I never knew I would see the day when the Chinese government would actually crack down on counterfeit goods. After all, China is the source of a huge chunk of the global trade in counterfeit goods. We’re not just talking about Louis Vuitton bags here. We’re talking everything from toys to clothing to even pharmaceutical products. This is why it struck me as quite ironic that the Chinese government is putting pressure on Alibaba (NYSE:BABA) for allowing shady merchants to operate on its platform.
According to government reports, Alibaba is under investigation for misleading promotions, counterfeit goods, and its failure to police its merchants. This is quite an indictment considering that Alibaba is now traded in the US stock market. A lot of American investment houses and institutional investors are heavily invested in this Chinese e-commerce giant. One particularly troubling bone of contention is that the Chinese State Administration for Industry and Commerce has accused Alibaba of letting sellers operate on its platform without required business licenses. These unlicensed merchants supposedly run unauthorized online shops that co-opt recognizable brands as well as outright selling fake fashion accessories and wine. The report also alleges that Alibaba staffers took bribes. Worst of all, from a legal perspective, the report says that Alibaba was aware of flaws in its customer feedback system that would have alerted it to these issues.
One particularly troubling bone of contention is that the Chinese State Administration for Industry and Commerce has accused Alibaba of letting sellers operate on its platform without required business licenses. These unlicensed merchants supposedly run unauthorized online shops that co-opt recognizable brands as well as outright selling fake fashion accessories and wine. The report also alleges that Alibaba staffers took bribes. Worst of all, from a legal perspective, the report says that Alibaba was aware of flaws in its customer feedback system that would have alerted it to these issues. As reported here, the Chinese are cracking down on corruption, and this is in keeping with the general government-set tone of institutional housekeeping in China.
Not surprisingly, Alibaba stock fell when news of this official report came out. It’s going to take a while for Alibaba to recover from this public relations fiasco. On the technical side, a lot of these complaints can be resolved fairly easily. After all, Ebay (NASDAQ:EBAY) has procedures and mechanisms in place to handle counterfeit sales and other shady activities. What would take a little bit longer to resolve is the damage these revelations caused to Alibaba’s international brand. From a development perspective, this shouldn?t cause Alibaba shareholders much long-term worry. A lot of this can be fixed. It’s just a question of Alibaba communicating clearly that it would take a stronger stand both on a reactive and proactive basis to ensure that these problems don’t occur again
