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...
Action Ramps Up as the Alibaba IPO Date Nears
Earlier this month, Alibaba sped up the process for removing fake listings, removing them within days, rather than weeks, after they were flagged by the maker of the original product.
The faster process so far has applied only to about two dozen brands that had signed up for the program, but it is expected that more of the 114 eligible brands will soon join - even though the annual fee to participate is $9,900.
The fee is needed because fighting the fakes doesn't come cheap, as it forces Alibaba to invest in personnel and systems to catch the counterfeiters. Almost a quarter of Alibaba's workers are devoted to intellectual property protection.
"[Their policy is] almost as good as it possibly could be in terms of balancing the rights of [intellectual-property] owners and sellers," Chris Bailey, deputy country manager in China for the law firm Rouse, told The Wall Street Journal.
That brings up another point. If Alibaba goes after the counterfeit listings too aggressively, some legitimate sellers might get targeted.
"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," Alibaba said in its prospectus.
It's a tough problem, because Alibaba is keenly aware of the harm that can come to its brand if it can't find a workable solution.
"Although we have adopted measures to verify the authenticity of products sold on our marketplaces and minimize potential infringement of third-party intellectual property rights... these measures may not always be successful," the company warned in its prospectus. "We may be subject to allegations and lawsuits claiming that items listed on our marketplaces are pirated, counterfeit or illegal."
While the problem can never be totally eradicated, Alibaba will earn points from investors for making the best effort it can - which, with the incentive of the approaching IPO, appears to be the case now.
"In this business reputation is everything," Kent Kedl, managing director of Greater China and North Asia for Control Risks, a risk consulting firm, told Reuters. "Brand is something companies are trying very hard to build and if their brand is associated with really good buyer access and protection of IP it can serve only to increase brand value and the value of the company."
Will you be investing in the Alibaba IPO? Join the conversation on Twitter @moneymorning using #Alibaba.
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Related Articles:
- Reuters: Fighting Fakes: Ahead of IPO, Alibaba Takes a Tougher Line
- The Wall Street Journal: Alibaba Expedites Action Against Fakes
About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.