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China Will Tighten Direct Sales Rules

February 18, 2014

Closer scrutiny of a $15 billion industry

The direct selling business in China has doubled to nearly $15 billion since 2008, but with allegations of abuses by Nu Skin Enterprises, China  plans to tighten rules on how direct-sales companies train sales staff and introduce products.

According to a Bloomberg report, China’s State Administration for Industry & Commerce is drafting rules that would regulate sales-force training, monitor marketing meetings and tighten application procedures when direct sellers seek to enter new regions in China and offer new products.

Tighter restrictions stand to affect the China operations of direct-selling companies including Amway Corp., Herbalife and Mary Kay Inc. The probe into Nu Skin led the company to promise a review of operations in China, where it got more than half its revenue in the three months ended in September, and postpone its full earnings release.

“Direct selling companies use a lot of independent people to get members to boost sales,” James Roy, a Shanghai-based analyst at China Market Research Group. “That issue of assembly is not something that the government is necessarily used to. And these are happening outside of the eye of the government.”

Shares of Provo, Utah-based Nu Skin, a seller of skin-care products, plunged the most in more than nine years Jan. 17 after the government announced the probe following a report in the Communist Party’s official People’s Daily newspaper that the maker of skin-care and nutritional products is operating a “suspected illegal pyramid scheme.”

China should “severely” crack down on pyramid schemes and strictly regulate direct sales, the country’s State Council said in a notice dated Feb. 7 and posted on its website.

In a Jan. 21 letter to customers, Nu Skin said it would review employee and sales-force practices and take “corrective actions.” Nu Skin Chief Executive Officer M. Truman Hunt said in an earlier interview the company is “absolutely not” a pyramid scheme.

“We remain committed to working cooperatively with the government to ensure long-term, sustainable growth in this important market,” Nu Skin said in response to an e-mail seeking comment. “We are dedicated to operating in full compliance with all applicable regulations as interpreted and enforced by the government of China.”

China banned door-to-door sales in 1998, saying it wanted to end “a decade of rampant pyramid sales abuses.” The country lifted the ban seven years later. Amway and other direct sellers lobbied U.S. politicians and policy makers to lift the ban as China negotiated to enter the World Trade Organization, Audie Wong, president of Amway’s business in China, said last year.

Amway is the biggest player in China's direct sales market with a 30% share. China’s Lee Kum Kee Co. was second, with cosmetics seller Mary Kay ranked third and Nu Skin fourth with a 6.6% share.

In China, Nu Skin’s more than 40,000-strong sales force sells weight-loss kits and skin cleansers in more than half the country’s provinces and municipalities, according to Hunt.

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