Page 244 - 2018 White Paper on the Business Environment in China
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8 White Paper on the Business Environment in China
characterized as illegal pyramids under these regulations. joined the World Trade Organization in 2001, the direct
Sales representatives earn commission only according to sales industry was a grey area, regarded as an illegal
their sales performance, and the proportion of payment activity until the first concrete legislation was released by
to sales promoters should not exceed 30 percent of the the State Council in 2005. The legislation consisted of two
income generated from sales. Furthermore, commission laws, namely the Regulation on Direct Sales, and the Anti
paid to a salesman cannot be calculated based on Pyramid Selling Regulation. Pyramid selling is defined as
the MLM structure. Language exists requiring the different to direct sales in that it requires sales personnel
construction of fixed location service centers in each area to make investments in inventory upfront, lacks return
where sales occur for the purpose of after-sales service or refund policies, and makes remuneration based on
and consultation. Getting started is rather expensive and recruitment. On the other hand, direct sales operations
many requirements must be met. For example, to obtain employ personnel as sales promoters, and have a series
a direct sales license requires a 20-100 million yuan of policies that safeguard consumers. Pyramid selling is
bond deposit and a 80 million yuan registered capital specifically highlighted as an illegal activity in China.”The
threshold. Many major international companies have had Daily Briefing concludes that China’s direct sales industry
success in overcoming these barriers, but the Chinese presents a huge potential for foreign companies, but it is
Government has remained slow to approve direct-sales important to know and fully understand the regulatory
license applications for new entrants over the past few environment (Erdenbileg).
years. In general, the Chinese central government and
the relevant authorities at central and local levels tend In order to operate under these regulations, Amway
to heavily regulate and supervise the industry (China- has opened hundreds of “experience centers” in China.
Direct). You would think that limitations such as these That is no surprise since about one third of Amway’s
would kill a business right out of the gate, but the sales $8.8 billion in revenue came from China. Amway is the
numbers tell a different story. Sales went from zero to biggest direct seller in China, but the company has a
$18 billion in less than a decade (Minter). That number market reach of only about 12 percent. The Michigan-
continued to grow. The World Federation of Direct Selling based direct sales giant is counting on growing sales and
Association reported more than $33 billion dollars retail market share by appealing to the country’s 35-year-old
sales in China in 2016. China is now even with the United and younger demographic, and emphasizing technology
States in retail direct sales (Bangerta). in its multi-level marketing model. “They like the idea
of owning their own business and the way the younger
The idea of direct sales was perfect for many Chinese generation likes to communicate is a little different
who wanted to be entrepreneurs but did not have the than I communicate,” Amway Chairman Steve Van Andel
cash or political connections to go into business. The said. He’s talking about a generation that grew up with
industry also happened to fit seamlessly with China’s technology who use their mobile devices to interact with
business culture, which places a premium on working friends and the world. China’s population has quickly
with people whom you already trust. This is an important transitioned through the digital age into mobile, whether
relationship for many Chinese due to the unevenness of it’s a smart phone or an iPad. Many Amway distributors
Chinese consumer protection laws and the perception in China conduct their business on WeChat, the country’s
that the country’s court system is inaccessible to people most popular messaging app. It’s similar to Facebook but
with modest means. The public has learned they have lets users buy and sell products without clicking through
good reason to be wary of counterfeits and contamination to another website (Martinez).
when shopping at their local markets (Minter). If you buy
products from someone within your social network, E-Commerce
your chances of being burnt go way down. Many of
the products that thrive in the direct selling model are E-commerce is expected to account for 23.1 percent
consumables—products that can be harmful to your of all retail sales in the country. This number is expected
health if toxic or impure. In a culture where you can’t to increase to 40.8 percent by 2021, driven by the
expect the government to protect you, turning to your proliferation of mobile buying and the dominance of
community makes the most sense (Bangerta). marketplaces such as Alibaba, JD.com and Tmall. More
than 75 percent of e-commerce sales, over $1 trillion, is
Dezan Shira & Associates warns there is a clear difference already transacted via a mobile device. “Growth in online
between direct selling and pyramid schemes:“After China purchasing is being spurred along by a growing comfort
244
characterized as illegal pyramids under these regulations. joined the World Trade Organization in 2001, the direct
Sales representatives earn commission only according to sales industry was a grey area, regarded as an illegal
their sales performance, and the proportion of payment activity until the first concrete legislation was released by
to sales promoters should not exceed 30 percent of the the State Council in 2005. The legislation consisted of two
income generated from sales. Furthermore, commission laws, namely the Regulation on Direct Sales, and the Anti
paid to a salesman cannot be calculated based on Pyramid Selling Regulation. Pyramid selling is defined as
the MLM structure. Language exists requiring the different to direct sales in that it requires sales personnel
construction of fixed location service centers in each area to make investments in inventory upfront, lacks return
where sales occur for the purpose of after-sales service or refund policies, and makes remuneration based on
and consultation. Getting started is rather expensive and recruitment. On the other hand, direct sales operations
many requirements must be met. For example, to obtain employ personnel as sales promoters, and have a series
a direct sales license requires a 20-100 million yuan of policies that safeguard consumers. Pyramid selling is
bond deposit and a 80 million yuan registered capital specifically highlighted as an illegal activity in China.”The
threshold. Many major international companies have had Daily Briefing concludes that China’s direct sales industry
success in overcoming these barriers, but the Chinese presents a huge potential for foreign companies, but it is
Government has remained slow to approve direct-sales important to know and fully understand the regulatory
license applications for new entrants over the past few environment (Erdenbileg).
years. In general, the Chinese central government and
the relevant authorities at central and local levels tend In order to operate under these regulations, Amway
to heavily regulate and supervise the industry (China- has opened hundreds of “experience centers” in China.
Direct). You would think that limitations such as these That is no surprise since about one third of Amway’s
would kill a business right out of the gate, but the sales $8.8 billion in revenue came from China. Amway is the
numbers tell a different story. Sales went from zero to biggest direct seller in China, but the company has a
$18 billion in less than a decade (Minter). That number market reach of only about 12 percent. The Michigan-
continued to grow. The World Federation of Direct Selling based direct sales giant is counting on growing sales and
Association reported more than $33 billion dollars retail market share by appealing to the country’s 35-year-old
sales in China in 2016. China is now even with the United and younger demographic, and emphasizing technology
States in retail direct sales (Bangerta). in its multi-level marketing model. “They like the idea
of owning their own business and the way the younger
The idea of direct sales was perfect for many Chinese generation likes to communicate is a little different
who wanted to be entrepreneurs but did not have the than I communicate,” Amway Chairman Steve Van Andel
cash or political connections to go into business. The said. He’s talking about a generation that grew up with
industry also happened to fit seamlessly with China’s technology who use their mobile devices to interact with
business culture, which places a premium on working friends and the world. China’s population has quickly
with people whom you already trust. This is an important transitioned through the digital age into mobile, whether
relationship for many Chinese due to the unevenness of it’s a smart phone or an iPad. Many Amway distributors
Chinese consumer protection laws and the perception in China conduct their business on WeChat, the country’s
that the country’s court system is inaccessible to people most popular messaging app. It’s similar to Facebook but
with modest means. The public has learned they have lets users buy and sell products without clicking through
good reason to be wary of counterfeits and contamination to another website (Martinez).
when shopping at their local markets (Minter). If you buy
products from someone within your social network, E-Commerce
your chances of being burnt go way down. Many of
the products that thrive in the direct selling model are E-commerce is expected to account for 23.1 percent
consumables—products that can be harmful to your of all retail sales in the country. This number is expected
health if toxic or impure. In a culture where you can’t to increase to 40.8 percent by 2021, driven by the
expect the government to protect you, turning to your proliferation of mobile buying and the dominance of
community makes the most sense (Bangerta). marketplaces such as Alibaba, JD.com and Tmall. More
than 75 percent of e-commerce sales, over $1 trillion, is
Dezan Shira & Associates warns there is a clear difference already transacted via a mobile device. “Growth in online
between direct selling and pyramid schemes:“After China purchasing is being spurred along by a growing comfort
244
