Wednesday, February 23, 2011
China, Alibaba and the 2,236 thieves
IN ITS early days, the founders of eBay would often say that their real accomplishment was neither their clever technology nor the electronic marketplace they had created—both of which existed before. Instead, their achievement was spiritual: they helped create trust between people who never met.
Building this sort of trust was always going to be a challenge in China, where counterfeiting and the production of dangerously flawed products is rife, but it has been a key aspect in the development of Alibaba, China’s eBay-inspired ecommerce platform. The company’s value as an electronic listing service has always been evident: standard business directories had disappeared after the communist revolution and an information vacuum persisted after the economic re-awakening.
However, given China's problems with fraud and product quality, its potential as a trading platform has been a matter of debate, attracting both believers and sceptics. It now appears evident that at least some scepticism is warranted.
On February 21st, in a filing with the Hong Kong Stock Exchange, Alibaba announced two of its most senior representatives, David Wei, the chief executive, and Elvis Lee, the chief operating officer, would resign to accept responsibility for the company having granted "golden status" a mark of supposed integrity, to 2,236 dealers who it says had subsequently defrauded buyers. Although the two executives were not personally implicated, the company said an internal investigation had found that about 100 sales staff and “a number of supervisors and sales managers” were “directly responsible in either intentionally or negligently allowing the fraudsters to evade” various controls.
Alibaba says the average compensation claim from victims of the scams is only $1,200 but it has not so far disclosed how much the claims are likely to cost it in total.
In 2009, as the frauds started coming to light, the company set up a compensation fund, which has so far paid out $1.7m to 2,249 buyers.
The revelations, and the company’s response, have generated conflicting responses.
One view, which the company itself is vigorously promoting, is that the resignations and the firm's public announcements are indicative of Alibaba’s underlying integrity and quality. It investigated the fraud accusations thoroughly and was forthcoming in publishing details, in sharp contrast with other Chinese companies caught up in scandals, most notably those involved in distributing melamine-tainted milk.
Conversely, it can be argued that Alibaba had little choice. The revelations put the company’s very existence at risk. Anything other than a highly publicised defenestration of senior people could have been fatal to the overall business. The scam originated in a critical part of its business, a dedicated platform called “China Gold Supplier”. A trader pays a fee to join, and then after being verified by a third party, can sell to global buyers. The scams endangered the endorsement value of this verification system, and, of course, undermined the incentives for any global buyer to work through Alibaba. Had Alibaba done nothing, it may have ultimately been worth nothing.
The investigation attributed the fraud to “the pursuit of short-term financial gain at all cost”. It emerged at a time when Alibaba’s broader business prospects have seemed to be dimming. Its shares fell abruptly after the announcement, but even before it they had been trading at less than half their level in the heady days of 2007, following the company's initial public offering.
The company’s chairman, Jack Ma, is a brilliant speaker and acclaimed visionary and, apparently, too important to walk the plank with his underlings. In the aftermath of the announcement, he issued a letter saying, “only through holding onto our ideals and our principles will we be able to become the pride of this era!” Despite the resignations, global buyers considering using Mr Ma's portal may need further reassurances as to what those ideals and principles are. The Economist, Hong Kong