BEIJING — As Alibaba faces continued criticism from regulators in China and the United States over its business practices, analysts say it could be challenging for the e-commerce giant to overcome some problems, particularly what appears to be an endemic presence of counterfeits and gray-market products on its consumer-to-consumer marketplace platform, Taobao.com.
This story first appeared in the April 20, 2015 issue of WWD. Subscribe Today.
The platform is renowned among Chinese shoppers for its vast array of goods for sale, ranging from pets to fake college diplomas and counterfeits, or very close replicas, of fashion brands.
“It is very hard to eradicate the problem,” John Fang, an analyst with the Shanghai-based China Market Research Group, said, adding that heightened scrutiny could be related to China’s slowing economy, which expanded 7 percent year-on-year on the first quarter, the slowest growth in six years. In March, retail sales rose at the slowest pace in nearly a decade.
“The brands are hurting,” Fang said. “It is very hard to do business in China right now, so if the fake products are out there, it is making business even more difficult.”
Torsten Stocker, greater China partner at A.T. Kearney in Hong Kong, said it will be “difficult” for Alibaba to eradicate goods on Taobao that are blatant counterfeits or products that brands see as knockoffs, and thus, potentially undermining their legitimate sales channels to mainland shoppers. “If you take 5,000 storefronts down that sell these products, they will just pop up under a different name or company again,” he said. “Getting to the actual producers is not easy.”
Last week, at an American Apparel & Footwear Association conference in New York, the U.S. Trade Representative’s office joined in on a chorus of criticism that has been ongoing for months against Alibaba, which had a record-breaking initial public offering in New York last year. At the AAFA conference, a USTR representative said Alibaba has “essentially reversed course” on its efforts to remove counterfeit items from Taobao.
A week earlier, the AAFA filed complaints with the USTR and the U.S. Securities and Exchange Commission that claimed counterfeiting is worsening on Taobao and called for immediate action. In response to the AAFA complaint, Alibaba said in a statement that it is “dedicated to the fight against counterfeits because the health and integrity of our marketplaces depend on consumer trust,” adding that the e-commerce giant has been working closely with the AAFA since 2012 to discuss how Alibaba can address the sales of counterfeit goods online.
Alibaba declined to comment on the USTR allegations.
In 2012, the USTR removed Taobao from its “Notorious Markets” list and declined to re-list the site in its 2013 and 2014 reports. Alibaba said it has hired around 2,000 employees to help with intellectual property and counterfeit issues. The company said it has more than 5,000 volunteers monitoring Taobao for fakes, and, in 2013 and 2014 spent $160.7 million to battle intellectual property infringement and enhance consumer protection.
Additional scrutiny came from Beijing earlier this year, with China’s State Administration of Industry and Commerce, or SAIC, releasing a report that accused Alibaba employees of taking bribes and criticizing the company for not doing enough to crack down on the sale of counterfeit products.
Meanwhile, at the end of January, a lawsuit was filed in New York against Alibaba, claiming the e-commerce giant made misleading statements and hid the fact that it met with Chinese regulators months before the company’s IPO in September. The plaintiffs are alleging Alibaba met with SAIC in July 2014, just two months before its IPO, and that regulators raised concerns about possible illegal business practices.
Stocker said the increased criticism from American regulators could stem from the fact that Alibaba has come to represent China’s e-commerce industry abroad. With pressure on the company from Beijing, in addition to the announcement of a Chinese government investigation looking into business practices across China’s online shopping sector, it is an opportune time to step up criticism of the company.
Alibaba “is just so big and just so visible,” Stocker said. “If you are big and visible, you are the target of any underlying systematic criticism. Who else do you go after if you don’t go after them? If you are hoping for some change or some enforcement, then Alibaba is probably your best bet.”
“Everyone sees this as a moment of weakness for the company,” Mark Natkin, managing director of the Beijing-based technology consultancy Marbridge Consulting, said. “It is coming under attack, and therefore is vulnerable and that gains momentum as people start to look into the company.”
Natkin also said the challenge of eradicating counterfeit products from Taobao is an overwhelming one. “There is this vast ocean of stores,” he said. “There is just so much you have to sift through. It is sort of an impossible task.”
He added the question of what could happen to Taobao in the future “is the question that everyone always wonders.”
“We have long felt that Taobao still plays this very important role for the company,” Natkin said. “Even just in terms of a traffic hub, it is so enormous and generates traffic for so many other [Alibaba] platforms.”
Alibaba has long been seen as a symbol of national pride for China’s IT industry, which is why Chinese government scrutiny has been seen as surprising. Natkin said that it is hard to pinpoint what, exactly, is going on behind the country’s opaque political scene, but the fact that Alibaba is rapidly expanding its business into sectors long dominated by big state-owned enterprises or bureaucrats, such as banking, health care and public services, is one possible explanation for Beijing’s criticism.
“Alibaba is getting into a lot of areas that are sort of government territory,” Natkin said. “It is getting powerful in those areas. That is perceived by some as a threat.”
“It is unclear how long Alibaba will have to weather this or what measures they will have to take to convince people to stop attacking them,” he added. “My guess is that they still have a stretch to go. It is not necessarily great for them, but at the same time, in terms of the overall ecosystem, they are remarkably well-positioned.
“They probably can withstand a little longer,” Natkin said.