Alibaba, and Why Counterfeiting Is a Hard Habit to Quit

Author Zhang Xinyu / Edited by M.E. Strickland

During China’s two sessions legislative conference in March, Alibaba’s Jack Ma posted a public letter online calling for the sale of counterfeit goods to be “treated like drunk driving.”

Perhaps it’s not the most obvious comparison to make, but Ma said he believes that the tough enforcement measures and penalties taken against drunk driving in China in recent years have proven themselves effective, and hopes that “da jia,”—crackdowns on counterfeiting—can be done just as forcefully. But there are reasons why no such crackdown may ever work, no matter how sincerely Alibaba and others might push for it.

And of course, some might question how sincere Alibaba could really be, given that the company has been under fire off and on for years for the sheer quantity of counterfeit products and knockoffs sold through its online platforms (Alibaba, a B2B platform, as well as Taobao and Tmall, two somewhat different B2C platforms). Though of course, it’s not just Alibaba, either. Online retailer Jingdong has been derided by some as a “second hand” store. Jumei, which sells mainly beauty supplies, has seen its stock price directly track news stories of counterfeit goods. But Alibaba and its subsidiary platforms seem to have been almost cursed, unable to shake a certain notoriety at home and abroad as shameless dealers in fake goods.

That reputation for counterfeiting has had real consequences for Alibaba’s prospects outside of China. In October of last year, the American Apparel and Footwear Association called on the US government to put Alibaba and its subsidiaries on a “notorious market” blacklist, resulting in Alibaba’s share price taking a tumble. Alibaba hit back, “using facts to refute the allegations,” and emphasizing the results the company has achieved in recent years in pushing back on intellectual property infringements. But two months later, it wound up on the trade blacklist regardless. Donald Trump later met with Jack Ma in New York (at that point having been elected, but not yet sworn into office). It’s impossible to say what, if any, understanding was reached, but Ma declared that Alibaba would bring a million new jobs to the US.

This wasn’t the first time Alibaba had been put on notice, however, with its Taobao platform placed on the same list of notorious markets back in January, 2012, which in turn spurred a condemnation from the Chinese Ministry of Commerce, which then led the US to remove Taobao from the list later that same year.

It’s hardly surprising that the Chinese government would throw its support behind one of the favorites of domestic industry in an international trade issue. But that backing may not be so complete as it might seem, as the Chinese government itself has recently chosen to take Alibaba to task. This year in the lead up to the two sessions, one of the representatives from Guangdong province—where so much manufacturing is located—produced a statement arguing that the counterfeit business online was doing harm to the “real economy” (as opposed to the “virtual economy”). Alibaba couldn’t ignore such a direct critique from on high, and issued its own statement the very next day, bowing to the point and reaffirming its own opposition to the sale of counterfeit goods.

Then, on the eve of the two sessions, Alibaba upped the ante and announced the results of an investigation into dubious sellers on its site, identifying 4495 sellers with sales balances far in excess of the fines they would expect to pay for counterfeiting. And yet on the basis of publicly available information, Alibaba could confirm that a mere 33 of those sellers, or less than 1%, had been charged. It was in light of this apparent laxity that Ma made his call for a tougher crackdown.

So this is what lies behind Alibaba’s latest statement: not only do they now face international pressure to curtail fake goods being sold through their sites, but pressure from China’s own government as well. Yet even if all sides in this—Alibaba, the government, and international stakeholders—are on the same page, there are reasons why cracking down fake goods isn’t much like cracking down on drunk driving, as Ma alludes to.

While some counterfeit manufacturers may be what many would imagine—small operations churning out shoddy imitations of namebrand goods—many of the counterfeit operations in southeast China aren’t so much competitors of legitimate manufacturers as alter egos of the same: that is, the very same production lines that make legitimate, licensed clothing, appliances, and other goods also produce counterfeits, which is to say, the same products, made with the same materials in the same place as authentic goods, but simply sold without the proper licensing.

The causes of this lie in the basic, unforgiving facts of the manufacturing market: with limited orders, razor thin profits, and an inability to scale up, many of these factories have trouble even subsisting on legitimate goods production alone. In the days before online retail, these factories would hock their unlicensed production to lower tier cities and more remote places in China’s interior. The arrival of Alibaba and its peers, therefore, didn’t give rise to the counterfeiters, it just shifted their distribution channels and costs.

In light of this, inspectors making the rounds at factories are kept from putting a stop to all counterfeit production by a simple, hard-nosed realism—it can’t be done without cutting into the legitimate production that international brands depend on, especially now, when labor costs are rising, manufacturing orders are moving elsewhere, and more than a few factories have already been shuttered as a result. Equally, it would risk a shock to the local economy, with surges in unemployment and steep drops in tax revenue.

Everyone seems clear that if retailers and the government don’t take action against counterfeiting, legitimate brands and manufacturers lose money (not to mention China’s reputation for IP protections remains tarnished). But on the other side, there are forces pushing back; if enforcement is too heavyhanded, other manufacturers will struggle to continue on, leading to knock on effects that hurt many of the very same parties that actually want to drive out counterfeiting.

Alibaba, for the sake of enhancing its international reputation if nothing else, wants to crack down on counterfeiting. Some part of the Chinese government, at least, also wants that. Foreign companies and governments certainly want it. But the conditions on the ground, and conflicting interests on the part of both local governments and international brands, make the matter more difficult than even their own rhetoric would admit. Ma and Alibaba have signalled their intentions for stamping out counterfeit goods, but only time will tell if, and how much, they can really achieve.