Asia: China trade

Stephen Mulrenan

Chinese e-commerce giant Alibaba is taking action to reduce the number of counterfeit goods on its sites. As the company looks to expand internationally, gaining the trust of major retailers will be key to driving success.

Since its record-breaking $25bn US-listed IPO in September 2014, Alibaba’s share price has dropped from a high of $120 per share to below last year’s float price of $68. Currently hovering at just over $66 per share, this volatility has led to much media speculation, and even one or two adversarial exchanges: Alibaba chose to fight an article in investor magazine Barron’s, for example.

On the day the company went public, giving it a valuation of $168bn, its founder and chairman Jack Ma said: ‘Today, what we got is not money [but] trust from the people.’ It is this very trust, however, that Alibaba is accused of breaking, with red flags raised in connection with its corporate governance, counterfeit goods and conflicts of interest.

Critics of the company argue that its share price has nosedived because of increasing concern over the prevalence of counterfeit goods on its websites. In January 2015, for instance, Chinese regulator the State Administration for Industry and Commerce (SAIC) heavily criticised Alibaba for its tolerance of fake goods.

Stuart Durham is the London-based General Manager for Western Europe at online brand protection specialists NetNames, which monitors listings that are placed on a range of Alibaba sites. He says SAIC’s line and stance is absolutely fair. ‘China wants to be seen as a country that does business and ensures that brand owners are being protected.’

Criticism of Alibaba’s apparent lack of progress in addressing the problem of counterfeits is widespread. In April, the American Apparel & Footwear Association, a US clothing industry lobby group, claimed that the prevalence of counterfeit clothes and footwear on Alibaba sites had escalated since the Office of the United States Trade Representative (USTR) removed the company from its ‘notorious markets’ blacklist in 2012.

The following month, Paris-based group Kering, whose luxury brands include Gucci and Yves Saint Laurent, filed a lawsuit in New York.
In its complaint, Kering’s lawyers wrote: ‘The Alibaba defendants facilitate and encourage the sale of an enormous number of counterfeit products through their self-described “ecosystem”, which provides manufacturers, sellers and buyers of counterfeit goods with a marketplace for such goods, and provides online marketing, credit card processing, financing and shipping services that effectuate the sale of the counterfeit products.’

In response, Alibaba’s vice president of corporate affairs made it clear that the company’s statement on the issue remains the case: ‘We continue to work in partnership with numerous brands to help them protect their intellectual property, and we have a strong track record of doing so.’ Alibaba added it regretted that Kering Group had chosen to litigate and intends to fight the complaint vigorously.

Could do better

Alibaba has taken a number of positive steps in recent years to protect brand owners, and has high-level statistics to demonstrate its various initiatives. ‘But it could do even more,’ says Durham. ‘If I was writing a school report, I would say Alibaba is showing potential and promise, but could do better.’

In an attempt to increase the effectiveness of its procedures, the company has embraced data mining, enhanced cooperation with the police and worked directly with more than 1,000 brands.

According to a 2014 report it submitted to the USTR, Alibaba removed 114 million product listings from its Taobao marketplace in the first ten months of 2013. This included collaborating with the likes of Chanel, Nike and Prada to remove allegedly infringing listings for handbags, sports shoes and watches.

Shanghai-based HJM Asia Law & Co partner Caroline Berube is Senior Vice-Chair of the IBA Asia Pacific Regional Forum and Co-Chair of its China Working Group. Sitting also as Asia Pacific Forum Liaison Officer for the IBA Intellectual Property and Entertainment Law Committee, Berube agrees that Alibaba has done a lot in terms of managing counterfeits, ‘but it needs to show greater sincerity and commitment and prove it with action.

‘Alibaba needs to take a more proactive approach in investigating and dealing with counterfeit goods, which are significantly lower in price than those of legitimate retailers,’ she says. ‘At the same time, it should more proactively communicate and cooperate with brands to find a suitable way to protect the IP rights of companies joining the platform.’

A number of NetNames’ customers now have regular six-month meetings with Alibaba. ‘It’s very easy to put the boot in to Alibaba, but it has increased its outreach to brand owners,’ says Durham. ‘However, it can always further increase this engagement. There’s still no opportunity to interact with the company’s IP team.’

Durham argues that Alibaba needs to focus on delivering greater consistency. For example, its response times when engaging with customers currently differs across products. In the case of two identical listings, sometimes one is accepted and one rejected. The company also needs to be more consistent with its methodology in areas such as procedure, knowledge and training. ‘We have seen the counterfeiters evolve their modus operandi, but we haven’t really seen Alibaba evolve its enforcement measures,’ explains Durham.

AkzoNobel is a consumer-facing Dutch multinational that is active in the fields of decorative paints, performance coatings and specialty chemicals, and has at least 30 staff working full-time on the issue of counterfeits. Its Shanghai-based Assistant General Counsel Graham Wladimiroff, who sits as Corporate Counsel Forum Liaison Officer for the IBA Asia Pacific Regional Forum, says that sustainability and promoting company values is still nascent in China. ‘Now that Alibaba is very much established,’ he says, ‘I would expect that it is only now becoming aware of its greater responsibilities and longer-term interests.’

In the same month that beauty retailer Sephora selected rival JD.com to host its first online store in China due to concerns over Alibaba’s apparent tolerance of fakes, Alibaba launched a new technology platform to combat the presence of counterfeits. The ‘Blue Star’ platform allows Taobao consumers to check if a purchased product is genuine by enabling them to scan QR codes to confirm authenticity once they have the item in their possession. However, given that the buyer has already purchased the item, the platform’s benefit is more reactive as it can’t be used to make an informed decision prior to purchase.

‘[Alibaba] should team up with government, which also has an interest in improving matters,’ says Wladimiroff. ‘It should consider sponsoring initiatives that will further improve the situation – such as training personnel at supplier companies – and it should initiate a societal discussion on trust.’

International expansion

In a statement earlier this year, Alibaba CEO Daniel Zhang said: ‘Globalisation is Alibaba Group’s most important strategy for the coming decades, and our goal is to help ten million global businesses and serve two billion consumers around the world.’

Just as it had hired former USTR General Counsel James Mendenhall in April 2012 to help remove the company from the USTR blacklist, Alibaba has appointed former Goldman Sachs banker Michael Evans as president in a bid to woo prestigious foreign brands to its online platforms. Evans ran Goldman’s Asia business for almost ten years before unexpectedly leaving in 2014. He is the second former Goldman Sachs employee to take a senior role at Alibaba, following Michael Yao, who was appointed head of corporate finance in 2012. Yao played a key role in guiding Alibaba to last year’s record IPO, on which Evans also advised. Following the float, Evans was an independent director at Alibaba until his appointment as president.

‘It is possible that this former Goldman banker can establish ties between Alibaba and the international capital markets, and in one fell swoop save the company’s stock price,’ says Berube. However, given that Goldman Sachs is a longstanding adviser to Alibaba, others are concerned that Evans is less likely to hold Jack Ma to account. For them, Evans’s move from independent director to an executive position only bolsters the argument that Alibaba founders are subject to precious few checks and balances. 

Stephen Mulrenan is managing editor of Compliance Insider at Compliance Publishing Group. He can be contacted at stephen.mulrenan@complianceinsider.com