Multi-level Marketing’s Deep Roots in Taiwan

doTerra Taiwan training event. Photo: doTERRA

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.