Fight the power

Two private sector giants take on the government

Jack Ma, Executive Chairman, Alibaba Group, speaks at the WSJD Live conference in Laguna Beach

Fighting back: Alibaba in war of words with regulator SAIC

When Charlie Rose asked when Jack Ma first realised that Alibaba was a success, the founder of the e-commerce giant told the American TV host this story: “I went to a restaurant to go for dinner. And when I tried to pay the bill, the owner of the restaurant came to say, ‘Sir, your bill is paid by someone’. And there was a small note saying, ‘Hey, Mr Ma, I’m a customer of Alibaba, I made a lot of money, and I know you don’t make any money. I’ll pay the bill for you.’”

Another time, Ma was buying a coffee and someone sent him a cigar with a note thanking him for Alibaba (Ma politely declined, because he doesn’t smoke).

But the reception experienced by the Alibaba boss got a little frostier this month. Last week, the State Administration for Industry and Commerce (SAIC) published unusual criticisms on its website accusing Alibaba of allowing fake products to be sold on its platforms. It also alleged that company employees took bribes from merchants in exchange for better placement on the site. And the regulator called Alibaba “arrogant” and “narcissistic”, saying that it was “undergoing the biggest test of its credibility since its establishment”.

In the report the SAIC said it had conducted an audit that showed that nearly two-thirds of the merchandise sold on Alibaba’s popular Taobao platform was fake. It claims that it presented the results of the audit to the e-commerce giant last summer, but held off publishing the final report until last week for fear of derailing Alibaba’s record-breaking IPO that raised $25 billion last September in the US.

It is not the first time that Alibaba has been accused of allowing counterfeits to be sold. After the SAIC’s report came out, a joke began to circulate widely on social media: “Jack Ma, upset about the recent development, sought out a senior monk for advice. The monk didn’t speak for a long time but showed him an electric hot water bottle. After filling it with water, it suddenly exploded. Ma asked: ‘Master, are you saying my bad luck will soon be broken?’ The monk shakes his head: ‘No, I bought this from Taobao.’”

Ma hasn’t been in the mood for humour, and Alibaba quickly responded to the SAIC report, describing it as an “inaccurate and unfair attack”. It also questioned the audit for a number of reasons including its methodology and small sampling size.

The company also said it planned to take some form of legal action against the government agency.

“Very bold move,” a columnist responded in Hong Kong’s Ming Pao newspaper.

“But no matter how invincible Jack Ma is or how strong Alibaba is… it is not that difficult for the Communist Party to mess with you.”

Nonetheless, the bold response seem to have had some impact because SAIC backtracked on its findings, without further elaboration. An Alibaba spokesman said: “The most recent SAIC posting speaks for itself. We feel vindicated”.

Alibaba’s experience might give encouragement to China Pacific Construction Group (CPCG), after its chairman decided to take legal action against several local governments, too.

Last week Yan Jiehe, the founder of China’s largest private sector construction firm by revenue, launched lawsuits against six municipal and county governments for unpaid bills. In an interview with the Financial Times, the tycoon said he was “testing the waters” with the lawsuits, which are also intended as a warning to other debtors of CPCG.

Take the government of Jinning in Yunnan province, where CPCG delivered four infrastructure projects in 2012 at a total cost of Rmb184 million ($30 million). The Jinning government should have fully repaid the construction firm by the end of last year. However, CPCG claims that it still owes the firm Rmb95 million in debt and interest. Similarly, the government of Ningjin in Hebei province, where CPCG had completed 16 infrastructure projects by August 2013, is said to owe Rmb83 million. Yan says that he has repeatedly asked local governments to pay up but to no avail.

“Private enterprises are particularly vulnerable, so seeking legal action is our last resort,” he told a press conference last month.

China Business Times says infrastructure companies have always struggled with collecting contract payments, but that this is the first time that a private construction firm has taken local governments to court. CPCG’s course of action is “disregarding all decorum,” the newspaper suggests. (Though his gutsy approach is not entirely a surprise, given Yan’s nickname in the media as ‘China’s No.1 Madman’.)

“This case will be closely watched by other creditors of local governments,” says Zhong Liang, director for public finance ratings at Standard & Poor’s. “If China Pacific wins its case, more cases will follow.”

Still, China Business Times questions Yan’s chance of victory in the legal tussle. The tycoon admits that he is not wholly confident either: “My chance of winning the lawsuits? I am really not sure. But we need to not only safeguard the rights and business interests of private enterprises in accordance with the law, but also hope that through our efforts we will advance the promotion of the rule of law… My real purpose is not to ask for money but to help enforce the rule of law in this country. So even if it means my business will have to make sacrifices, so be it,” the tycoon added rather nobly (for our profile of Yan see WiC42).

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