Alibaba's Woes in China Could Spread to the U.S.

Posted: January 30, 2015 
by Bruce Einhorn

--Alibaba is bracing for a backlash on all fronts after attacks from the Chinese government and disappointing third-quarter results--

In China, the land of the Great Firewall, local Internet companies are supposed to enjoy a home-field advantage. The Communist Party leadership is notoriously wary about the ability of ordinary Chinese to speak their minds, look at naughty pictures, or engage in other online behavior that makes censors jittery—and foreign-owned companies make officials especially nervous. Google, for instance, won't play by China's censorship rules. Local search giant Baidu, on the other hand, will.

Billionaire Jack Ma, chairman of Alibaba Group Holding Ltd.

Photographer: Scott Eells/Bloomberg

The Chinese government's interest in promoting local companies is one reason its current battle with Alibaba—China's most powerful Internet business—has given investors such a shock. Accusing Alibaba Group of allowing the sale of frauds and knockoffs on its online marketplace, China's State Administration for Industry and Commerce this week said billionaire Jack Ma's company "faces its biggest credibility crisis since its establishment." In a particularly damaging accusation, given Chinese President Xi Jinping's high-profilecampaign against corruption, the SAIC also accused Alibaba employees of taking bribes.

The company has fired back by filing a complaint against the regulator. Via Alizila (the group's communications arm), Vice Chairman Joe Tsai yesterday assailed what he called "inaccurate & unfair attacks against us."

Adding to Alibaba's woes, the company yesterday announced disappointing third-quarter results, with revenue of 26.2 billion yuan ($4.2 billion). Analysts had been expecting 27.6 billion yuan, according to a survey by Bloomberg. Net profit was 5.98 billion yuan, compared with the 8.8 billion yuan average of analyst estimates.

The fight is all the more surprising because until recently Alibaba's biggest bureaucratic troublemakers were not in Beijing but in Washington, D.C. A few years ago the company's main tormentor was the U.S. Trade Representative, which put Alibaba's Taobao marketplace on its annual "Notorious Markets" list of foreign businesses peddling counterfeits and other products that violate the intellectual property of American companies. In 2011, for instance, the USTR said Taobao had a "long way to go" in cracking down on the easy availability of infringing goods.

Ma was determined to get Taobao off the list. Fighting piracy is “not only for the country, it’s for our company,” Ma said in an interview with Bloomberg Businessweek in 2012. “If we do not take down these false products, it’s going to destroy Taobao." It would also make an IPO for Alibaba more challenging.

But at the end of 2012, after Alibaba retained James Mendenhall, a partner in the Washington office of Sidley Austin and former general counsel at George W. Bush's USTR, the U.S. government dropped Alibaba from the list of shame. Last February, the USTR heaped praise on Alibaba, saying the company "has continued working to rid its marketplace of infringing products through the procedures established in 2012."

Now that the Chinese regulator is singing a different tune, though, Alibaba should get ready for some new legal challenges in the U.S. The company's representatives discussed the SAIC's claims in meetings with the agency's Internet regulation director, Liu Hongliang, in July—about two months before its record-breaking New York Stock Exchange debut.

Did Alibaba need to disclose this information before going public? Following the plunge in Alibaba's stock price, which has dropped almost 14 percent since Monday, the class action lawyers are taking aim at the company. Pomerantz, a firm that says it fights "for the rights of the victims of securities fraud, breaches of fiduciary duty, and corporate misconduct," announced yesterday an investigation for Alibaba investors. Rosen Law Firm is investigating allegations the company "may have issued materially misleading information to the investing public," the New York-based firm announced yesterday. The firm "is preparing a class action lawsuit to recover losses suffered by [Alibaba] shareholders."

Several other law firms have said they're investigating, too. Responding to the law firms' announcements, Alibaba said today in a statement to Bloomberg that it is a company "with strong values" that "will vigorously defend the truth and our reputation."

Source: http://www.bloomberg.com/news/articles/2015-01-30/alibaba-s-woes-in-china-could-spread-to-the-u-s-

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