TED Case Studies

Case Number: 502 Case Mnemonic: Amway

Case Name: Amway in China

I. Identification
1.The Issue
Amway, Inc. is a distribution giant that expanded to Mainland China in April 1995. Founded in 1959 in Ada, Michigan in the United States, Amway is one of the largest direct selling companies worldwide. Amway has establishments and distribution networks in Europe, Latin America, Africa, and Asia. They entered China only three years ago in April, 1995. Their entrance into the Chinese market has earned big profits, with more potential to grow. In just three years of sales in China, Amway earned over $178 million in sales. But on April 21, 1998, Chinese officials issued an immediate ban on direct marketing that threatened a multimillion-dollar market for Amway and other potential direct marketing companies. Chinese government officials claim the ban was absolutely necessary because the direct-selling operations functioned as a base for criminal activity. Amway's directselling techniques scared Chinese officials for fears of spreading heretical religion and the start of secret societies. The ban was lifted three months later on July 21 due to heavy lobbying from American businessmen and Chinese government officials.

2. Description
Amway, Inc. is a distribution giant that sells everything from soap detergents to fruit juice drinks. They are an international corporation with affiliates in 45 countries and penetrates more than 80 countries and territories worldwide. Amway recorded global sales of US $7 billion at estimated retail on August 31, 1997. Global sales have tripled since 1990. (http://www.amway.com/InfoCenter/imediIC.asp). Amway Corporation has two publicly traded sister companies: Amway Japan Limited and Amway Asia Pacific Ltd. Amway's affiliation in China falls under the jurisdiction of Amway Asia Pacific. Amway's recent entrance into China has earned them big profits, with even more potential to grow. Amway (China) Co., Ltd., Amway Asia Pacific Ltd.'s (APP) China affiliate is making changes in their distribution methods in order to work with China's unique regulations. This is because Amway faces political challenges from the Chinese government. On April 21, 1998, the Chinese government ordered an immediate ban on direct marketing, causing Amway stocks to plummet. Amway faces the challenge to interpret the very different cultural and political implications of their presence in a changing communist country. All these events and uncertainties will definitely affect Amway's sales and trade opportunities in China. Their sales will also effect the environment. The products introduced in China may increase waste and create new environmental concerns.

The pyramid and recruiting method which Amway distributors use has been branded for cultic recruitment. Distributors are people who sell Amway products, and look to recruit others to become members of their pyramid. The Amway system works like this: You are an Amway distributor and sell products family, friends, and acquaintances. Then you, as the distributor explains the Amway business opportunity to people to see if they want to become an Amway distributor themselves. This is called sponsoring. Then those newly recruited distributors in turn will try to sponsor other people. Amway claims distributors who sponsor others generally have higher sales than those who don't. This system creates a "group" which is a team of distributors that was started by one person. This group gets together for motivational meetings and seminars to promote new business ideas and opportunities. As more and more people enter the group, the higher "pin" level you can qualify for. The more pins you earn, the higher achievement level you can elevate to. So it is in everyone's interest to recruit more people into the circle. There are definitely risks and uncertainties with respect to operations in China. According to Amway's press release on July 21 at http://www.amway.com/InfoCenter/pressrel/pressrel42.asp, it states the following risks involved:

The ability of the Company to manage effectively transition issues associated with the modification of its distribution system under the new government directive The regulatory environment at the national, provincial, and local levels (with three supervisory agencies) as the Company implements its new plan of operations

The possibility of governmental action (China) restricting the ability of the Company to sell existing inventory not manufactured at the Guangzhou facility and to import additional products on a test market basis. It is too early to tell if Amway's modified sales technique will result in continued high profits or cause major losses in China. It is interesting to analyze why Amway was shut out in the first place, and the great lobbying efforts that brought them back into China's market. It is clear that there are cultural and trade implications in this case that will have major monetary repercussions. The results of this case remains to be seen.

Trade Clusters 12. Type of Measure: License

Amway is taking steps specific towards China. They do not plan to extend measures to other countries. The directive made by the Chinese government on April 22, 1998 required immediate cessation of direct selling activities, and required all direct selling companies modify their mode of operation. AmwayChina resumed business operations on July 21, 1998 after Chinese officials approved modified plans of selling operations. Nevertheless, Amway is the player that had to respect the Chinese authority's wishes to cease direct selling efforts and use revised business plans to sell only in retail outlets. 13. Direct v. Indirect Impacts: Direct Amway is directly marketing their products within China. Selling activities began on April 10, 1995. Amway's direct investment in China is approximately $100 million, that includes IS 09002 artified manufacturing plant in the Guangzhou Economic & Technological Development District of China. 14. Relation of Trade Measure to Environmental Impact

a. Directly Related to Product: Many There are 40 product service centers nationwide in China. Facilities that make the products are in the cities of 14 provinces and four direct municipalities. http://www.amway.com/InfoCente r/pressrel/pressrel39.asp b. Indirectly Related to Product: No c. Not Related to Product: No d. Related to Process: Yes

Environment Clusters
Environmental Problem Type: Enviromental Problem Type: Culture/Air Air Pollution Land Pollution Name, Type, and Diversity of Species Resource Impact and Effect: Impact: Low Effect: Regulatory Urgency and Lifetime: Urgency: Low Lifetime of Species: Hundreds of years Substitutes: Biodegradable

Other Factors Culture: Yes There is a cultural gap between an American company trying to use American sales tactics in a foreign country. Amway has to bridge this cultural hiatus in order to win the approval of the Chinese government. Before the concept of direct sales hit China in the early 1990s, no one could have imagined such a lucrative market of product hungry customers. In the Chinese society where "face" is almost everything, a business that relies on connections or "guang xi" can be tricky. "Guang xi" means connections or relationships in English. These connections in Chinese culture is an intricate part of the livelihood of the Chinese people that effects almost every aspect of life. The Chinese basically coined the phrase, "It's not what you know, it's who you know." Amway's pyramid scheme is based on personal connections in order to recruit new salespeople. It is not surprising the Chinese government became very scared of the potential chaos Amway's direct

selling technique could cause in China. Due to the fact connections and personal relations serves such an intricate part of Chinese culture, it could explain why China's officials took such drastic actions in April of 1998 by cutting off all direct Amway sales and recruiting methods. Trans-Boundary Issues: Yes Rights: No

Conclusion
This case study has enhance the sales of amway products.