18 July 2018
State broadcaster CCTV reported that the chiefs of SAIC and Alibaba met at the end of last month. Photo: CCTV
State broadcaster CCTV reported that the chiefs of SAIC and Alibaba met at the end of last month. Photo: CCTV

What lies behind Alibaba’s Taobao fake goods tussle?

Dramatic developments have occurred in the past week in the long-running feud between China’s State Administration for Industry and Commerce (SAIC) and Alibaba Group Holding Ltd., which is at the apex of its business.

SAIC, a ministry-level registration and licensing authority that oversees virtually all business and commercial activities in the mainland, published on Wednesday a white paper on how it had executed its regulatory duties with respect to Alibaba.

That document was a disaster for the e-commerce giant.

It contained a slew of serious allegations against certain vendors on Alibaba’s Taobao platform that were suspected of fraud and pyramid-selling scams.

SAIC’s biggest charge is that up to 63 percent of the goods sold on Taobao are counterfeits or knockoffs.

Alibaba’s share price in New York tumbled 4.5 percent during that day’s trading and plummeted a further 9 percent the following day.

The firm rules the roost in China’s online marketplace, commanding a market share of 80 percent.

Communist cadres like to hail it as the epitome of China’s economic restructuring and a source of national pride in the e-commerce industry.

Thus SAIC’s sudden attack is a mystery.

One possible explanation is that Beijing aims to purge the market of fake products and copycat goods. Some even link the initiative to President Xi Jinping’s graft-busting drive.

But given that the Chinese economy will surely have to take a battering if such an anti-counterfeiting clampdown is to be fully carried out, I see no reason for Beijing to suddenly move consumer protection or intellectual property rights to the top of its agenda.

A sensible explanation may be that the bitter tussle between SAIC and Alibaba has severely worsened, resulting in the release of the white paper.

The wrangling started in July last year, when both sides reportedly met behind closed doors in the run-up to Alibaba’s debut on the New York Stock Exchange.

SAIC officials apparently demanded that fake items must be removed from Taobao. But the regulator agreed to hold its fire while Alibaba readied itself for the initial public offering in September.

At the end of the year, Alibaba announced that as many as 90 million fake items or goods suspected of infringing intellectual property had been removed from the e-shops on Taobao.

The firm said it spent 1 billion yuan (US$160 million) on the “cleanup”, involving 1.31 million vendors.

Major government mouthpieces, including the People’s Daily, on its website reported Alibaba’s claims.

Then SAIC broke its silence on Jan. 23, with a report that examined goods sold online during the second half of 2014.

It found that Taobao had the most fake products among all the e-commerce platforms it inspected.

Alibaba fought back in a post in its Weibo account suggesting SAIC had used a biased statistical approach.

In a rare move, the firm denounced Liu Hongliang (劉紅亮), director of SAIC’s internet supervision office.

SAIC’s white paper appeared the next day, resulting in the biggest slide in Alibaba’s stock price since it went public.

On Thursday, the day Alibaba announced its fourth-quarter results, mainland media were abuzz with news that US investors are considering a class-action suit against Alibaba for failing to disclose the July meeting with SAIC in its IPO documents.

Obviously the gloves are now off.

The unusual, open tit-for-tat spat between a state department and a giant firm may reflect the fact that the government watchdog, which is trying to achieve control over the rapidly growing industry, is tired of Alibaba, with its economic clout, defiantly challenging its authority.

It’s also possible that someone behind the scenes plotted the whole thing to profit by short selling shares of Alibaba before the SAIC dropped its bombshell.

Another theory interprets SAIC’s move as part of just another factional struggle among the mainland’s top leaders and princelings (see note below).

Editor’s note:

Rumors have been circulating that Alibaba is backed by members of the “Shanghai clique”, with former president Jiang Zemin as its core figure.

Taiwan-based Liberty Times reported that Jiang’s grandson Jiang Zhicheng (江志成) and former premier Wen Jiabao’s son, Wen Yunsong (溫雲松), hold stakes in the firm.

Alibaba chairman Jack Ma Yun is said to have close ties with Zeng Qinghong (曾慶紅), a former vice-president and Jiang’s right-hand man.

Some observers believe that Xi wants to reduce the influence of Jiang and his associates, so as to consolidate his own power. As a result, firms linked to the Shanghai clique face political headwinds.

Others say some senior officials are not happy with Ma’s strategy to diversify Alibaba’s business (its Yu’ebao money market fund has been eating the lunch of traditional lenders).

Some may also be rankled by Alibaba’s high profile and Ma’s persona as a rock star among business leaders, which he has not been eager to play down.

This article appeared in the Hong Kong Economic Journal on Feb. 2.

Translation by Frank Chen

– Contact us at [email protected] 


Former full-time member of the Hong Kong Government’s Central Policy Unit, former editor-in-chief of the Hong Kong Economic Journal

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