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Alibaba Shakes Off Counterfeit Label Smoothing Path to U.S. IPO

Photographer: Nelson Ching/Bloomberg

Employees work at Alibaba's headquarters in Hangzhou, Zhejiang Province, China. Close

Employees work at Alibaba's headquarters in Hangzhou, Zhejiang Province, China.

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Photographer: Nelson Ching/Bloomberg

Employees work at Alibaba's headquarters in Hangzhou, Zhejiang Province, China.

Eighteen months ago, Alibaba Group Holding Ltd. was under U.S. scrutiny because counterfeiters were selling goods on its website. Now it’s heading for what may be the nation’s biggest initial public offering since 2008.

Alibaba’s Taobao Marketplace, which links individual buyers and sellers, cracked down on 87 million listings that may have breached intellectual-property rules on cigarettes, clothing and medicine as it tried to address concerns by the Office of the U.S. Trade Representative. It also teamed with brand owners and law enforcement officials to target peddlers offering knockoff items for sale.

The strategy to repair its reputation worked. Alibaba was removed from the American government’s Notorious Markets list in 2012, helping pave the way for a U.S. IPO that could value the company at as much as $200 billion. Keeping control over the sale of fakes and pirated goods will be crucial to maintaining credibility with investors, said Duncan Clark, the chairman of BDA China Ltd., which advises technology companies.

“With Taobao early on, there were quite a lot of fake goods sold, but they have been working hard to clean up those issues,” Clark said. “As Alibaba goes public it will have to meet a higher bar.”

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Alibaba Group Holding Ltd. Chairman Jack Ma. Close

Alibaba Group Holding Ltd. Chairman Jack Ma.

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Photographer: Jerome Favre/Bloomberg

Alibaba Group Holding Ltd. Chairman Jack Ma.

Washington Lobbying

To help get off the U.S. list, Alibaba hired James Mendenhall, a former general counsel for the USTR under President George W. Bush, to aid lobbying in Washington and help in talks with the music and movie industries, Alibaba said then.

Billionaire founder Jack Ma spearheaded the effort to expel copycats, labeling organized counterfeiting a “cancer” and “tumor in society.” Alibaba Group is highly committed to the protection of intellectual-property rights, the company said in an e-mailed statement.

Alibaba said March 16 it will start the process for an IPO in the U.S., without specifying how many shares it would sell or at what price.

China’s biggest e-commerce company may sell about a 12 percent stake in itself, according to a person with knowledge of the matter, making it an $18.4 billion offering based on the $153 billion average valuation of analysts, according to data compiled by Bloomberg.

That would surpass General Motors Co.’s 2010 sale to rank behind Visa Inc. as the second-biggest U.S. IPO ever, according to the data. Facebook Inc. raised $16 billion in May 2012.

Beijing Market

Alibaba’s struggle to fight copyright infringement is part of a larger problem China faces. The country is host to a number of markets known for “prominent and extensive availability of counterfeit merchandise,” the USTR said in a February report. It cited Beijing’s Silk Market and Guangdong’s Zengcheng International Jeans Market, where vendors set up stalls, as examples.

Photographer: Nelson Ching/Bloomberg

Alibaba Group Holding Ltd.'s website, top left, in addition to the company's Alibaba.com, top right, clockwise, Alipay.com and Taobao.com websites are arranged on a computer in Shenyang, China. Close

Alibaba Group Holding Ltd.'s website, top left, in addition to the company's... Read More

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Photographer: Nelson Ching/Bloomberg

Alibaba Group Holding Ltd.'s website, top left, in addition to the company's Alibaba.com, top right, clockwise, Alipay.com and Taobao.com websites are arranged on a computer in Shenyang, China.

Alibaba’s most popular platforms are Taobao and Tmall.com, which connects consumers to retail brands. Alibaba doesn’t sell merchandise itself and makes most of its sales from commissions and advertising.

The safeguards in place include requiring vendors to make deposits with Alibaba to ensure their products are genuine, allowing buyers and sellers to rate each other and helping consumers get refunds.

On Tmall, guarantee fees range from 10,000 yuan ($1,619) to 150,000 yuan, depending on the products. The money is used to pay shoppers for breaches of contract, according to Tmall’s website.

Nike, Chanel

This helped make Tmall more trusted than some actual retail outlets, said Mark Tanner, the founder of China Skinny, a Shanghai-based research and marketing agency.

“For some goods including wine, users could be more inclined to buy on Tmall because offline counterfeit is even worse,” Tanner said. “Users can actually use the review-and-complaint system built by Alibaba to select stores that sell authentic goods.”

Taobao was taken off the Notorious Markets list after significantly decreasing the sale of infringing products, the USTR said in December 2012.

Alibaba subsequently removed 114 million allegedly infringing listings from January to October last year, according to a 2014 report it submitted to the USTR. The Hangzhou, China-based company removed listings for sports shoes, watches and handbags and teamed with the owners of global brands including Nike Inc., Prada SpA (1913) and Chanel.

“Such collaboration is invaluable to us, in order to prevent the manufacture, transport and sales of counterfeit goods, online as well as off-line,” Valerie Sonnier, Global Intellectual Property Director for Louis Vuitton, said in October after the companies agreed to cooperate on the issue.

Arresting Counterfeiters

Alibaba worked with law enforcement on 77 intellectual-property infringement cases in 2013, leading to the arrests of suspects from 51 counterfeiting rings, according to a 2014 World Intellectual Property Organization report prepared by Alibaba. The value of merchandise involved in the takedowns reached 360 million yuan.

The company said in April it would coordinate with five Chinese government and law enforcement agencies, including the Ministry of Public Security, to identify and shut down factories and other channels for knockoffs, according to Alizila, a website run by Alibaba.

China will step up its fight against copyright infringement on the Internet, in the nation’s western and central regions, and on the fringes of cities, a government official said Jan. 21.

Kobe Bryant

Authorities arrested 59,000 people and seized more than 9,000 tons of fake and shoddy products last year in cases worth 172.9 billion yuan, a Ministry of Public Security official also said Jan. 21.

The USTR started naming Notorious Markets in 2006, highlighting online and physical businesses that allow or encourage counterfeit products and piracy.

Businesses named in the list include Megaupload.com, the file-sharing website shut down by U.S authorities in January 2012. Megaupload founder Kim Dotcom denies criminal activity and is fighting extradition to the U.S. from New Zealand. Other sites named by the USTR include physical markets in Bangkok, New Delhi and Jakarta.

While Alibaba has made inroads on counterfeiting, some questions remain when items are available for much less than they cost elsewhere.

A yellow Los Angeles Lakers jersey featuring the name and number of Kobe Bryant can be bought for the equivalent of $10.50 on Taobao, with the vendor given three blue crowns, a mid-level rating based on its system.

On the National Basketball Association website, similar jerseys start at $49.95.

With plans for a U.S. share listing, the scrutiny on Alibaba may only get stronger.

“When you start listing on exchanges in New York and Nasdaq, you’re obviously put under the spotlight,” Tanner said. “You’re under Western rules, and Western rules around copyright are a lot more stringent.”

To contact the reporter on this story: Lulu Yilun Chen in Hong Kong at ychen447@bloomberg.net

To contact the editors responsible for this story: Michael Tighe at mtighe4@bloomberg.net Robert Fenner

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