INTERNET: Shutters C2C Site, Concedes to Taobao

Bottom line: JD’s decision to shutter its Paipai C2C marketplace looks like a smart move, as China looks set to crack down on online trafficking in fake goods that is often rampant and hard to police on such sites.

JD to shutter Paipai by next April

E-commerce (Nasdaq: JD) has just announced it is formally shuttering it Paipai C2C site, citing difficulties policing the thousands of small merchants and individuals who sell products on the site. Timing of the move is slightly strange, since JD announced the downbeat decision just a day before the November 11 Singles Day, which has become the world’s biggest day for online shoppers.

On the surface at least, the move looks like a major victory for archrival Alibaba (NYSE: BABA), whose Taobao online marketplace competes directly with Paipai and controls the vast majority of China’s C2C e-commerce market. But the move also represents a major tactical decision for JD, since C2C markets are notoriously difficult to police for fakes, substandard products and fraud due to the huge number of merchants they host.

Many people will recall that those kinds of quality control issues were directly responsible for a major scandal that engulfed Alibaba early this year, sending its stock into a tailspin. That scandal saw China’s commerce regulator issue a report that showed its own survey found that nearly two-thirds of the products sold on Taobao were fakes.

Alibaba has pledged to clean up Taobao and be tough on piracy, but JD’s latest move shows just how difficult that is to do . Apart from the huge numbers of merchants that must be vetted and watched, such C2C site operators must also constantly be watching out for fraudsters and pirates that get kicked off the site, only to return using different names.

According to the latest reports, merchants on Paipai will stop taking new orders on December 31, and the actual site will be formally shuttered by April next year. (English article; Chinese article) A visit to Paipai’s actual site has no word of the pending closure, at least not on the home page. Instead the site is filled with the promotions that one would expect for the ongoing November 11 Singles Day online shopping extravaganza.

Paipai added that starting today it would no longer allow new sellers to register on the platform, and that existing sellers can apply to transfer to JD’s own platform for third-party merchants. JD cited a number of reasons for the decision, but the bottom line was that it was too difficult to police the site for fraudsters and sellers of fake and low-quality products. JD pointed out that China’s registration rules and penalties for violators  were both insufficient to deter such problematic sellers.

Origins at Tencent

Paipai was originally the C2C marketplace for social networking (SNS) giant Tencent (HKEx: 700), and got transferred to JD last year after the pair formed a major strategic partnership that included an equity tie-up. Paipai’s staff moved to JD as part of that deal, and the site itself was relaunched last July with an eye to challenging Taobao”s dominance. (previous post)

Paipai’s history dates back to 2006, but it never gained much traction by the time JD took it over. JD’s commitment to the service was never very strong, though the C2C market was one it couldn’t ignore due to the huge success of Taobao. But the Taobao scandal early this year also highlighted the challenges of running a C2C marketplace, and I suspect JD and Tencent probably held some consultations on that element of the story before making the final decision to close Paipai.

In addition to putting Alibaba under pressure from its own regulator, the piracy issue at Taobao has also put Alibaba at risk of coming under similar fire in an upcoming annual piracy report put out by the US. China has also indicated it plans to get tougher on the problem, recently issuing draft rules for fighting online piracy and copyright infringement. (English article) With all those signs of a much tougher climate coming, JD’s decision to close Paipai isn’t a surprise and even looks like a smart tactical move.

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