China's Government Just Released a Scathing Report on Alibaba

Counterfeit Goods and Employee Bribe-Taking Figure in List of Accusations

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Alibaba founder Jack Ma
Alibaba founder Jack Ma Credit: Scott Eells/Bloomberg
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Alibaba has a "credibility crisis" fueled by a failure to crack down on shady merchants, counterfeit goods, bribery and misleading promotions on its online malls, the Chinese government said.

The scathing report by the State Administration for Industry & Commerce accused Alibaba Group Holding Ltd. 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 report 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 itself doesn't sell goods direct to consumers, but offers platforms where merchants or brands can sell them. Its biggest marketplace, Taobao, is similar to eBay; another platform, Tmall, is where brands open virtual storefronts. Alibaba, which makes most of its money from selling ad space within its platforms, is the world's No. 4 recipient of digital ad revenue, after Google, Facebook and Chinese search giant Baidu, according to eMarketer. The company was founded by Jack Ma and 17 others in 1999 in Hangzhou, China.

In response to the government report, Alibaba said in a statement that Taobao is improving its technology and procedures to fight against fakes. Taobao also decided to file a complaint against the SAIC's internet regulation director, Liu Hongliang, who presided over 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.

Selling contraband

Two phone calls to the SAIC's press office went unanswered. 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 New York in September, the government said. The report was released a day before the 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," said Li Muzhi, a Hong Kong-based analyst at Arete Research Service LLP 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."

Microblog 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 microblog 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 Mr. Liu and said he wasn't treating China's biggest e-commerce operator fairly and his methods were flawed.

Last week, Alibaba's founder said it would only share user data with Chinese authorities if they were investigating terrorism or other crimes. "The rest, no," Mr. 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 with a market value of $254 billion.

"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. Mr. 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," the report 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, yet another report released on the same day said.

"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."

--Bloomberg News, with Ad Age Staff--