The failure of AMWAY Corp’s marketing strategy in China
3 mai 2006
WHAT IS AMWAY ?
Amway Corporation was founded in 1959 in Ada, Michigan, USA, by two entrepreneurs. In their first full year of business, Amway’s sales were more than half a million dollars. Their concept for an innovative business opportunity, centered around person-to-person marketing, established itself as a leader among one of today’s fastest-growing industries.
Today, more than 3.6 million independent business owners distribute Amway products in more than 80 countries and territories. Indeed, the Amway Business can be found in Americas, Europe, South Africa, Greater China, Korea and South East Australasia.
Amway offers a complete range of products for home care, laundry care, personal care, skin care and cosmetics, nutritional supplements, hometech and fragrances.
ANALYSIS OF THE SLEPT FACTORS :
Market entry barriers are critical factors that influence entry decisions and a firm’s performance. In the course of international expansion, a firm encounters new factors such as new government regulations, new legal and financial systems, new cultures, new languages, greater distances, new modes of transportation, currency exchange rates and their vagaries.
The environmental influences on international marketing that Amway must consider :
Economic : Fuelled by foreign direct investments, China’s economy is beginning to dominate the Asian economic landscape. Indeed, China springs past tiger nations. It has had positive GDP growth in the last five years, while other Asian economies have stalled. China’s economy is growing at a rate of about 8 percent, the fastest in Asia. It means that this country is certainly profitable. But Amway must ask itself if the market demand is important and if it will be competitive.
Indeed, China is an emerging economy but a dual economy too, with a wealthy urban professional and a poor country people. The gap between rich and poor has grown almost as fast as overall income, meaning that inequality is increasing nearly with the country’s development. There are huge income discrepancies that are emerging within social groups and between regions.
The Chinese market has attracted foreign investors because of its huge size and market potential. Some predict that China will become in few years the world’s largest economy but that could fall flat due to political circumstances.
Political : The Communist Party of China has transformed itself. It has declared that it represented capitalists as much as workers and peasants. The Old China defended the working class against the capital class. China has just begun its transition to become a democratic country. China’s new leadership has come to power facing enormous economic, environmental, political and social challenges at home. So, Amway faces the challenge to interpret the very different cultural and political implications of their presence in a changing communist country.
Social : The Chinese population = 1.2 billion of people. The past decade has seen a phenomenal rate of growth in China. It represents an important potential of customers for a firm.
Cultural : The consumer buying process is consistent across cultures. The level of consumer involvement : The Chinese are seen as having a low level of involvement when purchases are for private consumption but a high level of involvement when they are buying products for their social or symbolic value. Since the Chinese greatly value social harmony and smoothness of relationships within the extended family, the social significance of products are highly important be it to express status, gratitude, approval or even disapproval.
The level of risk consumers associate with a purchase varies enormously across cultures and as such it is an important variable in consumer behaviour. It will determine whether a consumer will go for the comfortable purchase or is willing to try new products and services.
The Chinese are sensitive to social risk and the loss of social status if a wrong buying decision is made. The level of brand loyalty found in a market is also closely related to the perception of risk. There are huge variations in attitudes to brand loyalty across different cultures.
In China, consumers are loyal, not really brand conscious and not really used to cross product comparisons, except the urban consumers, who have a wide recognition of foreign brand names. Indeed, there are sharp differences between rural and urban attitudes. On a national level, Chinese consumers prefer to buy domestically manufactured products rather than comparable foreign-made goods. But, consumers in big cities are less likely to favour domestic products than are consumers nationally.
And, typical Chinese consumers do not want to be amongst the first to try a new product. They are reluctant to be pioneers, especially for an expensive, unrecognised (in terms of brand) , foreign product.
Concerning the cognitive style ; the Chinese have a quite synthetic, concrete and contextual orientation in their thought patterns. Thus culture not only impacts on how we behave as consumers but on the whole decision-making process, advertisers, and marketing managers need to examine how they can exploit such nuances in building their global brands.
There is a cultural gap between the USA and China. Chinese cultural values are largely formed and created from interpersonal relationships and social orientations. Chinese nations tend to rely heavily on personal relationship (Guanxi) in business dealings.
A culture of Guanxi networking is already established. "Guanxi" means connections or relationship. Guanxi is essential in the initial stages of entering the Chinese market. For foreign investors who seek to do business in China, to understand the dynamics of Guanxi can contribute to the success of business.
Finally, Amway produces standard products to meet consumer needs in Japan, Philippines, Taiwan, Singapore..., but their product range may not be appropriate to China. Indeed, even if Amway has considerable experience in the Far East, the Chinese market is not a mirror image of these countries. Then, door-to-door selling and “party programmes” are not part of the Chinese culture.
All these aspects need to be examined to understand the consumer in any international market. If a company is to fully empathise with a culture they must pose a series of questions about buyer behaviour, culture and the suitability of various marketing communications approaches for that culture. The local distributor must understand the cultural drivers of its market.
Legal : Government policies are barriers in international markets. In China, policies and regulations are often applied inconsistently and can vary between regions. Both foreign nationals and Chinese officials themselves lack a solid understanding of China’s policies.
The key policies which act as barriers to entry relate to foreign exchange control policies and foreign investment policy. Concerning foreign exchange control policies, the state is responsible for formulating and promulgating the principles, degrees and regulations for foreign exchange control.
The acquisition of foreign exchange is a significant non-tariff barrier to doing business in China. Concerning foreign investment policies, China encourages joint ventures.
The barriers to access China’s distribution system make this system unstable : wholesalers at both the local and central levels, new collective and private enterprises and factories, as well as some foreign companies compete to distribute consumer products. Local ministry of commerce wholesalers traditionally served as intermediaries between the producer and retail outlets.
Foreign companies are not permitted to engage in wholesale trade.
A strict isolationist policy kept foreign goods and trends out of reach of the average Chinese person, because Chinese consumers have less abundant information and purchasing experience with foreign products, they may rely more heavily on information such as the producing country’s image in product evaluation.
Which consequences could this strategy have ?
In China, direct-selling operations function as a base for criminal activity. Indeed, the market is riddled with unscrupulous operators selling substandard goods with poor services, claiming to be legitimate direct marketers. So, Amway’s direct-selling techniques could scare the Chinese government and all direct selling could be ban ; it means that Amway China affiliate could have to make changes in its distribution methods in order to work with China’s regulations. Amway could have to revise its business plans to only sell products in retail outlets.
Concerning the personal sales, customers could receive discounts by paying a small annual fee, similar to buying a membership in a wholesale club. Goods could be sold by “sales representatives”. They will theoretically operate from the retail establishments. But most former distributors will probably continue to do business as usual, telling the retail centre they are purchasing goods for themselves and then re-selling them to customers on the rare occasions where there actually is an end consumer.
In fact, there is a cultural gap between an American company trying to use American sales tactics in a foreign country like China.
Technological : China has become a competitor for the medium/ high-tech industries that still power growth in its more developed neighbours, the Asian tigers. The internet and the access gained to the world wide web is revolutionising international marketing practices. This explosion of international marketing activity and the associated emergence of the global information highway will impact on all businesses. But the poor country people probably don’t have a computer and internet, and some don’t even have electricity at home.
ANALYSIS OF THE REASONS OF FAILURE :
1- Inability to find the right market niches
2- Unwillingness to adapt and update products to local needs : Amway produces standard products to meet consumer needs in Japan, Philippines, Taiwan, Singapore... but their product range may not be appropriate for China.
3- Not having unique products that are viewed as sufficiently higher added-value by customers in local markets : no added-value.
4- A vacillating commitment. It takes time to learn how to function in countries such as Japan : Amway had not considered the environmental influences on international marketing that could represent barriers to their entry in China.
5- Assigning the wrong people. Picking the wrong people or the wrong top team in an affiliate : no information
6- Picking the wrong partners : no information
7- Inability to manage local stakeholders. This includes an incompetence in developing a satisfactory partnership relationship with unions and governments : Amway had not developed a partnership/relationship with the Chinese government
8- Developing mutual distrust and lack of respect between headquarters and the affiliates at different levels of management : no information
9- Inability to develop ideas developed in one country to other countries worldwide : Amway tried to use American sales tactics in China, but cultural gaps are too important.
In conclusion, the barriers to market entry make China a challenging market for foreign enterprises. The possible modes of entry into the Chinese market include equity joint ventures, contractual joint ventures, joint exploration projects and wholly foreign owned enterprises. But, Amway must consider the environmental influences on international marketing, which are the SLEPT factors, especially cultural, political and legal factors.
It means that Amway must follow the culture rather than imposing itself, as its rival direct marketer Avon did. So it has to start practically from scratch in marketing the business in China, otherwise, the probable bans of the Chinese government could be dangerous for its activity. It should begin with new distribution methods in order to work with China’s regulations and adapting the products to local needs.