Alibaba has a lot of fence mending to do with govt, customers

February 02, 2015 10:44
Jack Ma may have to reconsider how Alibaba responds to criticism from regulators. Photo: Bloomberg

The recent public quarrel between Alibaba Group, China’s largest e-commerce firm, and the State Administration for Industry and Commerce (SAIC), a market regulator, has all the makings of a game changer for the country’s burgeoning e-commerce industry.

The squabble was triggered by a product quality report released by SAIC on Jan. 23, which claimed that less than 40 percent of the goods tested on Taobao, Alibaba’s flagship online customer-to-customer platform, were authentic.

Taobao was the worst performer among major Chinese online shopping sites in protecting trademarks and other intellectual property rights, the report found.

Alibaba fought back, questioning the procedure and methodology of the tests, saying Taobao had been treated unfairly.

The internet giant said it would lodge a complaint against Liu Hongliang, a director general of SAIC, whose department conducted the quality checks.

What worsened the situation was SAIC’s claim that the testing was done before Alibaba’s listing in September and the results were withheld until recently to avoid disrupting the firm's initial public offering, the world’s largest.

The spat has created the most serious crisis for Alibaba since its phenomenal debut on the New York Stock Exchange.

On Wednesday and Thursday last week, Alibaba’s market value evaporated by US$33 billion.

The decline in the stock price reduced the wealth of Jack Ma Yun, Ablibaba’s chairman, who had to yield his title of richest man in mainland China to Wang Jianlin, chairman of the conglomerate Dalian Wanda.

What was worse was that five US law firms decided to investigate the issue on behalf of investors in Alibaba to determine whether the firm had made inadequate disclosures or false statements.

This means Alibaba could face a class-action suit.

Ma went into crisis management mode and met SAIC chief Zhang Mao in Beijing on Friday.

SAIC said in a statement released after the meeting that the two sides promised to join hands to deal with fake goods online and acknowledged each other’s important role in doing so.

The meeting appeared to provide an opportunity for a friendly handshake, which put a temporary end to the weeklong quarrel.

However, the impact of the spat will be profound.

First is the damage to Alibaba’s image.

The company has won the hearts of ordinary people in mainland China with its innovative and revolutionary products.

Yu’ebao, its online money market fund, for example, challenged the monopoly of the state banks.

Consumers like Alibaba because of its serving-the-masses approach and defiance toward unfair market monopolies and regulation, not to mention the user-friendliness of its platforms and the convenience it has brought to people's lives.

The firm has also won the heart of some top policymakers, such as Premier Li Keqiang, in whose eyes Alibaba represents an industry that is helping the economy make the transition from relying on manufacturing and exports to being driven more by consumption.

The support from both top and bottom pampered Alibaba.

Whenever a market regulator accused it of wrongdoing, the company would fight back with tough words.

Most of the time, the public and internet users voiced their support for the firm.

But this time turned out to be different.

Many netizens criticized Alibaba’s arrogance rather than expressing their sympathy.

The change in sentiment can be easily understood. Alibaba is in the wrong this time.

Fakes and counterfeits are bad for consumers. They also mean lost sales at bricks-and-mortar retailers, who often have a better track record for the authenticity of their goods.

Alibaba must learn its lesson and address the quality issue more seriously.

Fortunately, Alibaba’s fundamentals won’t be shaken by the spat with SAIC.

The handshake between Ma and Zhang showed that Alibaba’s leadership position was solid, as it has retains the favor and backing of top leaders.

However, a seed of mistrust has already been sowed.

This seed can grow into a tree if Alibaba does not refine its strategy for engagement with the regulator, especially when it has done something wrong.

Top policymakers may change their mindset in regard to the regulation of the e-commerce industry.

Previously, top policymakers showed great tolerance toward the industry by imposing fewer or lighter restrictions and regulations in the hope of encouraging innovation.

The recognition last year of online financial products such as Yu'ebao is a good example.

But with the Alibaba-SAIC spat as a turning point, this tolerance may gradually decline. Regulation of the e-commerce industry could be tightened.

Market regulators such as the Ministry of Commerce, the Ministry of Finance and SAIC are likely to accelerate the pace of drafting various e-commerce laws to check rampant counterfeiting and tax evasion.

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The writer is an economic commentator. He writes mostly on business issues in Greater China.