Why American Companies Can’t Trust Alibaba

May 06, 2017

When Jack Ma, executive chairman of the Chinese e-commerce company Alibaba, met with President Donald Trump in January, he made a promise: The online sales platform would give one million U.S. small businesses entrée to the Chinese market. Ma also said that this effort would create one million new U.S. jobs. He is even planning a conference in June to teach U.S. businesses how to sell to the company’s 443 million customers in China.

But given Alibaba’s reputation as a hub for counterfeiters and China’s tacit allowance of counterfeiting, American companies should not trust Alibaba to guide them into the Chinese market.

On the surface, Ma’s plan certainly looks attractive. America has a serious trade imbalance with China. In March, the U.S. imported $34.2 billion in goods from China while exporting only $9.6 billion. Alibaba is the largest Chinese “virtual mall”; it gives Chinese and other businesses the ability to create online stores that sell products and services to Chinese consumers. It only has 7,000 U.S. businesses on its site. So any shift that helps American businesses access those customers would seem to be a positive development.

Also, the timing couldn’t be better. According to a story in USA Today, “Chinese consumers don't trust the safety and wholesomeness of Chinese-grown foods and Chinese-made beauty products, and they're especially worried about anything that touches their or their children's skin. American food and products have a very high reputation.” Chinese consumers have a strong preference for legitimate American products. But the word “legitimate” is crucial.

That’s where the bad news begins. Alibaba is known as a haven for counterfeiters, including those who rip off many American-made brands. The fake-goods business is a massive industry. The International Anti-Counterfeiting Coalition estimates that counterfeiters sold more than $1.7 trillion in fake goods in 2015 alone. According to the Organization for Economic Cooperation and Development, U.S. companies suffer the most at the hand of brand pirates, with one in five knock-offs infringing on American products. Even Amazon faces a rapidly growing problem with Chinese counterfeits of American products. Experts estimate that 70% of all counterfeit goods come from China.

Alibaba must prove to businesses and the American government that it has truly robust tools to protect the integrity of U.S. brands. For Alibaba to win the trust of sophisticated American firms, its plan must have the explicit approval of the Chinese government.

Therein lies the second rub. Some experts have suggested that more than 10 million Chinese work in firms that produce hundreds of billions of dollars of counterfeit goods. If the government of China wanted to stop counterfeiting in its country, it could do so in little time. Yet the Chinese government doesn’t want to force the collapse of counterfeiting firms that employ millions of their citizens.

Given this uncertainty, U.S. businesses need to do their homework. Those wishing to enter the Chinese market should track down the U.S. Commercial Service, which helps American firms export their products around the world. The service has multiple offices in China and can help businesses find reputable partners on the ground, assess the potential demand for products, and get legal assistance.

American firms can do business in China. But they should think twice before doing business with Alibaba.

John Doggett is a senior lecturer of management at The University of Texas at Austin.

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