A Study of the Mainland China’s Direct Selling Market Access and Control
【Abstract】
Even though the Mainland China has publicly announced a ban of multi-level
sales in 1998, however the country still make a promise to the World Trade
Organization (WTO) that the country will open up the direct selling market.
This paper looked at the evolution and difficulties that are encountered by
direct selling companies in the Mainland China, including both Taiwanese businessmen
and foreign businessmen (in particular the American businessmen), how are they
going to cope in the unique socialist economy system with regard to the lift
of ban on direct selling and the legislation development in the Mainland China.
In addition, this study also explored the impacts of the promulgations of “Regulations
on Direct Sale Administration” and “Regulations on the Banning of Pyramid Selling”
in 2005 on the Mainland China’s direct selling market and the entry of Taiwanese
businessmen into the market, the differences of cross-Straits’ multi-level
sales industry policies, and the affect of the enforcement of Mainland China’s
direct selling policy on Taiwanese multi-level sales industry.
The direct selling industry in the Mainland China began in the twentieth century
or the early 1990s. In the beginning, the Chinese government adopted loosen
and tolerant attitudes towards direct selling. However, the lack of understanding
on direct selling and the inadequacy of relevant regulations prescription have
led to market confusions in direct selling and social and economic disorder,
consequently, the government has imposed economic control for the industry
with a reason of market failure and finally came up with a decision of complete
ban on direct selling. In 2005, the Mainland China in accordance with the promise
made in the accession to the World Trade Organization has promulgated and formally
implemented “Regulations on the Banning of Pyramid Selling” and “Regulations
on Direct Sale Administration”, allowing a limited reopening of the direct
selling market.
Although “Regulations on Direct Sale Administration” allows “wholesale
or retail services to be carried out at any location”, but the multi-level
sales is completely banned, and as a result, the direct sales companies that
have mostly sold its products through multi-level sales channels must make
huge adjustment in its modes of operation. This paper presented relevant information
concerning problems that may be encountered after the Mainland China opens
up its direct selling market and made suggestions for the said problems:
- Legal dimension
The first direct selling company started its operation
in the Mainland China in 1990, since then, the supplementations of the relevant
laws and regulations are constantly made. The administrative policies are
always changed and varied. The promulgation of “Regulations on Direct Sale
Administration” only showed that the Mainland China has no option and thus
adopted legislation that gave the smallest impact on the China society, as
a way to fulfill the promise of WTO accession. However, for the sake of being
certain and able to control direct selling industry, “Regulations on the
Banning of Pyramid Selling” was also promulgated so as to completely ban
multi-level sales activities, an operation that the industry has very much
looked forward for its opening. Furthermore, the “Regulations on Direct Sale
Administration” included stipulations on the governing of multi-level sales
that are more stringent than those of the other countries. The stipulation
of “approval system” and its strict qualifications for application is more
controversial among all other stipulations. There are many restrictions on
the qualification of direct salesperson, qualification of training class’s
lecturer, area for holding direct selling activities and remunerations of
direct salespersons. Such restrictions indeed will affect the business freedom
of an enterprise. And, the Ministry of Commerce in the Mainland China has
recently published several complementary measures, including “Measures to
Govern Training of Direct Salespersons”, “Measures to Govern Direct Selling
Company’s Information Reporting and Disclosure” and “Measures to Govern the
Collection, Payment and Use of Direct Selling Company’s Deposit” on its official
website. The direct selling companies are requested to report to the Ministry
of Commerce and the Headquarter of Industry and Commerce the incomes and
taxes of its direct salespersons and companies before the fifteenth of each
month. Such request has more seriously affected the time for a company to
close its account and its sales and returned purchase system. Therefore,
the company that intends to enter the China’s direct selling market must
think about the ways to cope with these regulations and measures.
- Risk of transformation
In the Mainland China, the promulgation of law
of complete banning on multi-level sales has forced the companies that intend
to enter the direct selling market of the Mainland China to revise its mode
of direct selling operation to the way that is permitted by the current law,
that is to adopt a localized tactics in Mainland China when planning its
global business strategy. However, there are risks and uncertainty associated
with transformation as there is a change of business tactics in the transformation
and the process of transformation varies from country to country due to differences
in national conditions or laws and regulations. Therefore, the direct selling
companies have to take heed of that they no longer can use the past success
experience of multi-level sales, such as the combination of multi-level sales
organization, product and bonus system, to operate the business and create
sales. They instead have to face the harsh challenges of creating the unprecedented
success experience of single level direct selling, developing legal direct
salesperson’s bonus and direct salespersons recruitment systems, also the
ways to utilize local human resources or to compete with the local direct
selling companies.
In addition, the direct selling companies also have to pay high threshold of
start-up capital, monthly deposit, and expenses for direct salespersons’ trainings
and examinations, thus the costs for the companies inevitably will increase
tremendously. The amount of capital invested obviously is different from the
cost of multi-level sales that is determined by the connection, cooperation
and guidance between the upper and lower levels. Moreover, according to the
regulations of “Measures to Govern Direct Selling Company’s Information Reporting
and Disclosure” and “Measures to Govern the Collection, Payment and Use of
Direct Selling Company’s Deposit”, the unexpected administrative cost for direct
selling companies would increase every month. The direct selling companies
that have made decisions to enter the Mainland China’s market must confront
the aforementioned problems and adjust their pace and direction according to
the effects brought by these problems.
An observation of the Mainland China government’s “five stops and four revisions”
policy changes for direct selling industry in the past ten years indicates
that the companies that enter the Mainland China’s market indeed must have
well-planned risk management policies. Although the direct selling market of
domestic is almost saturated, nevertheless the legal system in Domestic is
perfectly planned; therefore, the Taiwanese direct selling companies should
consider the market of Domestic as a good base for both offensive and defensive
strategies. This paper suggested that the companies that have aggressively
taken action to enter the Mainland China’s direct selling market should be
cautious, “stop, listen and look” before action, they even should not hastily
neglect their Taiwanese market.
Researcher: Wu, Tsui-Feng
Yeh, Tien-Fu
Hsu, Hung-Jen
Kuo, An-Chi