Whether it’s good news or bad news for Alibaba Group Holding Ltd (NYSE:BABA) shareholders remains to be seen, but the e-commerce giant is finally starting to crack down on the counterfeit merchandise that’s a little too easy to buy (usually unknowingly) through its online-shopping sites. Last week, the Chinese e-tailer sued two vendors for selling fake Swarovski watches.
The upside to the value of BABA stock is that with this official anti-bootlegged-brands stance, Alibaba’s e-commerce site gains more credibility as a venue … among consumers as well as vendors.
The downside is, a big chunk of Alibaba stock was built on sales of low-cost counterfeit goods. On balance though, there’s not quite as much risk to BABA stock in the company’s newest position on fakes.
BABA: Enough Is Enough
Any statistic that describes the amount of fake merchandise available via Alibaba’s e-commerce platform should be taken with a grain of salt; nobody truly knows. That hasn’t prevented counterfeit watchdog NetNames from taking a guess though; it believes anywhere between 20% and 80% of the goods sold via Alibaba’s Taoboa aren’t actually made by the companies their logos, looks and tags are supposed to imply.
NetNames’ suggested range of fake merchandise sold by Alibaba is admittedly wide, but that disparity underscores the complexity of the problem. Even if the real number is somewhere in the middle though, at 50%, that’s still 50% too much.
It’s an issue that has nagged BABA stock holders for years, though it has become a much more serious concern over the course of the past year or so. In fact, the problem of knock-offs became so prevalent that Gucci parent company Kering SA filed a suit against Alibaba in mid-2015, claiming that not only did the company not do enough to prevent counterfeit goods from being sold at its website, but that Alibaba actually encouraged it.
Kering SA’s suit was just a microcosm of how other brand names felt at the time.
The lawsuit, along with pressure from Chinese regulators, appeared to get CEO Jack Ma’s attention, finally prompting him to say,”There’s no ceiling for investing in fighting fake goods” early last year. Little changed in the months that followed, however. Indeed, Ma was almost defiant of the backlash in June of last year, saying:
“The problem is that the fake products today, they make better quality, better prices than the real products, the real names…. It’s not the fake products that destroy them [the real designers making authentic goods], it’s the new business models.”
He may well be right, but it’s not a philosophy that flies with regulators or brand-names.
The ongoing pressure seems to have finally sunk in, though. That, or the fact that the Office of the United States Trade Representative officially (once again) blacklisted Taobao in December seems to have gotten Ma’s attention. Last week, Alibaba filed lawsuits against two of its merchants for knowingly selling counterfeit goods. Presumably, the company will continue to file suits until it makes the point that fake goods won’t be tolerated at its e-commerce venue.
Or, will it?
Impact on Alibaba Stock
It’s easy to make examples of two vendors when there are thousands more that may or may not notice, or care. If Ma wants to make a statement that matters, he’ll need to take aim more often, with a bigger gun.
And therein lies the rub … it’s not clear to what extent Ma actually wants to crack down on the sale of fake goods at the Taobao website.
In the same sense, it’s impossible to determine exactly how much of the merchandise sold via Alibaba sites is counterfeit; it’s impossible to determine how much business may be lost (and not won back with sales of authentic goods) should Alibaba crimp down on bootlegged brands. But, if fake merchandise accounts for half the goods sold by the e-commerce giant, such measures may not actually be good for business, or for BABA stock.
And “half” may be a generous estimate. In January of last year, China’s State Administration for Industry and Commerce released a study it had commissioned suggesting that only 37% of the merchandise available on Taobao was genuine.
It’s in that light that the underpinnings of the lawsuits may not be as heartfelt as the more visible suggestion of them is. As Nissan’s William Forsythe commented late last year, “They are counting the money with their left hand, and covering their eyes with their right.”
To that end, it’s not clear if Chinese regulators are entirely on board with the premise either. Counterfeiting is almost a $400 billion industry in China, accounting for roughly 12% of its exports. Alibaba is a big reason that industry has managed to grow at a time the nation desperately needed more jobs to meet its growth goals. If Taobao can’t sell a big chunk of those goods, the ripple effect could be significant.
Fortunately, there’s more bark than bite with the most recent anti-counterfeiting showmanship.
Bottom Line for BABA Stock
For better or worse, Ma isn’t terribly serious about quelling sales of sham goods via Taobao. It’s one of those things where consumers — most of them anyway — quietly know the game, understanding no authentic Gucci handbag can sell for $30.
The real Gucci has good reason not to like it, but a buyer of a $30 knockoff isn’t apt to be a potential buyer for the real thing. And, even to the extent fake merchandise should be combated, the sheer number of those vendors makes it an almost insurmountable task.
In other words, Alibaba stock holders worried the two recently filed lawsuits mark the beginning of a much more disruptive period for the e-commerce giant need not worry.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
