In an attempt to snuff out an explosion of pyramid schemes and get-rich-quick scams, the Chinese government last week banned all forms of direct marketing. The move sparked a riot in at least one city and harsh words from U.S. trade officials defending what they said was the legitimate business done by three top American direct marketing firms in China: Amway Corp., Avon Products Inc. and Mary Kay Corp.
U.S. Trade Representative Charlene Barshefsky met with China's minister councilor, Wu Yi, on Friday to discuss the issue, which threatens to further worsen the already prickly trade relations between the two countries. China has the highest trade surplus of any country with the United States. U.S. officials also accuse China of not doing enough to protect intellectual property rights.
Chinese officials have told U.S. business executives that the ban, issued April 21, was aimed not at the U.S. companies but at sleazy Chinese and Taiwanese firms that have mushroomed in recent years since the relaxation of laws against private business. Their scams resemble those in other countries in which investors were swindled out of millions: the M & M pyramid fiasco in Russia, an investment scam that destroyed Albania's economy in 1997 and a get-rich-quick scheme that impoverished the Romanian town of Cluj in 1994.
However, others have suggested that the Chinese Communist Party might feel uncomfortable with direct marketing companies, which can inspire strong loyalties and grow into large, influential organizations, as they have in the United States. Indeed, direct marketing has swept into China.
Beginning with Avon's toehold in the southern province of Guangdong in the early 1990s, direct marketing has blossomed into a multimillion-dollar industry involving more than 10 million people in China, including 2 million people associated with the U.S. firms. Amway alone has invested more than $100 million and has 80,000 people actively distributing its products, said Richard Holwill, director of international affairs for the Ada, Mich.-based firm. Avon is believed to be even bigger, business managers said.
An example of the intensity of Chinese feelings for direct marketing occurred during a trip to a temple off the coast of Fujian province that is routinely visited by about 1 million pilgrims a year. Two women approached a visitor and said the temple, dedicated to a fishing goddess, wasn't the main focus of their faith. Producing a spiral notebook from one of the women's belongings, they said they were Amway saleswomen and opened the book to a page with a photo of Amway's president and a list of principles for its salespeople. "We worship him," one of the women said.
In China, the scams mimic American direct marketing operations in that participants buy products to sell to other consumers. However, in the scams, the products are often worthless.
"The difference is that the bad companies are selling a business opportunity to people not sophisticated enough to understand that what they are buying for $1,000 can't be resold even for $10," said Holwill, who vowed that Amway would fight the ban. "We understand that the Chinese have a problem, but we are frustrated with their sledgehammer approach."
Beijing's decision met with some displeasure among Chinese direct marketers. In Beijing, local state-run TV showed Amway workers grumbling about a loss of their livelihood. On Friday, according to press reports in Hong Kong, a riot erupted in Zhangjiajie, a city in Hunan province in southern China, when a protest against the ban turned violent. Hundreds of people involved in direct sales smashed cars and looted stores around city offices Friday, government and police spokesmen told the Associated Press today. More than 10 people were injured and several were arrested, the report said.
Barshefsky told reporters Friday that the sweeping ban was the wrong way to deal with fraud, specifically because the U.S. firms offer protective measures such as money-back guarantees and cooling-off periods for consumers to change their minds about buying products.
"It is a serious matter when the {Chinese} government simply bans the legitimate business of foreign-invested companies," she said, adding that the total ban "goes well beyond China's legitimate need to pursue consumer protection." CAPTION: CHARLENE BARSHEFSKY