A Utah-based direct marketer of cosmetics and nutritional supplements makes China its growth engine. What could go wrong? Plenty. Nu Skin Enterprises saw its market cap cut nearly in half this week after a Chinese newspaper described its sales tactics as “brainwashing”. Chinese regulators will investigate. The company, while denying impropriety, has said the review will hurt sales. A direct sales company can resemble a pyramid scheme, or be one, and it can be hard to tell the difference (ask Bill Ackman about Herbalife). But the Nu Skin story is also about the perils of doing business in China.
Nu Skin had been on a spectacular run. The company had forecast 2013 earnings to rise 60 per cent. The shares were up 250 per cent since the beginning of 2013. Greater China, including Taiwan and Hong Kong, is Nu Skin’s fastest-growing region, with revenues expected to jump 145 per cent. China would account for two-fifths of its $3.2bn revenue.
Nu Skin’s annual report states that the “regulatory environment in China is complex”. Indeed. The company’s Chinese business model departs from its standard elsewhere, because China prohibits “multi-level” compensation where distributors can be paid commissions for selling products to other distributors (often a sine qua non of pyramid schemes). Rather, Nu Skin books revenue through retail sales and via direct sales to end-consumers in China.
Nu Skin spends 600 words in its filings on the risks of doing business in China, noting a “lack of clarity in the rules regarding direct-selling activities and differences in customs and practices in each location”. Paragraphs of warnings and Chinese scandals at bigger multinationals including Avon and JPMorgan did little to spook Nu Skin investors. But its guilt or innocence is not the key. Rather, the opacity of Chinese rules and their unclear enforcement require that investors show vigilance.
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