China Accuses Alibaba of Lax Oversight of Merchants

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Alibaba Group Founder Jack Ma.

Photographer: Scott Eells/Bloomberg

Alibaba Group Holding Ltd. has a “credibility crisis” fueled by a failure to crack down on shady merchants, counterfeit goods, bribery and misleading promotions using its online malls, the Chinese government said.

The scathing report by the State Administration for Industry & Commerce accused Alibaba of allowing merchants to operate without required business licenses, to run unauthorized stores that co-opt famous brands and to sell fake wine and handbags. Alibaba employees took bribes, and the e-commerce giant didn’t fix flaws in customer feedback or internal credit-scoring systems, the report said.

“For a long time, Alibaba hasn’t paid enough attention to the illegal operations on its platforms, and hasn’t effectively addressed the issues,” the government agency said. “Alibaba not only faces the biggest credibility crisis since its establishment, it also casts a bad influence for other Internet operators trying to operate legally.”

Alibaba shares fell the most in about two weeks, dropping 3.2 percent to $99.62 at 10:52 a.m. in New York on Wednesday.

Alibaba’s Taobao Marketplace is improving its technology and procedures to counter fakes, the company said in an e-mailed statement. Taobao also decided to file a complaint against the SAIC’s Internet regulation director, Liu Hongliang, who presided at a meeting with Alibaba representatives in July to discuss the claims.

“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,” Alibaba said in the statement.

Taobao will set up a 300-member employee task force to fight counterfeits, according to a statement on its official microblog on Wednesday. The problem must be solved through joint efforts with the whole community rather than by accusing each other, Chairman Jack Ma said in the statement.

Selling Contraband

Two phone calls to the SAIC’s press office went unanswered earlier. The authority is a watchdog for consumer protection, trademark protection and business practices.

Although the meeting happened in July, the report wasn’t published until now to avoid affecting Alibaba’s record-breaking $25 billion initial public offering in September, the government said. The report was released a day before the Hangzhou-based company is scheduled to release earnings for its first full quarter since the IPO.

“The SAIC is now teaching Alibaba a lesson and telling it to learn its place,” Li Muzhi, a Hong Kong-based analyst at Arete Research Service LLP, said by phone. “Many Chinese government agencies are probably not too happy with Jack Ma’s high profile, his initiatives in the financial sector and impact on the retail sector.”

Weibo Posting

Alibaba said in its IPO prospectus that there were allegations in the past, and likely would be more in the future, that the company’s platforms were selling goods that were counterfeit or infringed on other copyrights, including music.

“We also have been and may continue to be subject to allegations that we were participants in or facilitators of such allegedly unlawful activities,” Alibaba said at the time.

Wednesday’s release came the day after a posting on one of Alibaba’s official Weibo accounts said government inspectors applied standards inconsistently and didn’t give merchants enough time to respond to accusations. The post was written as a letter to Liu and said he wasn’t treating China’s biggest e-commerce operator fairly and his methods were flawed.

Last week, founder Ma said Alibaba will only share user data with Chinese authorities if they are investigating terrorism or other crimes.

“The rest, no,” Ma told Charlie Rose during a Jan. 23 interview in Davos, Switzerland.

Fighting Counterfeits

Alibaba has worked to get rid of counterfeits as it expands internationally, saying it removed 90 million listings for products that breached intellectual-property rights before its IPO. The crackdown is part of Alibaba’s effort to build its reputation after becoming Asia’s largest technology company.

“There is a bit of irony here since Alibaba loves to tell the world about how strict it is on piracy and how it moves quickly to shut down sites that sell fake goods,” said Doug Young, the Shanghai-based author of “The Party Line: How the Media Dictates Public Opinion in Modern China.”

In December, Alibaba said it spent $161 million from the beginning of 2013 through November to block counterfeit products and boost consumer protection. Ma, China’s richest man, said last week he wants to reach 2 billion customers through his websites.

Fake Transactions

SAIC said Alibaba was still allowing sales of contraband such as fake cigarettes and alcohol, and items “that threaten public safety” such as knives and phone-tapping devices.

“A huge number of merchants” haven’t registered for operating licenses and are engaging in illegal behavior that includes bribing Alibaba employees and misleading customers during sales promotions on Nov. 11 and Dec. 12, it said.

“Some operators on the platform have created fake transactions and deleted negative comments to improve their own and others’ reputations,” SAIC said.

In a separate report on China’s e-commerce industry released Jan. 23, SAIC said it found that sites sold fake cigarettes, wine, mobile phones and handbags. Only 19 of 51 samples sold via Taobao were authentic, according to another report released on the same day.

“As their impact on commerce, media, advertising, etc., continue to increase, Chinese Internet companies face an increasing amount of interactions with the ‘relevant organs’ across the country and in central government,” said Duncan Clark, chairman of technology consulting firm BDA China Ltd. “What’s unusual about the SAIC intervention is how public it is, how detailed and wide in scope.”