But it might be an excuse for China’s largest e-commerce company to clean itself up, for regulators but more importantly, Wall Street.

By Scott Cendrowski
January 29, 2015

During Alibaba’s earnings call this morning, when it reported revenues that missed expectations, only one question came up about the report released yesterday by a Chinese regulator criticizing the e-commerce giant. But that might understate how likely the report is to influence talk about Alibaba for some time.

The regulator, the State Administration For Industry And Commerce (SAIC) accused Alibaba of selling fake goods and misleading customers on its biggest shopping platform Taobao.com.

SAIC has already taken down the report, but in it Alibaba’s consumer-to-consumer platform Taobao ranked worse for fakes and reliability than other Chinese sites like JD.com and Yihaodian.com. One fair reason for that, from Alibaba’s perspective, is that Taobao is much bigger than its rivals, with 500 million consumer accounts. But the report also includes allegations that Alibaba employees accepted bribes from merchants who wanted to improve their search rankings. Those allegations are going to be riling Wall Street for a while.

Taobao’s history of fakes and ripoffs is well known in China. But that hasn’t hurt Alibaba because increasingly, shoppers look to comments sections first while scanning similar products. If the seller isn’t well reviewed, they simply move on, similar to the way a low feedback score on eBay.com can doom a seller.

In that way, it’s tough to understand the timing of SAIC’s report, which was held until after the firm’s September IPO, the government said. Even if Alibaba isn’t pushing forward with solutions fast enough for regulators’ liking, CEO Jack Ma and Co. would certainly move fast if customers were turned off. But that’s the thing: customers are only growing. In today’s earnings report, Alibaba said revenues in the quarter grew by 40%, even if they slightly missed estimates.

As Paul Mozur of The New York Times notes, Alibaba’s success has brought it greater scrutiny “with China’s opaque and at-times arbitrary government regulators, a reminder that an investment in Alibaba brings inevitable political risk.”

Fortune highlighted those regulators in a piece last year about the scrutiny Western companies have come under. In it, foreign business groups accused China’s regulators of having a spotty record of openness and fairness. Now Alibaba has joined the criticism. On Taobao.com, it said the SAIC’s main investigator, Director Liu Hongliang, had unfairly formed the report, including the tiny sample size used (92 batches of products).

“We felt we were unfairly attacked by a report that was a sample check of some of the items,” Alibaba vice chairman Joe Tsai said in an interview this morning on CBNC. “We thought the methodology was flawed, we felt the attack was targeted at us specifically, and it was unfair. Over time we hope to work with regulators to address the issues of their concern.”

One response to the SAIC on Taobao, by an unsigned employee, included a fair point. As translated by the WSJ:

SAIC has “succeeded in proving just how unsafe and unreliable online shopping in China is, just how crafty the several millions of online retailers are, just how blind and stupid its 500 million consumers are….”

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