Alibaba takes beating in China and US over regulatory feud

E-commerce giant Alibaba has taken a beating in both China and the US as company founder and executive chairman Jack Ma takes on Chinese regulators in a dangerous political feud.

On Friday, China's State Administration for Industry and Commerce (SAIC) and Alibaba came to an agreement to tackle the sale of fakes on the Hangzhou-based company's online platforms and boost consumer protection following a meeting between Ma and SAIC minister Zhang Mao.

The agreement represents what should at least be a temporary resolution to the feud, which began after the SAIC issued a white paper on Jan. 28 accusing Alibaba of allowing its merchants to operate with business licences and sell fake goods. Company employees were also alleged to have accepted bribes from merchants in exchange for better website placement.

The white paper, which was taken down without explanation from the SAIC website before Friday's announcement, prompted Alibaba investors in the US to retain New York law firm Pomerantz LLP to conduct an investigation into concerns that the company and its officers may have violated the US Securities Exchange Act of 1934.

Alibaba's executive vice chairman, Joe Tsai, hit back against the Chinese regulator on Jan. 29, claiming that the white paper is flawed and that the company is preparing a formal complaint. Tsai said Alibaba first saw the paper when it was made public by the SAIC and denied requesting that its publication be delayed.

Alibaba's Taobao platform said that it is "willing to assume the responsibility of fighting fakes" and that its effort "is far from complete," but slammed the inspection methods of SAIC internet regulation director Liu Hongliang.

"We believe director Liu Hongliang's procedural misconduct during the supervision process, irrational enforcement of the law and obtaining a biased conclusion using the wrong methodology has inflicted irreparable and serious damage to Taobao and Chinese online businesses," Taobao said in a statement.

Some analysts believe Taobao's assault on Liu is part a larger campaign against the official. Last year, the company alleged leaked allegations that Liu ordered his officers to issue fines to Alibaba equal to about 1% of the company's daily transaction value every day, backed up with a recording of Liu declaring that Alibaba's platforms and sellers are fined up to several thousand times a year.

The feud has coincided with a sharp dive of Alibaba shares on the New York Stock Exchange, with prices plummeting by around US$10 Thursday to fall below US$90. The company's market cap has dropped by US$70 billion since November.

However, there are analysts claiming that Alibaba's drop in share price could be more closely tied to the company's most recent quarterly revenue falling short of expectations despite climbing 40% to US$4.22 billion.

Henry Guo, a senior analyst with US consultancy JG Capital, said while most people were not shocked by fake goods being sold on Alibaba's websites, investors found it surprising that "a government regulatory body would have gone so far to protect Alibaba as to delay the issuance of a white paper and cover up facts about the sale of fake goods."

"Of course it will make investors imagine and worry whether more facts have been covered up," Guo added.

The New York Times has reported in the past that Alibaba has many friends in the Chinese government, with Ma himself crossing paths many times with China's Ministry of Foreign Trade since 1997.

Duowei News, a US-based Chinese political news outlet, says that Ma must know the dangerous consequences of daring to challenge regulators, suggesting that perhaps the company has powerful backers in Beijing. Alibaba's third-party online payment platform, Alipay, could be shut down any time by the government, which is also keeping a close eye on the company's heavy foreign investment levels, Duowei added.

A big company like Alibaba must be heavily involved in politics to succeed in a country like China, Duowei said, which is why it has been cooperating with the government in its various ventures into logistics, health care, and urban and rural economics. The apparent resolution of this recent feud suggests that Alibaba is now powerful enough to stand up against Beijing, though Ma must continue to tread carefully for there is no telling what might happen if Alibaba pushes its luck too far, Duowei added.