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Ecommerce Giant Alibaba Tackles Counterfeits in China as Fake Goods Proliferate; “Counterfeiting is a cancer we have to deal with,” Alibaba founder Jack Ma said

August 5, 2013, 5:23 a.m. ET

Alibaba Tackles Counterfeits in China

E-Commerce Giant Faces Big Challenge as Fake Goods Proliferate

JURO OSAWA

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HONG KONG—Alibaba Group Holding Ltd. is stepping up its battle against rampant counterfeiting in China, as it gears up for one of the technology industry’s biggest initial public offerings. For the past several years, the Chinese e-commerce giant has been working to remove fake items from its Taobao shopping site. But counterfeiters are persistent, posing a challenge for Alibaba just as bankers and investors are raising their expectations for the company ahead of its initial public offering. The IPO is likely to raise about $70 billion based on analysts’ estimates and bankers said it could take place as soon as this year, but Alibaba hasn’t set a specific date. “Counterfeiting is a cancer we have to deal with,” Alibaba founder Jack Ma said at a news conference in April, when the company announced its partnership with government agencies to fight piracy online and offline. Later this month, a group of Alibaba officials will travel to the U.S. to meet with representatives from brands, industry associations and the government in Los Angeles, New York and Washington to discuss intellectual property issues, the company said.Unlike Amazon.com Inc., AMZN -0.45% Alibaba doesn’t sell products itself but operates websites that help sellers find buyers. While Alibaba doesn’t have much control over who sells what on Taobao–a mammoth site with more than 800 million product listings—it has been continuously upgrading the system to delete listings for counterfeit goods. In Alibaba’s efforts to maintain credibility, Tmall, another shopping site that became independent from Taobao in 2011, plays a key role. While anyone with a national identification document can become a seller on Taobao, Alibaba’s criteria for Tmall, which hosts storefronts for major brands such as Nike Inc.NKE +0.50% and Gap Inc., GPS +0.35% are more stringent as it tries to make the site a piracy-free zone.

“If Alibaba wants to remain the top dog in China’s e-commerce, maintaining credibility with consumers is crucial,” said Duncan Clark, chairman of BDA China, an investment advisory firm specializing in the Internet and e-commerce.

It helps that consumers view Tmall as a place to find authentic branded products, Mr. Clark said. BDA forecasts Tmall transactions to reach 520 billion yuan this year ($84.8 billion), from only 25 billion yuan in 2010—faster than Taobao’s expected growth to 830 billion yuan from 293 billion yuan over the same period.

 

D’Addario & Co., a major U.S. maker of guitar strings used by popular musicians such as Lenny Kravitz, opened its store on Tmall in May. The decision to use Tmall came after the New York-based company in 2009 discovered through its investigation that seven out of 10 sets of D’Addario-branded strings sold at brick-and-mortar stores throughout China were fake. At the time, the company also found many counterfeit strings online, including on Alibaba.com, a trading site that links suppliers and buyers. After requests to Alibaba to remove the items got no replies, D’Addario reported the issue to U.S. Senator Charles Schumer in 2010. Alibaba said that the lack of response to D’Addario’s requests was due to technical issues and miscommunication.

“At the time we thought that Alibaba wasn’t taking the problem seriously,” said D’Addario President Rick Drumm. But D’Addario has since made peace with Alibaba, and Mr. Drumm said he is happy with their collaboration on Tmall.

Still, Mr. Drumm said he found some fake “Made in China” D’Addario strings on Taobao just last month. “We spend a lot of time educating consumers that D’Addario strings are all made in the U.S.,” he said, adding he would like Alibaba to consider developing a system that can prevent fakes from being listed, based on information such as a product’s stated country of origin.

Alibaba said it blocks some items from being posted on Taobao using filtering mechanisms based on certain keywords used by sellers to describe counterfeit goods. Brands like D’Addario constantly monitor Taobao and report any counterfeit items to Alibaba. D’Addario spends about a quarter-million dollars annually on such efforts, as it needs to hire Chinese speakers to monitor local sites, Mr. Drumm said.

Alibaba has in the past stumbled in its effort to build trust. In 2011, the company’s internal investigation found that more than 2,300 sellers on Alibaba.com committed fraud, sometimes with the help of Alibaba sales staff. The scandal resulted in the resignation of Alibaba.com executives and raised questions about management oversight.

In June, Alibaba and 20 other Chinese Internet firms, including social media giant Tencent Holdings Ltd. and search provider Baidu Inc., vowed to share information and cooperate to fight online fraud such as counterfeiting and fake advertisement scams, under the guidance of China’s Ministry of Public Security. The rare cooperation among industry competitors came after China’s top legislature in April published a draft amendment to the country’s consumer rights law.

While brands are frustrated by the costly battle against piracy in China, they are aware that it is easier to identify and remove counterfeit items online than at retail shops. “On the Internet, we can have one person monitoring a hundred sites each day, but on the street, we need the person physically walking into every store,” said Mr. Drumm. According to a report released in April by the United Nations’ Office on Drugs and Crime, China was the source of about two-thirds of counterfeit goods seized around the world between 2008 and 2010.

“The Internet is not a place that generates [piracy] problems, but it’s a place that exposes the problems,” said Alibaba Group Vice President Brian Li.

New Balance Athletic Shoe Inc. opened its flagship store on Tmall in 2011. At the same time, the U.S. sporting goods maker works with a Chinese business partner to monitor Taobao and other local shopping sites to spot any suspicious items. The counterfeit items found on sites like Taobao are a reflection of a much bigger problem of intellectual property in the overall commerce environment in China, said a New Balance spokeswoman.

“It’s a long-term task for everyone.”

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About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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