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Are Fake Goods To Blame For Alibaba’s Stock Slump?

Alibaba’s executive team has repeatedly said it’s taken strict measures to combat fraudulent sellers on its marketplaces, but there’s another force in China’s e-commerce market that’s making it harder to regulate: brushing.

Just what is this phenomenon and why could it be impacting the latest dose of regulatory that the e-commerce giant Alibaba faces? And now possibly the value for its shareholders?

The Wall Street Journal took a look at the concept, which it explains involves a merchant or seller hiring people to make purchases through its sites in order to increase sales and give the merchant a better spot on the marketplaces, also known as “padding” its sales. Brushing works by the vendor finding “brushers” to buy products with its money, and the vendor then sends them fake packages. The so-called “brushers” are then expected to write positive reviews that in turn help that vendor get a higher rank in the marketplaces’ search results.

Sites like Alibaba, for example, give preference to larger merchants which are likely to bring in more sales, since it benefits the company to have prominent sellers featured. Ironically, Alibaba was also accused by Chinese regulators of accepting bribes from merchants to earn a better spot on the site, but has adamantly denied such claims.

While brushing is illegal in China, and Alibaba said it has invested in technology to combat the fraudulent seller and buyer behavior, that doesn’t exactly appear to have stopped merchants from engaging in the practice.

For example, WSJ interviewed two entrepreneurs (identified only by their last names) who admitted to participating in the fake ordering practice. One of those entrepreneurs fessed up to leading a brushing group which he claims took part in millions of fake orders on Alibaba’s marketplace. Claims like that certainly don’t help Alibaba’s case that it can regulate who is cheating the system or not. According to WSJ’s report, Alibaba says it removed known fake transactions from its merchandise volume ($274 billion) from its Taobao and Tmall sites. Still, there’s no guarantee they’re able to catch every fraudulent transaction — at least that’s what’s kept the regulators eyeing the e-commerce giant.

The WSJ article also cited a report from China’s state-run Xinhua News Agency which said 17 percent of all merchants faked transactions (1.2 million sellers), according to Alibaba’s Vice President Yu Weimin, who said that estimate was “conservative” and “only the tip of the iceberg.”

Alibaba’s Vice Chairman Joseph Tsai said Alibaba has a “zero-tolerance policy” against fraudulent behavior — including measures in place to stop, flag down and block merchants who act outside the law. He also said Alibaba has always worked with regulators, spends its time and money into ensuring data technology and IP firms help catch counterfeit goods. Tsai defended Alibaba’s practices against accusations from the SAIC, China’s regulatory agency, that said Alibaba didn’t have a system in place to stop fake goods from being sold on its marketplace. Alibaba wasn’t accused of selling counterfeit goods itself, but the SAIC report described the issue as Alibaba’s “biggest credibility crisis since it was founded.”

Alibaba’s Slump Drags Yahoo’s Value 

Alibaba has had better days, like when it posted a record-breaking $25 billion IPO last September.

Fast forward to March 3, 2015, when Alibaba’s stock has hit a new post-IPO low, Seeking Alpha reported, bringing the company’s trading shares to just 19 percent above their IPO price ($68) to $82. Alibaba, overall, was down 3.3 percent during trading yesterday (March 3). Overall, Alibaba’s shares hit an all-time high in November, according to Yahoo Finance, but the shares are now down by more than 30 percent from that time.

Alibaba’s slump didn’t just impact its shareholders, of course, but its problems also seemed to impact Yahoo, which saw a 3.8 percent dip during yesterday’s trading as well. Yahoo, a major investor in Alibaba (which it is soon spinning off), saw its investment value dip from $38.4 billion to $31 billion following Alibaba’s stock drop.

 

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