Alibaba 'comes clean' on fraud but cynics are unimpressed
Jack Ma Yun is definitely one of the smartest businessmen in China. The founder of the country's largest e-commerce group, Alibaba.com, has successfully turned a corporate scandal into a gain - at least as far as his personal reputation is concerned.
Mainland media now hail him as the 'crusader for corporate integrity' or the 'courageous corporate conscience'.
It all happened virtually overnight after the firing of two Alibaba.com executives for failing to taking action against scams involving 2,326 fraudulent traders and 100 salespeople.
Alibaba volunteered its own story on the fraud on Monday, emphasising it was the result of an internal investigation.
It offered an 'investigative' piece by its 'in-house journalist' which gave all the details and, thus, fended off further digging by reporters. It said 'the scope of the fraudulent activity appeared to be within the risk range for e-commerce websites in general'.
Ma himself issued an open letter that said: 'Profit maximising is never Alibaba's top goal ... We would rather see no growth than hurt the customers. Let alone cheating ...'
He compared the house-cleaning to the courageous ancient Chinese general Guan Yu who had a physician cut open a wound in his arm and scrape away the traces of poison from an arrow - while he was playing a game of weiqi.
'The world doesn't need another profit-pursuing company ... but one that is courageous enough to shoulder its social responsibility ...' Ma said.
In a society that has seen enough cover-ups and lies, Ma's remarks sell really well. But, emotions and gestures aside, the ultimate question is whether Alibaba is truly serious about integrity and verification now. There are doubts.
In his letter, Ma appeared as the righteous and godly founder who's shocked to discover that some crooks and staffers have trashed the integrity of his enterprise. Is he? Here are some revealing facts.
First, Alibaba.com has been the target of fraud complaints for years. Overseas buyers are so fed up that a website - alibabascam.com - was launched in 2009. It carries a list of 1,000 allegedly fraudulent suppliers on Alibaba.
Second, Alibaba's double-digit annual revenue and profit growth comes largely from a six-fold increase in the number of paying suppliers in the past six years. They paid between 2,800 yuan (HK$3,314) and 30,000 yuan a year to put their names on the site as 'trusted' vendors. The strategy of growing revenue by adding paying vendors proved correct, said its 2009 annual report.
Third, Alibaba tells buyers it has verified these vendors, which means it has checked their business registration. According to the company, it spent 0.7 per cent of its revenue on authentication and verification in 2009. That means 46 yuan per paid vendor - the cost of a plate of fried rice and tea in Shanghai and Beijing.
Alibaba's verification expenses have dropped steadily in the past six years despite the significant increase in paying suppliers. In 2004, 1.7 per cent of Alibaba's revenue went on vetting. That was 77.30 yuan per paid seller.
Fourth, Alibaba's salespeople are rewarded largely on the number of suppliers and orders they have signed up. In 2009, sale commission and marketing expense accounted for 41.3 per cent of its revenue, or 2,965 yuan per paid vendor.
These salespeople are operating in a country where people cheat and bribe to get a loan to produce lethal baby milk and sell fake medicine.
It is hard to accept that Ma, Alibaba's non-executive chairman, and the board had no knowledge of these problems. But one cannot find the word 'anti-scam' or 'anti-fraud' in any of the company's annual reports. In response to our inquiry, an Alibaba spokesman said the company had over the past 18 months made reports to mainland law enforcers involving the alleged fraudsters and devoted both time and effort to educating its people.
Cynics, however, point to the 315 Evening Party, an influential annual consumer rights programme produced by China Central Television, which had warned that it would report on e-commerce fraud in its upcoming March show.
Alibaba could have silenced the cynics if it had hired an independent party to investigate fraud, review its internal controls and make suggestions for improvement to management. But it did not do that. Instead, independent director Savio Kwan, who worked for Ma until 2005, headed the investigation. Kwan was president and chief operating officer of Alibaba Group, Ma's holding vehicle.
Kwan heads Alibaba's audit committee, which is tasked with internal control and risk management and had failed to previously mention any systematic fraud or faults with the system over the past two years.
How much credibility should one give this investigation, which said only 1 per cent of Alibaba's paid sellers and 2 per cent of its sale people were involved in fraud and has yet to put a price tag on the total damage?
And there is not much comfort be found in the leadership reshuffle of Alibaba.com. Ma has installed Jonathan Lu, chief executive of Taobao, Alibaba.com's sister company as the new leader.
Taobao, China's largest retail e-commerce website, has its own integrity issues. Consumers have been complaining about getting counterfeits on the trading platform, which pledges to 'provide only genuine goods at genuine prices'.
In mid-2009, Ma denied the validity of the complaints, saying they were misunderstandings by consumers who had found the prices to be too good to be true, as well as a smear campaign by his competitors. Yet, within months, Taobao set up a 100 million yuan anti-fake budget. The problem continues. Last May, Ma admitted that fake goods were sold on Taobao and pledged to deal with that.
Taobao's Lu has yet to establish credibility in fighting fraudsters and now he'll be overloaded with responsibility. According to a company announcement, Lu will retain his Taobao job. Yet it is widely known that Taobao is busy preparing its own listing.
How serious a house cleaning can Lu do at Alibaba.com? How serious is Ma about the integrity issue when he has appointed Lu?
Perhaps Lu's real contribution will be in bringing out the synergy between Alibaba.com and Taobao, which will be good for the latter's listing.
'His background is expected to allow him to take a leadership role in building an e-commerce ecosystem that would make it more efficient for manufacturers on the Alibaba.com platform to supply products to Taobao merchants or sell directly to Taobao consumers,' wrote Alibaba's in-house journalist. That's right. With the previous executives swiftly removed in the wake of the scandal, Lu can now enjoy a free hand. Who says 'integrity' and 'growth' cannot co-exist?