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Amway's big China makeover

Can an American icon help transform the Chinese economy?

A beautician puts makeup on a woman in front of an advertisement at a beauty and hairdressing expo in Taiyuan, Shanxi province April 6, 2009. (Reuters)

SHANGHAI — Chen Jiamei is a foot soldier in China’s 200,000-strong Amway army. She’s set up shop in a noisy Shanghai noodle bar and is talking about a favorite topic: face cream.

Business is booming.

“Guess how old I am?” Chen asks, gushing with enthusiasm.

“I’m 31 years old! Can you believe it? I look so young because I’ve been using Amway cosmetic products since I was 24,” she explains with the earnest look of a true believer.

In 2008, a poor year for the vast majority of retailers, the direct-selling giant that peddles everything from makeup to vitamins to frying pans saw massive growth in China. Sales jumped 28 percent to Rmb17 billion ($2.5 billion), and the company is forecasting a similar growth rate in 2009, despite the global economic slowdown.

According to Michelle Huang, an analyst at market research firm Euromonitor International, Amway is quickly picking up market share from its main competitors like Mark Kay, Avon, Nuskin, and Proctor and Gamble. It now holds a commanding 10.3 percent market share in China's booming cosmetics market, which is growing about 40 percent a year.

Riding that wave, Amway now employs 6,000 direct employees and an estimated 200,000 sales representatives across China.

“People interested in working in direct selling definitely prefer Amway, because it has such a wide product portfolio and massive marketing campaigns,” Huang said.

But it wasn’t always easy selling the American way in China.

In 1998, the company was shut down by the Chinese government. Officials claimed that direct sales companies like Amway were providing cover for illegal pyramid schemes, which were widespread in the 1990s and resulted in thousands of people losing their life savings.

Other officials thought the company’s actions were even more sinister. The practice of recruiting new salespeople through existing ones was creating a secret society or, as one member of the State Council implied, "an evil cult" within China.

After three months of lobbying, Amway negotiated a compromise. It would survive in China by opening up retail shops, the only such ones in the world, and would have to make all sales representatives direct employees, garnering wages only for their sales and not their recruits. In 2005, the government eased restrictions further by allowing some home-to-home sales.

More than 10 years after the original ban, Amway has learned to adjust to the new regulations by bending the rules. The vast majority of sales at Amway’s retail stores are to its salespeople, who use them as a distribution center.

“You need a special card to buy products in the store and only sales representatives have cards,” said Chen. “If someone off the street comes in to buy something at the store, they have to tell them who their salesperson was so that we can get a commission.”

According to Chen, the company has also worked out a way to circumnavigate the recruitment incentive ban. It gives employees a bonus linked to performance – the bonus happens to be 40 percent of their recruits’ sales, she says.

But none of this has made Amway a company non grata in the eyes of the state — far from it. In a reversal of fortune, Beijing now sees Amway as model company in helping the Chinese economy through increasing domestic consumption on a grand scale. In fact, 4,266 Amway China employees were recently sent to Taiwan amid heavy publicity as one of the mainland’s first tourist groups to the island.