INTERNET: Regulatory Toughness Needed Towards Alibaba, Telcos

Bottom line: China’s largest corporations need to face stiffer regulatory penalties to ensure their compliance with Beijing rules, as part of a campaign to clean up the country’s business climate.

More strictness needed in Alibaba, telco cases

Some of China’s leading high-tech firms were in the headlines last week for foot-dragging in response to government calls to change their business practices, in separate cases that show why Beijing needs to get more aggressive about enforcing its rules among big domestic corporations.

The first case saw e-commerce giant Alibaba (NYSE: BABA) sued by one of the world’s top makers of luxury goods for allegedly refusing to clean up its popular sites of trafficking in pirated goods. The second saw critics accuse China’s 3 major mobile carriers of taking largely empty steps to improve their mobile data pricing and speeds, after Beijing called on them to take such action.
Both cases reflect an increasing boldness among big domestic firms about breaking or ignoring central government rules, knowing they are unlikely to face strong punitive action due to their importance to China’s economy. Beijing has taken a far harder stance against similarly large foreign companies, leveling big fines and taking other steps to force them to change their ways.

Now it should consider taking similarly aggressive steps to tackle cases involving domestic giants like Alibaba and China’s 3 big wireless carriers. Such actions would dispel criticism that China unfairly targets major multinationals for regulatory violations, and would send an important signal that big domestic companies must also play by rules that Beijing sets for healthy market development.

Alibaba has been in the headlines for much of this year on the issue of piracy, following the release of a government report in January that found a majority of goods traded on its Taobao marketplace were fakes. The latest story in that saga came last week, when it was sued in New York by Kering SA (Paris: PRTP), owner of luxury brands including Gucci and Yves Saint Laurent. (English article)

The lawsuit accused Alibaba of allowing the trafficking of counterfeit versions of its products, prompting Alibaba to say the complaint has no basis. The lawsuit comes just 4 months after China’s State Administration for Industry and Commerce (SAIC) released its own critical report that found nearly two-thirds of the goods traded on Taobao were fakes. A high-profile squabble followed that ultimately ended with Alibaba promising to crack down on counterfeiting.

In a separate but similar case, China’s 3 big state-run mobile carriers have been coming under repeated pressure from Beijing to improve their service – most recently in the fast-emerging and cutting-edge area of mobile Internet services. Regulatory criticism dates back nearly 4 years, when China’s powerful state planner first leveled allegations against China Telecom (HKEx: 728; NYSE: CHA) and China Unicom (HKEx: 762; NYSE: CHU) for monopolistic practices in the fixed-telecom broadband space. (previous post)

The latest move has seen the telecoms regulator call on China Telecom, Unicom and leading mobile carrier China Mobile (HKEx: 941; NYSE: CHL) to improve speeds of their mobile data services, and also offer packages at lower prices. The trio enjoy a monopoly over the market for such services, leading to lackluster innovation that has caused China to become a global laggard in telecoms services despite the huge size of its market.

The 3 operators finally took some moves to heed the regulator’s latest call last week, but were immediately criticized for a lack of sincerity. (English articleChinese article) For example, observers noted that new plans offered cheap mobile data usage late at night when many people would be sleeping or would be more likely to use faster and more stable fixed-line broadband service. Other plans were criticized for slashing prices for high-speed service for users who were unlikely to need such service.

Both cases show how big names like China Mobile and Alibaba often drag their feet in response to regulatory oversight, mostly to protect their own profits. In such cases the regulators could be far more aggressive, for example by setting for goals and timetables for companies to meet requirements and then levying aggressive fines or even revoking business licenses if they fail to meet those goals.

Regulators have taken that kind of aggressive stance against a wide range of big multinationals over the past 2 years, resulting in quick compliance and record fines for such big names as leading global cellphone chipmaker Qualcomm (Nasdaq: QCOM) and luxury car makers like Audi. Regulators should consider getting equally tough on the big Chinese names like Alibaba and China Mobile, and not be afraid to punish them with big fines or other restrictive actions when they fail to comply with government requirements designed to foster the healthy development of emerging markets.

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