took credit for the turnaround of the downtown takes "a little political license."

But the elder DeVos, who poured millions of dollars into downtown Grand Rapids projects, said: "If Dick wouldn't have been there, we wouldn't have given that kind of money."