INTERNET: Alibaba Probed, Visited by Commerce Regulator

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Bottom line: China’s commerce regulator is putting growing pressure on Alibaba to play by its rules governing piracy and fair competition, but is likely to keep dialogue private to avoid public spats like one early this year.

SAIC accepts JD’s Alibaba complaint

E-commerce juggernaut Alibaba (NYSE: BABA) is coming uncomfortably under the microscope just days before its important Singles Day shopping extravaganza, with 2 new developments reflecting growing scrutiny from the nation’s top commerce regulator. The first has the powerful State Administration for Industry and Commerce (SAIC) formally accepting a complaint from rival JD.com (Nasdaq: JD), which accuses Alibaba of strong-arm tactics aimed at stifling competition during Singles Day promotions set for November 11.

The second headline looks a bit more benign, and simply says that SAIC Minister Zhang Mao visited Alibaba’s headquarters in the city of Hangzhou in coastal Zhejiang province this week. Headlines from that meeting look designed to show a facade of harmony, with Zhang praising Alibaba for its innovation in e-commerce. But I do suspect that Zhang is strongly pushing Alibaba behind the scenes to clean up its sites of traffic in pirated and substandard products, and also to avoid abusing its market dominance that led to the JD.com complaint.

Let’s begin with the complaint, which JD happily publicized earlier this week in a story that made global headlines due to Alibaba’s involvement. JD said that Alibaba was using its market dominance to pressure third-party online merchants to exclusively participate in Alibaba’s own Singles Day promotions. That implied it was telling those merchants not to take part in similar promotions by others like JD, according to the complaint. (previous post) Alibaba denied it was engaged in any such tactics.

The initial reports early this week only cited JD saying it had formally submitted its complaint to the SAIC. But now JD is saying on its microblog that the regulator has formally accepted the complaint. (English article; Chinese article) This particular development is incremental but also significant, since the complaint is based on a new regulation that came into effect last month as part of the SAIC’s efforts to create a more orderly e-commerce environment.

That regulation states that operators of online shopping malls can’t forbid the merchants that populate those malls from participating in promotions in rival malls. The fact that the SAIC has accepted the complaint could show that it believes JD’s accusations could be valid, meaning Alibaba could ultimately be penalized if found guilty of violating the new rule.

Avoiding Negative Publicity

Any fines related to a guilty finding are likely to be small and inconsequential for a company of Alibaba’s size. But Alibaba is desperate to avoid negative publicity these days, following a major scandal early this year that saw the SAIC accuse it of allowing frequent trafficking in pirated goods on one of its most popular sites. The resulting spat sparked a months-long sell-off for Alibaba’s stock, wiping out billions of dollars in market value.

Alibaba’s strong desire to avoid more negative publicity was quite apparent in the other reports surrounding the visit to its Hangzhou headquarters this week by SAIC chief Zhang Mao. (Chinese article) The stories are mostly positive and quote Zhang commending Alibaba for its pioneering role in Chinese e-commerce. They also cite him wishing Alibaba success in advance of next week’s Singles Day promotion that has become the world’s biggest online shopping day in its brief history.

But it’s almost certain that Zhang had more frank discussions with Alibaba executives behind closed doors, telling them to be more active in stamping out piracy and not to abuse the company’s dominant position in Chinese e-commerce. In the end, I do think the SAIC will probably keep this kind of frank discussion with Alibaba private in the future, which should help to avoid too much negative publicity. But JD has little interest in avoiding such negative developments, and is likely to widely publicize any negative finding against Alibaba in its own case. Alibaba’s shares could also come under pressure if it gets criticized in an annual US report on piracy that’s also due out in the next 2-3 months.

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