Amway faces crackdown in China
Growing country has become big market for business.
LANZHOU, CHINA — Feng Gang stood in front of 150 people in a conference hall in Beijing that Amway, the U.S. marketing giant, calls its flagship “experience center.”
Introduced endearingly as Big Brother, he pitched the company’s newest product to an audience of recruits — men and women, young and old, one a street sweeper still in his orange municipal jumpsuit.
Feng said Amway’s energy drink, XS, could reduce blood-alcohol levels by as much as 70 percent. It could cure depression, he went on, or help someone who is drunk drive home. His aim: to get the crowd to go out and sell the products.
For more than a decade, scenes like this represented a financial salvation for Amway and other companies that use sales representatives to recruit others below them in what’s called multilevel marketing.
Facing declining fortunes in the United States and elsewhere, they turned to a ballooning consumer class in China hungry for new products — and susceptible to promises of the riches to be had by selling them.
Now, the future seems less promising. The giants of multilevel marketing have come under a dual assault, from regulators here and in the United States.
Two companies, Herbalife and USANA Health Sciences, disclosed last year that they faced investigations in the United States for their operations in China under the Foreign Corrupt Practices Act, which prohibits U.S. companies from bribing foreign officials. Another, Nu Skin, settled a similar case with the Securities and Exchange Commission in 2016, while Avon Products pleaded guilty in 2014, resulting in a $135 million fine.
Amway, which is not public, has not disclosed any inquiries by U.S. regulators. In one Chinese province, however, the conduct of some Amway sales distributors prompted an investigation, one that the victims say was squelched by local officials, including at least one with ties to the company.
“This industry is absolute chaos for China,” said You Yunfan, a former Amway distributor who wrote a scathing memoir under the pen name Xiao Fei.
Noting that Chinese law prohibits many of the worst practices associated with multilevel marketing, he added, “The root problem is that the government is riddled with corruption and not doing its job.”
That may be changing. Four government agencies last year announced a crackdown on the marketing model, which critics denounce as a pyramid scheme.
Turbulence in the Chinese market could be devastating for Amway, which has relied on China for much of its growth over the last decade.
It is now, by far, the largest of the multilevel marketing companies here, with 1.5 million distributors, more than all the others combined, according to the Ministry of Commerce’s records. China is now Amway’s largest market, accounting for $2.6 billion in revenue, or about 30 percent of its worldwide sales, the company’s president, Doug DeVos, told Reuters last year.
In a statement, an Amway vice president, Scott Balfour, said the company welcomed the crackdown, saying it would distinguish pyramid schemes from legitimate direct selling.
Amway has not been singled out in the campaign, and it has built an impressive brand here, operating gleaming showrooms in Beijing and elsewhere and sponsoring the Chinese Olympic team. Yet it has been dogged by accusations like those it has faced elsewhere.
Former Amway distributors have organized online to warn others of the company’s model. Amway’s name in Chinese, An Li, has entered the vernacular to mean to “promote heavily” or to “be brainwashed.”
In some regions, Amway in particular has come under focus.
In Lanzhou, a city of nearly 3.7 million along the Yellow River and the ancient Silk Road in Gansu province, dozens of former distributors have accused the company of abetting extortionate practices that left them in debt. They accused those above them of conning them into buying products they could not realistically sell.
One of them, Liu Gang, said he had been persuaded to give up a job as a teacher in 2009 to pursue an Amway fortune.
In training sessions, some of which he recorded and played for The New York Times, he was told that the way to achieve success was by working under pressure. He took out loans — first mortgaging his home, then borrowing from unofficial lenders working, he and others said, with the local Amway staff — to load up on vitamins, water filters and soaps. By 2014, he could not unload his merchandise and faced $600,000 in debt.
“I was brainwashed,” Liu said.
The provincial office of the State Administration for Industry and Commerce, which regulates businesses, took the accusations seriously. In May 2016, the office sent a letter to complainants saying that there was evidence of wrongdoing and that the region’s top two distributors, a husbandand-wife team, Tang Jinsong and Zhao Yufang, “are suspected of operating a pyramid scheme.”
“To climb to the top, you need a team of distributors under you,” said Liu Jianhong, another former distributor, who provided the letter to The Times.
Balfour, the Amway vice president, said that the Lanzhou situation had “involved a number of serious violations of our rules of conduct, as well as violations of Chinese lending laws” by sales distributors, but that the company itself had not been accused of wrongdoing.