Alibaba Accused Of Selling Counterfeit Products By Chinese Officials, Alibaba Fires Back

Alibaba continues to post record numbers, but now there is discord between them and the Chinese government.

ABC News is reporting that the Chinese government regulators have accused Alibaba of insufficient control of counterfeit items being sold on the Alibaba website. What strikes most observers as strange is the timing of the report. The initial report was done and ready for release in July after investigating and meeting with Alibaba management, but the report was shelved because of Alibaba’s initial purchase orders, which were expected to raise millions in capital. The IPO raised approximately $25 billion.

Alibaba’s own initial prospectus touched on the issue of counterfeit selling, but mentioned nothing of the report before the September IPO. This report caused shares of Alibaba to go down by four percent, to a value of $98.45.

This issue expects to cause trouble for Yahoo! Inc., as well. Yahoo! currently holds a 15 percent stake in Alibaba, but Yahoo!’s shares were devalued by about $1 billion with the four percent drop. This was just hours after Yahoo! announced that it would shed the Alibaba shares later on this year.

“If the spinoff was going to occur at the end of this month, there would be nothing to worry about,” says Rosenblatt Securities analyst Martin Pyykkonen.

“But if Alibaba’s stock is down by 20 percent six months now, then there could be problems.”

The Wall Street Journal is reporting that Alibaba is not taking this report lightly. In a mostly unprecedented move, Alibaba is accusing the Chinese government and its regulators of causing irreparable harm to the reputation of Alibaba and Taobao, the platform Alibaba uses to get on the internet. Taobao said it is “willing to assume the responsibility of fighting fakes” and that its effort “is far from complete.”

“We believe director Liu Hongliang’s (of the Science Applications International Corporation, or SAIC) 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.

The SAIC had no immediate comment on the situation, or Taobao’s accusations.

Alibaba has claimed itself to be the victim of the counterfeit market, and welcomes greater supervision and regulatory control of the market, as well as stronger law enforcement efforts to crack down on the counterfeit market. Alibaba states it spends more than $16 million the effort against the counterfeit market.

“We understand the difficulties faced by the regulatory authority in regulating a fast-changing innovative environment, but we hope the authority can see the millions of young people” taking risks, innovating and persevering as entrepreneurs, it said.

[Image courtesy of Darry Ring]