Monday, February 9, 2015

Alibaba and the Proverbial Thieves

Just a few months ago, Alibaba’s record setting $25 billion IPO was seeing upward bounds trading at around $120 per share. That’s close to doubling its $68 per share IPO price. These days, Alibaba is facing class action lawsuit in the United States for allegedly violating the U.S. Securities laws, criticism from China’s own regulators at the State Administration for Industry and Commerce (SAIC), and backlash from customers for the abundance of fake products. This started with the release of a “secret white-paper” from SAIC stating that over 60% of sampled goods on the Taobao website are “not genuine”  and also evidenced secret meetings between Alibaba and Chinese government officials not previously disclosed in its IPO filings.

Jack Ma quickly maneuvered on the PR offense in China and put up legal defense in the United States, but are these enough to solve Alibaba’s problems? Not likely. First, the Chinese government is no sleeping cat. There is a serious brand control problem with Alibaba that is drawing domestic and international attention. Even though Alibaba allegedly spent $160 million since 2013 trying to tackle the fake products listed on its online stores and has a 2,000 strong employee force actively curbing the problem, but the SAIC did not just now release the “secret white-paper” accidently. It is meant to get Alibaba’s attention that it wants more done. SAIC making this public is more interesting and I can only speculate that it was meant to “杀鸡给猴看”. Speculation aside, even if Alibaba can take the lashes now and spend its way out of the close scrutiny Chinese regulators are imposing, it still has to face the likelihood that regulators will come out with more stringent rules and regulations to tighten the market’s operating freedom. Increasing compliance requirements means increasing cost to do business and add the prime legal fees Alibaba is paying to defend itself in New York, one can only guess how much profitability Alibaba shareholders are really seeing.

But the regulatory challenge is just one facet of Alibaba’s problems. The worse Alibaba will have to overcome is the public opinion that are outcome determinative. The recent “secret white-paper” publicity probably contributed to a loss of US investor confidence and loss of domestic favorability making Alibaba more vulnerable to market volatility. But Jack Ma is no fool and the recent news of state-backed Ant Financial’s $30 billion valuation is either meant to be a distraction or a hint of something else at play with Ma and the Chinese government. I wonder what that may be but anything I say now is again pure speculation. I leave that to your wild imaginations.

Irrespective the conspiracy theory in Ant Financial and Alibaba’s interplay, Alibaba’s longevity is probably not in the regulator or the public’s hands in the sense as we see them. Rather, the inherent integrity of the ecosystem Jack Ma has created and attested to in Alibaba’s F-1 filings is one that will test the character of China. Does the government have the will to really crack down and does the once teacher billionaire boss Jack Ma have what it takes to enforce a reputable infrastructure of the world’s largest e-commerce network are both irrelevant. The more interesting question is whether the Chinese people using Taobo understands the right way of using it? The kind of micro-innovation ecosystem on Taobo is meant for the people to be more entrepreneurial, not meant for the platform be a training ground for counterfeiting the country to an inflated e-commerce economy doomed to bust in front of the whole world's watchful eyes. 

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