Multi-level Marketing’s Deep Roots in Taiwan – Taiwan Business TOPICS

Despite some negative public attitudes, this business practice has been highly popular with local consumers and would-be entrepreneurs.

Few businesses face greater reputational
challenges in Taiwan than the multi-level marketing (MLM) industry, also known
as network marketing or direct selling. Past unethical practices by a minority
of companies have caused the industry to be heavily regulated, and many
consumers are leery of the business model, identifying it with a pyramid scheme
(老鼠會 or “mice club” in Chinese).

“In
terms of both public attitude and the regulatory environment, conditions in
Taiwan are unfriendly,” says Ceasar Chen, general manager of Herbalife
Nutrition Taiwan, an MLM company specializing in nutritional supplements.

Yet despite those
disadvantages, MLM has done extremely well in Taiwan. A 2018 survey by the Fair
Trade Commission, the industry regulator, found that slightly over 3 million
Taiwanese – equal to about 13% of the total population – had at least one MLM business connection in the
previous year. In the U.S., where the MLM concept is believed to have
originated, the proportion of the population engaged in the sector is less than
half the Taiwan level.

The survey of 346
direct-selling companies also showed total sales in the previous year of NT$83
billion (US$2.75 billion), ranking Taiwan tenth in the world, ahead of some
larger economies, including the UK. Dietary supplements accounted for 60.7% of
the revenue, followed by beauty-care items (15.7%) and cleaning products
(5.4%).

Although the industry in
Taiwan for many years was regulated under the Fair Trade Act, a dedicated
Multi-Level Marketing Supervision Act (MLMSA) was passed in 2014. The law
recognizes that the business model is based on individual participants’ enlisting of new
entrants into the enterprise – thus creating multiple levels of sales
personnel.

But whereas pyramid schemes
prioritize the recruiting of “downlines,” whose sales and recruiting efforts generate
income for the “uplines” who brought them into the company, the MLMSA outlaws that kind of
organizational structure. Article 18 of the law stipulates that the major
income of MLM enterprises must come from “promoting and selling goods or services at
reasonable market price,” rather than relying mainly on earnings from the
introduction of new participants.

The 2018 survey found
conflicting evidence regarding growth in the industry. The sales figure of
NT$83 billion represented a 6.31% decrease from the previous year, the first
decline in 10 years. At the same time, the figure of 3,049,000 Taiwanese
participants in MLM programs represented an increase of 6.6% from a year
earlier. Of those participants, 962,000 were newcomers to the industry,
indicating considerable distributor turnover.

Typically the MLM enterprises
includes two types of participants – those who simply wish to buy the products and
those who want to build a business by selling to others. Herbalife’s Ceasar Chen
suggests that Taiwanese are drawn to MLMs for the same reason the island’s economy is
dominated by SMEs. “The entrepreneurial spirit is very strong here,” he says. “Many people would
rather be a boss than work for a company.”

A bit of background

Shirley Chen, general manager
of Amway Taiwan, notes that the industry has been impacted by a small number of
“unscrupulous
operators who don’t abide by business ethics, even though “some of them aren’t actually direct-selling companies but are
mistakenly regarded as such.” She stresses that “what we want is a clean and fair market
environment.”

Amway began operations in
Taiwan in 1982. At that time, “local media and the public were not very
friendly toward foreign direct-selling companies,” Shirley Chen says. But “the concentrated
cleaning products and nutritional supplements we brought into Taiwan aroused
the awareness of local consumers to environmental protection and the concept of
health foods.” Taiwan is now one of Amway’s top six markets, with around 360,000
registered Taiwanese members and Amway Business Owners (ABO).

At the same time, the growth of e-commerce has been a challenge – and has likely been a major factor in the recent slide in MLM revenues. “All e-commerce and traditional retailers are our competitors,” says Shirley Chen. “Amway Taiwan launched an e-commerce platform in 2012. We’re still optimizing various one-stop mobile services and integrating mobile aids that help ABOs develop their businesses.”

A moment of levity at an Amway training session. Photo: Amway

Last September, Amway also introduced a new compensation policy that allows ABOs to earn a higher income in the initial stage of their business. “To meet the needs of today’s gig economy and part-time entrepreneurship, we provide more than 100 free training courses to help ABOs learn product and business administration knowledge,” Shirley Chen says.

Eddy Chai, a native of the
Malaysian state of Sarawak, speaks highly of the Amway experience that started
him on his MLM career. While running a restaurant in British Columbia in the
late 1970s, he was invited to become a distributor by a customer’s son. Soon
afterward he made his way to Taiwan, where Amway was preparing to launch. “I was making
NT$70,000 to $80,000 per month [in the early 1980s],”
he says, noting that this was then
far more than the average salary in Taipei.

Shirley Chen says that of Amway’s global top 10 ABOs, four are from Taiwan. The best known is Holly Chen, an ex-teacher profiled in the Wall Street Journal on February 15, 2012. Estimates of her MLM earnings have been as much as US$8 million a year. She has also made millions from training sessions and rallies.

Among the Taiwanese who prefer
MLM to a conventional career is Hsinchu resident Tiffany Yeh. Returning from
graduate school in Missouri in 1992, Yeh took a job at the Industrial
Technology Research Institute. That same year, a cousin introduced her to Nu
Skin Enterprises, which had just established its Taiwan branch.

Impressed with both the
company’s
skin-care products and its philosophy, Yeh signed up as a representative right
away. Twelve years later, she quit her job to focus on Nu Skin sales full time.
Making lots of money was not her main goal, she says. Rather, she savors the
flexibility and freedom of working for herself and enjoys the satisfaction of “helping my downlines
develop their businesses.”

Asked how many hours per week
she puts into Nu Skin, Yeh finds it difficult to come up with the answer.
Defining where socializing ends and work begins is not easy, she points out. “Sometimes, when I’m with friends, they
buy products or ask me questions about doing Nu Skin,”
says Yeh. “Overall, I think I
spend more time retailing than recruiting.”

Ceasar Chen says that at
Herbalife only 30% of the approximately 100,000 members are business builders.
Most of the others enjoy the discounts and other benefits of memberships but do
not sell. Compared to other MLMs in Taiwan, Herbalife distributors are somewhat
younger, more likely to be female, and more likely to be “active” (defined by the FTC
as ordering products at least once per month), he says.

Herbalife’s products fall into
three categories: weight management, healthy aging, and sports nutrition. “Right now,
sports-related products account for just a few percent of our revenue in
Taiwan,” says
Ceasar Chen. “But long term, we can see the potential.” 

Because selling such products
requires knowledge and ongoing support, “we equip our distributors with nutritional
information,” he says. “We don’t discuss medical claims or the treatment of diseases, but we do talk
about how a balanced, nutritious diet can prevent diseases. We need
distributors who care, who can build relationships and create communities. This
is what we call the ‘distributor difference.’”

In Taiwan, as elsewhere, “nutrition clubs” are central to
Herbalife’s
strategy. Close to 1,000 have been established across the island. Typical
attendance is 15 to 20 people, each paying a small amount to enjoy a Herbalife
shake. Often, there is a workout session they can join. Distributors receive
advice and posters from the head office, but need to find and rent venues, pay
utility bills, and promote their clubs.

“We
educate our distributors that if you want to build a sustainable business, nutrition
clubs are the most effective DOM [daily operation method],” says Ceasar Chen.

Domino effect

Eddy Chai, who between 1987
and 2008 served as Forever Living’s managing director in Taiwan, advises people
thinking of joining an MLM to carefully examine its marketing and rewards
policies. Few network marketing companies offer plans that are both fair and
viable over the long term, he says.

Attractive rewards may
encourage a distributor to recruit downlines, but if the latter cannot make
money for themselves, sooner or later they are likely to give up, Chai says. If
revenue from the downlines dries up, the distributor himself may well quit, in
turn producing the “domino effect” of reducing the income of the person who brought him or her into the
company.

In 2008, Chai left Forever
Living and set up an MLM enterprise called Diamond Lifestyle Corp. where he
continues to be the CEO.  While the
company is doing well in Vietnam and the Philippines, Chai says, it has yet to
make notable progress in Taiwan. “Sad to say, we haven’t found ‘the general’ – the key person who will make us boom here,” he laments.

According to Shirley Chen, the
number of Taiwanese involved in Amway has remained relatively constant in
recent years at around 360,000. “Some 60% of them are ABOs who can sell or buy
Amway products and sponsor others to be ABOs or members. They receive bonuses
and non-cash awards once they reach a certain level,”
she says. “The other 40% are
consumer-members who aren’t allowed to sponsor downlines or receive bonuses.”

Only around 20% of ABOs
actively sell products and recruit downlines, but Chen says Amway Taiwan
continues to attract fresh blood. “Our mobile and social commerce strategies are
attracting ‘slash youth’ [those pursuing a combination of different occupations] and the number
of under-35s among newly joined ABOs has increased to nearly 40%.”

Whether it is because they
lack salesmanship or lose interest – or, as some critics allege, the industry draws
people in with unrealistic tales of breathtaking financial success – only a minority of
Taiwan’s
MLM member-representatives make any money for themselves. The FTC survey found
that just 27.15% received payments in 2018, with the average payment paid over
the year coming to just NT$46,427.

Not all who fail to get rich
through MLM turn their back on entrepreneurship. Chai is convinced that some
people who cut their teeth doing network marketing learn skills that they put
to good use in later ventures. He notes that three former distributors he
worked with now run their own listed companies, two in Malaysia and one in
Taiwan.

Shawna Wang, president of
doTERRA Taiwan & Hong Kong, says that over 90% of the company’s wellness advocates
(WAs) in Taiwan are “general consumers who do not initially see doTERRA business as their
career.” Rather,
“they
join because of health benefits they’ve gained from our products. They consist
mostly of mothers who choose a natural way to health to protect their family
members.”

doTERRA sells essential oils
and related products. The company’s Taiwan branch, its first outside the U.S., “has recorded
double-digit growth for nine consecutive years and has so far accumulated
approximately 170,000 WAs,” Wang says. She notes that the expansion has
been achieved despite some regulatory hurdles. “Many popular U.S. products aren’t allowed here,
because of restrictions on the applications of and ingredients used in
essential oils. These rules became stricter after the Cosmetic Hygiene and
Safety Act took effect this July.”

“Regulations
in Taiwan concerning nutritional products are very strict, and sometimes we can’t be as specific as
we’d
like about the function of a product,” which sometimes causes confusion for consumers,” says Herbalife’s Ceasar Chen.

He cites lutein, a carotenoid
found in spinach and yellow carrots, as an example. “Here, we can’t promote it as beneficial for the eyes, but in
the U.S. and other markets we can,” he says. Vendors who break the law are subject
to relatively modest fines, which some smaller companies factor in as a cost of
doing business. “Herbalife cannot risk the damage [to our reputation], so we act more
conservatively,” says Ceasar Chen. “But we’ve discussed with the authorities what claims
we can make, and we’ve made some progress.”

It takes at least 18 months to
bring a new product to market in Taiwan because the testing and labeling
requirements are so complex. Ceasar Chen, who is co-chair of AmCham’s Retail Committee,
says the authorities have been receptive to suggestions that the process be
streamlined. 

Another difficulty, says Amway’s Shirley Chen, is
that the tax code is unfair to ABOs without downlines, because in reality they
are merely consumers of Amway products. She also urges amendment to the MLMSA
to end the current prohibition on the use of electronic contracts with sales
representatives. “Compared to paper documents, e-documents are easier to preserve,” she says. “Besides, the use of
e-documents matches the current trends of digitization and environmental
protection.” 

She also advocates abolition
of the special reporting system that requires MLM companies to file with the
authorities when launching new products. “Our products already have to obey labeling
regulations and ingredient requirements, so we hope the authorities can treat
us and FMCG [fast-moving consumer goods] companies the same,” she says. “This would avoid
needless duplication of administrative processes and provide a fairer
development environment for the industry.”

Alex Lin, Herbalife Nutrition’s government affairs
manager, explains that the law also requires MLM companies to report in advance
to the FTC every promotion, public event, or amendment to company rules
affecting distributors. The government agency takes this requirement seriously
and sometimes seeks clarification before giving permission via email. “Why should we be at
a disadvantage competing with retail companies that don’t need to do this?” he asks.

Amway’s Shirley Chen is
the current chair of Taiwan Direct Selling Association (TDSA), whose 50 member
companies account for an estimated 50% of the total revenue of Taiwan’s MLM industry.
Since its founding in 1990, the group has worked “to enhance professionalism, dispel people’s doubts about
direct selling, and enhance trust between companies and their distributors.” Member companies
follow a code of ethics which Chen describes as “stricter than existing national standards.”

Acknowledging that more than
300 MLMs active in Taiwan have yet to join the TDSA, Ceasar Chen says: “Getting more
companies to participate would be the first milestone we need to achieve if we’re to overcome the
industry’s
negative legacy. Through TDSA, we can prevent problems and regulate ourselves,
so companies won’t do anything that harms the MLM industry.”

TDSA has worked with the
government-backed Multi-Level Marketing Protection Foundation (MLMPF) to
establish a mechanism to handle disputes between direct-selling companies and
participants. For its part, the FTC – which did not respond to an interview request – devotes
considerable attention to the direct-sales industry. Of the 72 fines it imposed
between January and November 2019, 41 were against MLM companies.