INTERNET: Alibaba Spotlights China Internet Risk, Benefit For Govt
Bottom line: Government officials are being forced to deal carefully with newly minted Internet giants like Alibaba, which sometimes commit transgressions due to their youth but also provide huge contributions to China’s economy.
A trio of stories about Alibaba (NYSE: BABA) nicely summarize both the risks and benefits that China’s Internet juggernauts present for the government, which must walk a fine line between taming these newly minted giants while being careful not to kill such economic powerhouses. In just the space of a decade, Alibaba, alongside Tencent (HKEx: 700) and Baidu (Nasdaq: BIDU), have grown rapidly from venture-funded start-ups to become some of the world’s most valuable companies.
That growth and status has brought not only big prestige to China, but also valuable tax dollars to local governments and high-tech jobs that Beijing wants to replace lower-tech manufacturing labor. But at the same time, such young companies are particularly vulnerable to missteps, which can create chaos in the marketplace and Beijing needs to be careful to control.
One such misstep has dogged Alibaba since the beginning of the year, when one of China’s regulators accused the company of allowing widespread piracy on its hugely popular Taobao.com C2C e-commerce platform. In one of the 3 latest news items, regulators in Alibaba’s home province of Zhejiang have now fined the firm 800,000 yuan ($130,000) for allowing merchants on its main B2C marketplace, Tmall.com, to conduct misleading promotions. (English article)
While Alibaba suffers from that negative publicity, the broader benefits the company provides to China’s economy are present in the other 2 news items. One of those quotes Zhejiang’s governor saying that Alibaba on average provides more than 30 million yuan each day to provincial tax coffers. (Chinese article) The other item cites a recent report saying Alibaba founder Jack Ma was China’s biggest philanthropist, donating a massive 14.65 billion yuan to charities over the last year. (English article)
Let’s begin with the fine, which looks relatively tame by western standards but is actually quite big for China where such fines are usually very small. In this case the fine was actually quite costly for Alibaba, as it wiped 2.6 percent off the company’s stock after the news came out — equating to about $5 billion in market value.
The regulator broke the fine into 2 parts, one totaling 500,000 yuan related to 2013 promotions on November 11 Singles Day, an online shopping binge day created almost single-handedly by Alibaba. The other totaled 300,000 yuan and was related to other promotions in 2013 and 2015. Media reports said the complaints center on the fact that some online merchants often raise their prices prior to a promotion, then lower them back to original levels and trumpet the move as a “sale”.
This kind of pricing issue on both Tmall and the earlier counterfeit scandal on Taobao are both related to Alibaba’s business model, which sees it operate online malls that are home to thousands of large and small sellers. Such merchants are notoriously difficult to control, though western peers like Amazon (Nasdaq: AMZN) and eBay (Nasdaq: EBAY) have found ways to address that problem. Alibaba also takes its own steps to address issues like piracy and misleading promotions, though clearly the regulators are not satisfied with the results.
The other 2 news items are relatively straightforward, spotlighting the huge contributions that Alibaba makes to China’s economy. The company is a huge status symbol and economic contributor to Zhejiang, which is why it can regularly attract officials as high as provincial governor Li Qiang to its events. Li was on an inspection of the company when he revealed Alibaba paid 10.9 billion yuan in provincial taxes last year, making it the only company to pay more than 10 billion yuan.
The other report comes from an annual list of China’s biggest philanthropists. Jack Ma easily topped this year’s Hurun list with his 14.65 billion yuan in donations, trouncing the second biggest philanthropist, electronics chain store magnate Tang Lixin, who donated just 315 million yuan. China certainly needs this kind of philanthropy and Ma is a hugely good role model for this kind of positive behavior, which is why the government needs to tread carefully when it punishes Alibaba for its occasional missteps.
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