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As the Alibaba IPO date approaches – and some say the Chinese e-commerce giant could go public as early as August – the company is racing to resolve an issue with counterfeit products on its site that threatens to undermine investor confidence.
The problem is particularly acute on Alibaba subsidiary Taobao, which has 7 million sellers offering 800 million items. Last year alone Alibaba removed 100 million listings of fakes suspected to violate intellectual property rules and helped Chinese authorities arrest 51 criminal groups. It spends $16.1 million each year to fight the problem.
The problem of fakes also plagues big U.S. e-tailers like Amazon.com Inc. (Nasdaq: AMZN) and eBay Inc. (Nasdaq: EBAY). eBay spends about $20 million a year on "buyer protection programs" aimed at verifying its sellers and reimbursing buyers when fakes slip through.
Alibaba's position was much worse several years ago, when the flood of fake goods on its site landed the company on the Office of the U.S. Trade Representative's "Notorious Market" list, which tracks businesses worldwide that traffic in counterfeit goods.
An Alibaba IPO date could not even be considered until the company got off that list, which it managed to do in 2012.
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But while Alibaba has made a strong effort to weed out listings of knockoff products and go after the groups selling them, the problem has persisted – representing a lingering threat to the Alibaba IPO date.
For instance, approximately half of the 58,000 folding bikes listed on Taobao are fakes, according to Dahon, the Duarte, Calif.-based company that makes the real thing.
"We keep complaining" to Taobao, Dahon Chief Executive Officer David Hon told The Wall Street Journal. "The [counterfeiters] stop doing this for a while, and then a few months later, they resurface and open up another store."
Now, with the Alibaba IPO date only months away, dealing with the stubborn problem has taken on an increasing sense of urgency.
"When you start listing on exchanges in New York and Nasdaq, you're obviously put under the spotlight," Mark Tanner, the founder of China Skinny, a Shanghai-based research and marketing agency, told Bloomberg News. "You're under Western rules, and Western rules around copyright are a lot more stringent."
The question now is whether Alibaba is moving fast enough to satisfy potential investors…