The Big Alibaba Bamboozle

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\"THEThe World’s Largest Counterfeit Market

One can find fake or counterfeit brands in shops and on the streets of every major city in the world. I conjecture that there are probably more in China’s shopping areas than elsewhere around the globe, particularly since becoming the world’s manufacturing hub. It goes something like this: take one Gucci bag from assembly line “A” and three from assembly line “B.” Real Gucci bag goes to Gucci and three fake bags go to a local shop or to “whomever.”

Jack Ma, founder and CEO of Alibaba, has created a “whomever” marketplace for fake goods that is the biggest in the world. The market is named Taobao, with about a 50 percent share of all online sales in China. Furthermore, in my opinion, Ma bamboozled investors into the biggest IPO in the world last year on the NYSE, raising $25 billion. Talk about a shell game. Ma touts to the world his grand, altruistic contribution to capitalism by providing hundreds of thousands of small Chinese entrepreneurs a marketplace where they can sell their goods, make a living and move into the middle class. However, while his sites sold a combined volume of close to $400 billion last year (five times that of eBay), and are contributing to Ma’s expanding net worth (currently about $22 billion), most of those sales were of fake goods.

A recent article in Forbes magazine said, “The Alibaba juggernaut has been constructed to a significant degree on illegal, counterfeit products. The scale of the fakery is enormous – at any given time Taobao offers millions of suspect goods for sale, from handbags to auto parts, sportswear to jewelry. When Forbes searched for listings on Taobao with the word ‘Gucci’ and set the preferred price range under 300 yuan, or less than $50, well below the price of real Gucci products, 30,000 results popped up. The sellers of four of the items on the first page confirmed in online chatting that they hire factories to produce these wares using the original design.” In the article, a firm that fights counterfeiting, believes about 80 percent of what is sold on Taobao is fake. And New Balance’s head of brand protection believes at least 80 percent of their brands’ sales on the site are counterfeit. Finally, to put the icing on the cake, Harley Lewin, a veteran intellectual property lawyer, said if Alibaba got rid of all of the fake goods, “they’d go broke.”

It’s a DNA Thing?

It can be argued that counterfeiting, or copying to put it mildly, is in the Chinese DNA and has been a widely accepted practice in for a very long time. The article cited that back in the 19th century, American merchants would have cheap copies of paintings made in Chinese workshops. But counterfeiting got substantially worse as China began to pivot towards free market capitalism in the 1980s. As manufacturing fueled China’s economic ascent, the government turned a blind eye to counterfeiting and protecting intellectual property. Thus, China became a haven for production of fakes. The U.S. Department of Homeland Security said that nearly $1.1 billion worth of counterfeit goods from China and Hong Kong were seized entering the U.S. in 2014.

This knock-off market and the majority share of business these fakes account for on the Taobao site might also suggest that Chinese consumers are quite happy to pay under $50 for a Gucci bag, even if they know it’s a fake.

Anecdotally, I have a Chinese friend who says that copying such beautifully designed products and brands is an act of honoring the originator. I was waiting for a smirk, but didn’t see one.

So perhaps Jack Ma, in addition to honoring himself for supporting the middle class, should also slap himself on the back for having the most honorable marketplace in the world.

Unfortunately for Jack Ma, the rest of the world doesn’t think that way. And Ma painfully knows it, as he attempts to publicly spin his image as aggressively taking action to eliminate the fakes and to keep the door closed for those trying to get in. That’s one from “column A,” so to speak. But then from “column B” Jack Ma says of luxury brands, “How can you sell Gucci or whatever branded bag for so much money? It’s ridiculous. I understand branded companies are not happy, but I also say that’s your business model. You have to check your business model, too.”

How audacious for Ma to make a statement like that. I guess because he’s ranked by Forbes as the 22nd most powerful person in the world, he feels he has the unspoken right to suggest these iconic brands should change their business models.

Change Your Model or You Won’t Change the World

The only model Mr. Ma had better focus on changing is his own, or Alibaba will never be the global retail giant he envisioned, which he so brashly articulated in his run up to the IPO. Enough Chinese consumers may be fine with buying cheap fakes, and the growing volume of business Taobao does in China suggests they are. But for consumers around the world, and especially in the U.S., counterfeit goods are a non-starter.

However, changing the Alibaba model may not be possible. How does one change one\’s DNA? Selling counterfeit goods in the Alibaba marketplace and Chinese consumers\’ buying them is, in fact, the Alibaba model. It was the model right out of the starting gate, and in 2008, the Office of the U.S. Trade Representatives put Taobao on its list of Notorious Markets. Ma responded by getting tough, putting systems in place and working with brands to ferret out the fakes, leading to Taobao\’s removal from the blacklist in 2012.

Fast forward, the systems and the tough talk did not eradicate the fakes. In fact, it\’s gotten worse, along with escalating lawsuits. In one case, according to Forbes, Kering (owner of Gucci) sued Alibaba for the second time in 2014 citing that 37,000 counterfeit Gucci bags were sold on Taobao in one month from 2731 different shops. Alibaba said the suit \”had no basis.\” The Chinese government, which usually ignores counterfeiting, surveyed the site and found that only 37 percent of the goods it examined were authentic.

So in defense, Mr. Ma builds a sophisticated techno-war room with antifraud software, hires a couple thousand people as a task force, and appears to be aggressively committed to wiping out the counterfeiters. So far it\’s a one step forward and two steps back effort.

What will Jack Ma Do?

If Jack Ma is really committed to his vision of becoming a global retail giant, can he change the DNA of the Alibaba model? Does he really want to? As pointed out in the Forbes article, Ma still prioritizes his altruistic objective of lifting the wealth of the “little guys” over upholding intellectual property rights. He says, “It’s not white and black. If you just say, ‘take that down,’ it is unfair for that guy (the seller). We have to also protect these guys, not only the branded businesses. You have to care about all the people, their rights.” Furthermore, in his filings with the U.S. Securities & Exchange Commission for the 2014 IPO, while Alibaba insisted that “we maintain a ‘no tolerance’ policy with regard to counterfeit and fictitious activities,” the next sentence read: “Because many sellers doing business on our marketplaces depend on us for their livelihood, we have generally eschewed a ‘shoot-first, ask questions later’ approach to handling complaints from brands.”

I close referring back to Jack Ma’s perspective on luxury brands, “How can you sell Gucci or whatever branded bag for so much money? It’s ridiculous. I understand branded companies are not happy, but I also say that’s your business model. You have to check your business model, too.”

With that attitude, Jack Ma should understand that his model will always be confined to regional China where it’s accepted as a way of doing business.

Forget your global ambitions Mr. Ma.

The Alibaba business model is as the Alibaba model does.



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