US report raps Alibaba's Taobao, others for pirated goods

The Chinese government accused e-commerce giant Alibaba of failing to crack down on the sale of fake goods, bribery and other illegal activity on its sites in a rare public dispute with one of the country’s most prominent companies.

The claims—which prompted Alibaba Group Holding Ltd. BABA -0.51% Wednesday to accuse a senior official at a government agency of misconduct and threaten to file a formal complaint—highlight a major risk for the company that last year raised $25 billion from global investors in the world’s largest initial public offering.

Alibaba has long grappled with allegations that Taobao, its biggest e-commerce platform, is rife with counterfeit goods. The accusations from the Chinese government could lend further force to those complaints and damage Alibaba’s reputation among investors and brands overseas, while the highly public spat could hurt the company’s relationship with the government, experts warn.

The government’s accusations are in a white paper made public on Wednesday by China’s State Administration for Industry and Commerce, but based on conversations between the agency and Alibaba officials in July. That was two months before Alibaba’s U.S. IPO, which valued the Chinese company at more than $230 billion. In the paper, the agency said it held off on disclosing details of the talk so as not to affect the IPO
The paper alleged that Alibaba turned a blind eye to the sale of fake cigarettes, alcohol and branded handbags by vendors on its marketplace sites, as well as the sale of restricted weapons and other forbidden items.

It alleged that Alibaba staffers took bribes from merchants and others seeking help to boost their search rankings and to get advertising space. It also alleged that Alibaba ignored the practice by some vendors of faking transactions to make their sales volumes appear higher.

The paper also said company officials did nothing to stop merchants from using tactics such as false and misleading advertising. It accused Alibaba of alleged anticompetitive behavior such as forbidding merchants to participate in rival sites’ promotions.

The report said the problems had grown to become Alibaba’s “greatest credibility crisis” since the company was established. Citing a Chinese phrase that refers to letting a small problem fester, the paper said, “for a long time, [Alibaba] didn’t pay sufficient attention to the issue and didn’t adopt effective measures, causing a neglected carbuncle to become the bane of its life.”

In response, Alibaba’s Taobao platform said it is “willing to assume the responsibility of fighting fakes” and that its effort “is far from complete.” But it criticized the inspection methods of a top SAIC official, Liu Hongliang, and said it would file a formal complaint with the SAIC.

“We believe director Liu Hongliang’s procedural misconduct during the supervision process, irrational enforcement of the law and obtaining a biased conclusion using the wrong methodology has inflicted irreparable and serious damage to Taobao and Chinese online businesses,” Taobao said in a statement.

An SAIC representative said the agency didn’t have an immediate comment
Alibaba also said it welcomed additional supervision, as well as greater efforts by law enforcement to crack down on fakes. Alibaba is a victim and not a beneficiary of counterfeit items, it said.

“We understand the difficulties faced by the regulatory authority in regulating a fast-changing innovative environment, but we hope the authority can see the millions of young people” taking risks, innovating and persevering as entrepreneurs, it said.

Alibaba has said that it spends more than $16 million a year combating counterfeits on its marketplaces.

The criticism comes as China has put increasing emphasis on intellectual-property protection as it tries to foster innovation and move away from an economy dependent on cheap manufacturing and big government spending.

Last year the Chinese government announced a campaign to address online infringement and counterfeiting that includes a significant focus on e-commerce.

“There’s no question that [the government has] concluded Alibaba isn’t doing enough,” said Joe Simone, a Hong Kong-based anticounterfeiting lawyer specializing in China, who called the government’s open criticism “sort of unprecedented.”

Alibaba is widely considered to enjoy a healthy relationship with the government, despite initiatives like online payments that have challenged the traditional supremacy of China’s stodgy state-owned banks. Speaking at the WSJD Live Conference in October, Alibaba founder and Executive Chairman Jack Ma said, “we create 14 million jobs for China. We are making all the banks change. So the government finally realized that we’re helping them.”

It wasn’t clear whether the SAIC’s accusations would result in further action. In the white paper, it said the July meeting “basically achieved the anticipated outcome.” It said SAIC officials would beef up their monitoring of Alibaba’s practices and build a system to better supervise online transactions.

Peter Luo, a portfolio manager at U.S. asset-management firm RS Investments, which bought Alibaba shares in the IPO last year, said the accusations were concerning. “I think this dispute could pose a serious risk for Alibaba,” he said. “It could damage not only Alibaba’s relationship with the government and regulators, but also the perception among consumers. If consumers lose confidence in Alibaba, its business will be affected.”

In its prospectus filed with U.S. regulators ahead of the IPO, Alibaba said it could face legal action or reputational damage from the sale of counterfeit goods on its platforms, even as it said it had taken steps to weed out those products. It doesn’t mention the July discussions with the SAIC.

In terms of the timing of the talks two months before the IPO, Mr. Luo said, “As an investor, we prefer more disclosure and transparency, especially when it comes to important issues like regulation and relationships with the government. And in this case, the issue seems very relevant to Alibaba’s core business.”

Alibaba representatives didn’t immediately respond to requests for comment on the disclosure issue.

Such a vehement response to a regulator is rare in a country where the Communist party controls both the government and the courts, and where successful appeals of government decisions are rare.

“Alibaba’s reaction is quite strong, and I would say somewhat unusual,” said Paolo Beconcini, a Beijing-based managing partner at Carroll, Burdick & McDonough who specializes in intellectual-property issues. “Normally, what you would do is negotiate with the government.”

He added, “I can’t say if Alibaba is responding to the [SAIC] report in the right way.”

The flare-up between Alibaba and the SAIC follows a report on fakes released by the agency. The report, dated last week, said it found a number of counterfeit items on Taobao, particularly among mobile phones and toys.

On Tuesday, Taobao said on its official Weibo social-media account that the SAIC survey was based on a small sample size and contained other flaws. The post, which was unsigned, was later deleted.

On Tuesday, SAIC defended its findings, saying it has an obligation to monitor and protect the marketplace.

The agency has a broad role in marketplace regulation, including overseeing trademark and corporate records issues, and has a role enforcing China’s antimonopoly law.

Taobao was long included on the U.S. government’s list of “notorious markets” known for common counterfeit goods. The U.S. removed Taobao from the list in late 2012, citing the efforts it had made to curb fakes. Still, some companies and others have since criticized Taobao and Alibaba’s other platforms for not doing enough to stamp out counterfeit and gray market products.

Alibaba doesn’t sell products on Taobao itself. The marketplace offers a platform for outside sellers—often mom-and-pop outfits—to sell their products to Chinese consumers. It also offers its Tmall platform, which is home to online stores often dedicated to major global brands in cosmetics, electronics and other goods.

— Olivia Geng in Beijing and Kathy Chu and Juro Osawa in Hong Kong contributed to this article

Source: AFP