Two major Chinese e-commerce platforms named and shamed by the US Administration
On April 25, 2019 the US Trade Representative Office released its Annual Special 301 Report on Intellectual Property Protection and its Review of Notorious Markets for Piracy and Counterfeiting.
1- A new comer and a multiple award recipient
Among the “winners” this year, two of the top three e-commerce Chinese e-commerce platforms: Pinduoduo and Alibaba’s Taobao.
PINDUODUO
Pinduoduo was created four years ago, and listed on the Nasdaq in June 2018, raising USD1.6 billion, making it one of the largest IPOs of 2018. Its founder, now billionnaire, Colin Zheng Huang sounds very much like Jack Ma of Alibaba with grandiloquent statements (granted, most of companies’ statement the world over are pretty lame), like “Fulfilling our social responsibilities is the cornerstone of our value system – protect intellectual property rights, combat counterfeits vigorously, support farmers, and alleviate poverty.” But step away from official PR statements and you get to see a whole different situation. According to the UNIFAB (a French association of fight anti-counterfeiting comprising 200 member companies stemming from all the business sectors) ? The presence of counterfeits is tremendously high. It is almost impossible to find real products on this platform ?. And it is not only foreign brands that complain. TV maker Shenzhen Skyworth Digital Technology issued a statement that Pinduoduo listed many counterfeit Skyworth-branded products. According to the USTR, many brand owners also reported an increase in consumer complaints after “Shanzhai” versions of their products were listed.
The USTR report tells us that “Many of these price-conscious shoppers are reportedly aware of the proliferation of counterfeit products on pinduoduo.com but are nevertheless attracted to the low-priced goods on the platform”. Indeed, this is something we see all over the world: Some customers are looking for fakes, or know what they’re buying is not the real deal. As I pointed out in an article last year (“Fakes on Taobao a persistent problem”), social acceptance of fake brands in China is high. But with Pinduoduo these Chinese customers seem to have found the perfect outlet.
As notes Channel, Pinduoduo is “the fastest growing App in the history of the Chinese Internet”, and since March the second Chinese e-commerce platform according to its founder in a recent letter to its shareholders (https://investor.pinduoduo.com/company-information/message-shareholders), so we can understand brands wariness. But one has to keep in mind that this “success” is fragile: “In 2018 they spent more than their revenues on sales and marketing ?.
What impact?
A few months ago, just after its listing, the company took some heat because of some Chinese official inquiries following media reporting about the availability of fakes on sale. But the share’s price quickly recovered after “the company reportedly took down listings of counterfeit products, announced an effort to cooperate with brands to launch flagship stores with legitimate products on its platform, and invested in artificial intelligence tools to police the platform automatically for counterfeit products”. More precisely, “in the week spanning August 2 to 9, the company said it shut down 1,128 stores, took down 4.3 million listings, as well as blocked 450,000 suspected counterfeit good listings from going up on the platform”.
The publication of USTR notorious markets report seems to have a quite limited effect on investors. A look at the share’s price in the week following the publication does not show much of an impact, if any. On the day of the publication Pinduoduo’s share price did fall by more than 5%, closing at $21.92 on April 26, 2019. But less than a week later, it sells at more than 23 USD.
Did the measures announced in August 2018 changed anything regarding the products on offer? Not much according to the USTR: “Counterfeit and pirated products, including counterfeit copies of legitimate products sold in the flagship stores, appear to remain widely available on the platform”.
TAOBAO
Taobao marketplace has been listed as a Notorious market in 2008, 2009, 2010 and 2011. And again in the 2017 and 2018 edition. Not that great a result for a company that says it “spearheads a new model for intellectual property protection”.
According to the USTR, “although Alibaba has taken some steps to curb the offer and sale of infringing products, right holders, particularly SMEs, continue to report high volumes of infringing products and problems with using takedown procedures. Serious concerns remain about Alibaba’s responsiveness to SMEs, who continue to express concerns over ineffective takedown procedures, burdensome enrollment requirements for a Good Faith program that reduces the evidentiary burden for takedown requests, and Alibaba’s delays in respondingto SMEs”.
It echoes the UNIFAB’s statement: ? Though the Alibaba Group is trying to limit the counterfeit issue on its platform, Taobao.com remains a marketplace wtih counterfeits sold online. Alibaba mentioned that proactive measures are implemented to reduce the level of infringement but the contents of such proactives measures remain not totally clear. ?. MEMA, the trade association for motor vehicle and mobility suppliers and parts manufacturers and remanufacturers, also ? sees progress in the Alibaba processes, but its members have continued to express concerns that the processes are needlessly complicated, time- consuming, and ineffective. Furthermore, its members also continue to report a significant volume of counterfeit and infringing product on Alibaba platforms”. It seems to reflect what most brands’ owners think: Alibaba “talks the talk but does not walk the walk”.
What transpires from the statements of the parties involved, including Alibaba, is the absence of clarity regarding the actions actually taken, and their efficiency.
In its January 2018 report, the USTR pointed out that ? Alibaba has not identified metrics to assess objectively the scale of infringing products sold on Taobao.com nor objectively demonstrated that the volume or prevalence of counterfeit goods has decreased over the last year ?. Pretty much the same remark in 2019: “Alibaba’s statistics […] do not provide data for cases […] from the taobao.com market place”.
Among things Alibaba says it does, is the closing down of online shops: 240 000 between September 2016 and August 2017. The number for the year between September 2017 and August 2018 is “confidential”, but “it further demonstrates the robustness of [its]IP protection program” according to Alibaba. It could be helpful to know how many shops there are on Taobao to get a sense of the importance of this number. But unfortunately, this information is not publicly available.
What impact?
Alibaba’s share price does not seem to have been impacted by the USTR report, and most of analysts seem bullish, and even the news on April 30, 2019 that Alibaba agreed to pay $250M to settle a lawsuit over failure to disclose counterfeit claims did not hamper its prospects.
The most notable change might be the muted reaction of Alibaba. It simply said that it did not agree with the decision and that it “will continue to wage this fight against counterfeiters”. A far cry from what its President said last year: “this is a deeply flawed, biased and politicized process”.
One could then consider that its strategy is working: Convince some of the most vocal critics to join its very own “Alibaba Anti-Counterfeiting Alliance”, resulting in silencing them as well as the industry associations of which they’re member (and as a bonus getting Alibaba a “good” award), public relations activities with a smart timing, muddying the water (by using unclear metrics, and not differentiating platforms) and avoid a confrontational attitude.
2- What are the options for the brand owners?
For most SMEs, selling their products in the Chinese market without a store on the major platform there (“Annual active consumers on our China retail marketplaces reached 636 million, an increase of 35 million from the 12-month period ended September 30, 2018”) is difficult to imagine. But this quasi monopolistic situation is not why they come, according to Alibaba: “The fact that 180,000 brands and millions of SMBs [small and midsize businesses] operate on Alibaba’s platforms demonstrates the trust they place in us, and we will continue to work tirelessly to protect brands of all sizes and consumers”.
The meteoric rise of Pinduoduo, and its growing importance (even if only the bad image their offering could generate for the companies producing the real thing) is an additional challenge.
Even if the USTR report has a limited impact, it contributes to the pressure on Chinese online platform to clean their act. In the meantime, it is possible to limit the proliferation of counterfeits of your brand on e-commerce platforms (not only Alibaba’s). Actions include:
- Register Intellectual Property Rights (IPR) before entering the Chinese market (not specific to online selling)
- Monitor your IPRs online
- Enforce your IPRs (online, offline): Collect evidence and analyze facts, evaluate strengths and weaknesses of your IPR vs. evidence collected and set up a strategy of enforcement, that typically includes filing a take-down notice with the platform, filing a civil/criminal/administrative case if relevant
More than ever, brand owners will have to keep abreast of the changing online retail environment, and probably allocate more resources to fight against intellectual property rights infringements. The legal landscape is also changing, and even if it is too early to make an assessment on the impact of the new e-commerce law (especially considering that the implementing rules are yet to be published), one can hope it will be an additional deterrent for bad actors.