Beijing's Ultimatum For The Avon Lady

Its ban on direct selling may become a big trade issue

For centuries, China's far western Xinjiang region has been a key stop in East-West trade. You can still see mosques, camel caravans, oases--and, lately, Avon ladies. Avon dealers have helped make Urumqi, Xinjiang's capital, Avon's fastest-growing market in China.

The Chinese are trying to change all that, however. On Apr. 22, the State Council ordered all direct-sales operations to cease immediately. Alarmed by a rise in pyramid schemes by some direct sellers and uneasy about the big sales meetings that direct sellers hold, Beijing gave all companies that hold direct-selling licenses until Oct. 31 to convert to retail outlets or shut down altogether. The move threatens Avon's China sales, now about $75 million a year, and puts Avon, Amway, and Mary Kay's combined China investment of roughly $180 million at risk. It also creates problems for Sara Lee Corp. and Tupperware Corp., which recently launched direct-sales efforts in China.

But the move may be too late to halt direct selling. An estimated 20 million Chinese are involved in direct sales, with more turning to the business as unemployment rises. Already, attempts to carry out the decree have caused protests in central and south China, with the latest in Shenzhen.

The ban could also spark a U.S.-China trade dispute on the eve of President Clinton's state visit in June. "It is a serious matter when a government simply bans the operation of legitimate invested companies," warned U.S. Trade Representative Charlene Barshefsky at an Apr. 24 press conference in Beijing. "I hope that the Chinese come around quickly to that view."

MOONLIGHTING. Direct selling took off rapidly when Beijing opened the market in 1990. Estimates of total revenues from direct selling in China range up to $2 billion annually. And the China trade has become a handy growth vehicle for U.S. companies: Amway's China revenues reached $178 million last year, and Mary Kay, a relative newcomer, hit $25 million there.

But as American direct sellers have flourished, so have many local outfits and companies from Taiwan and Hong Kong that engage in questionable practices, including running pyramid and Ponzi schemes and stealing the savings of Chinese hoping to get rich on direct sales. The authorities are also irate about the many teachers and civil servants who have taken up direct selling to supplement their incomes. And the massive sales rallies that direct sellers use to motivate the troops "ring bells of Tiananmen Square and make [the government] nervous about the possible political aspirations of direct sellers," says a Tupperware spokesperson.

The shaken American companies are pinning their hopes on a promised meeting with Wu Yi, the state counselor responsible for trade and foreign investment. Richard N. Holwill, Amway's director for international affairs, says U.S. controversy about Amway's multilevel selling methods are not bothering the Chinese. "We have been told that they have no problems with Amway," he says. For its part, Avon plans to argue that its business is economically beneficial for China and its people and that it has a long history of ethical business practices.

They are certain to get help from the Administration. But they may not need to press too hard: With 20 million Chinese on their side, the ban on direct selling will be a hard sell indeed.