Ecommerce – Alibaba And Clawing Back Consumer Confidence

26th April, 2017 by

One of the first and the most enduring ecommerce successes worldwide, eBay has always stated their real achievement isn’t global reach or trading success, but the level of trust they have built between people who are possibly on different continents who have never, and are never likely to meet.

When Jack Ma founded the Alibaba Group in 1999, he was hoping to build the same levels of trust in the rising ecommerce market we expected from f2f transactions. Inviting business to business – and business to consumer – transactions as well as the eBay consumer to consumer model, Alibaba’s portal connected Chinese manufacturers with the rest of the world; something which hadn’t been happening up to that point.

By April 2016, Alibaba was the world’s largest retailer, with operations happening in close to 200 countries, and more revenue than and eBay combined. In September 2014, the company took the crown as the largest IPO in history, launching to the market with the Reuters code BABA.N, and with pricing initially raising $25 billion US. The shares were actually in a Cayman Islands shell corporation; not unusual for Chinese companies, as China forbids foreign ownership.

However, the company is not without considerable controversy; counterfeit goods, Gold Supplier membership, Uranium sales and other scams have all hit the company hard, and led to considerable efforts to restore faith in the Chinese e-commerce giant.

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Gold Supplier Membership

For a status which is supposed to indicate that a seller is genuine, it came as something of an embarrassment to admit that it had been granted to some 2,236 sellers who had subsequently engaged in fraudulent transactions with buyers.

Gold status isn’t free; sellers pay for the title and checks are stringent, with even more rigorous verification for sellers operating outside of China. With the checks listed on the website, this should be a guarantee of integrity. However, February 2011 saw the corporate office admitting that this supposed mark of trust wasn’t always what it appeared to be. The corporate office admitted fault, and the share price dropped abruptly. The general manager – Yan Limin – was dismissed for misconduct, and a further 28 employees who were involved also lost their jobs. Taking responsibility, the Chief Executive David Wei, and Chief Operating Officer Elvis Lee also resigned, even though they were not personally implicated. Internal investigations indicated some 100 sales staff, including supervisors and managers, were potentially involved, either “intentionally or negligently”. The company shares dropped 8.6% in Hong Kong the following day.

The investigation was rigorous, and delved deep into investigating the issues.

It was found that 1,129 gold suppliers registered in 2009, and a further 1,107 registered in 2010, and accounted for approximately 1% of the gold sellers registered over that two-year period. However, it was thought by the company that

“The vast majority of these storefronts were set up to intentionally defraud global buyers.”

They were selling consumer electronics at knock-down prices, and with very low minimum-order caps. Although critics of the crackdown state that the company had little choice, the hit to the brand was hefty all the same – had they not acted ruthlessly and quickly, the gold member status would have become worthless overnight. Even so, the share price eventually dropped by almost 15% – a considerable hit.

Everyone needs consumer and business trust to succeed.

With no commission charged on sales and an undeniable reliance on extra payments such as membership fees, Alibaba needed that consumer and business trust; and founder Jack Ma was – and remains – vocal about restoring confidence, sending the message that:

“It is unacceptable to compromise our culture and values.”

In a reassuringly frank and open interview with Forbes in March 2011, two things about Ma shone through; his anger at the level of fraud, and his passion for putting it right and restoring consumer and business confidence in his company. He spoke of the shock he felt at the what he felt was a systemic problem. The financial damage was small at around $2 million, but the hit to corporate trust was far more costly, as the perception was that short-term gain was more important. He also has a firm belief that his company’s problems are China’s problems, and that an emphasis on core values over profit is essential not just for Alibaba, but for the inevitable rise in ecommerce companies to come.

Further Issues

Only a year later, Alibaba once again found itself at the center of another scandal. In May 2012, an advertisement was posted on looking to buy uranium. The “American broker representing persons in Iran” was actually a US law enforcement agent. Arrests were made, but the fact that the accused was charged with looking to arrange exporting drums of yellowcake – a form of uranium concentrate powder before enrichment – from Sierra Leone to Iran is disturbing enough.

It’s not just dangerous materials making their way to Alibaba. The fraud tag refuses to go away, especially in connection with counterfeit items. Taobao – the ‘Chinese eBay’, and part of the Alibaba Group, is on a US Office of the Trade Representative list that puts it up there with Pirate Bay for the distribution of counterfeit material.

The issues aren’t all Alibaba’s fault – and indeed they are issues that hit other ecommerce giants Amazon and eBay on a regular basis. Cracking down on fraud and enhancing buyer protection are both issues that take considerable effort to implement, and indeed, the chances of ever being able to offer a guarantee that all online transactions are exactly what they seem is probably an impossible goal. Additionally, buyer protection promises are often difficult to put into action, especially when fake businesses disappear from the platform as soon as they’ve taken the money. Alibaba’s action against counterfeiters has been described as ‘timid’ – as of January 2017, only two lawsuits had been filed against fraudulent sellers.

However, Ma’s integrity is unquestionable – for him, Alibaba wasn’t about the money, but providing a shopfront for small manufacturers to sell overseas. If anyone can turn the Alibaba name away from ’40 thieves’ and back to ‘open sesame’, it’s Jack Ma.

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