China plans to tighten rules on how direct-sales companies train sales staff and introduce products, as authorities probe allegations of abuses by Nu Skin Enterprises Inc, two people familiar with the matter said.
The Chinese 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, said the people, who asked not to be identified as the matter is not public.
Tighter restrictions stand to affect the China operations of direct-selling companies including Amway Corp, Herbalife Ltd 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 last year, and postpone its full earnings release.
“Direct selling companies use a lot of independent people to get members to boost sales,” Shanghai-based China Market Research Group analyst James Roy said. “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 on Jan. 17 after the government announced the probe following a report in the Chinese 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 on Feb. 7 and posted on its Web site yesterday.
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 US politicians and policymakers to lift the ban as China negotiated to enter the WTO.