Why Alibaba can't stop counterfeiters

It's hardly a happy new year for Alibaba Group Holding Ltd. Just before Christmas, the US Trade Representative added Alibaba's Taobao e-commerce site to a list of "notorious markets" that traffic in counterfeits. That's an unseemly place for a publicly held company: Other members include a Chinese shopping mall that specialises in counterfeit leather goods and a Paraguayan border market rife with organized crime that hawks everything from fake Ray-Bans to knockoff DVDs.

Alibaba isn't keen to be associated with this motley group. But like Amazon.com Inc., EBay  and other online marketplaces dependent on Chinese manufacturers, it has struggled to maintain its integrity against an onslaught of counterfeiters. Without an aggressive crackdown by China's government, these marketplaces won't stand much of a chance against the fakes.

By many measures, counterfeiting is one of China's leading industrial sectors. A study by the US Chamber of Commerce found that it brings in about $396 billion annually, representing some 12 per cent of China's total exports and 1.5 per cent of its gross domestic product. Last year, when just one Chinese province decided to crack down, it shut 417 "manufacturing and sales locations" with stock worth more than $200 million.

This large-scale criminal enterprise has surprisingly staid origins. The global outsourcing boom that started in the 1980s brought foreign factories and expertise to China. Workers at those factories excelled at making iPhones and other consumer goods, but also quickly learned how to knock them off. These days, it's not unusual for a new product to face counterfeit competition in China within days of its release — or, in the case of the iPhone 6s, days before its release. In some instances, as with last year's hoverboard craze, the knockoffs proliferate so quickly that the original patent and brand owners are forgotten in favor of generic "made in China" versions.

This parallel economy is no secret. Last year, Alibaba co-founder Jack Ma bluntly told a gathering of retailers that counterfeiters use exactly the same factories and raw materials as legitimate manufacturers. Local governments tend to look the other way — or worse. A 2009 diplomatic cable released by WikiLeaks reported that China's economic downturn at the time was weakening efforts to enforce intellectual-property protections. In one passage, it described how Apple Inc.'s effort to shut down a MacBook counterfeiting line was rebuffed because it would threaten "100 local jobs."

That's actually pretty sizable for a knockoff operation. I've visited counterfeit iPhone "manufacturers" in Shenzhen that consisted of only a handful of family members. They would expertly assemble parts into reasonable facsimiles for sale via online marketplaces such as EBay, Lazada and Taobao. Though none of these marketplaces welcome counterfeiters, they do welcome small Chinese manufacturers — and distinguishing between the two is often difficult.

Amazon, for instance, has tried to fight off a growing problem with fakes, but in doing so has risked disqualifying legitimate small retailers, who use the site to sell everything from paperclips to pillow covers directly to consumers worldwide. Such entrepreneurs reduce costs for customers and constitute an important and fast-growing segment of Amazon's online marketplace.

As a China-based company, Alibaba has greater exposure to counterfeiting than Amazon does, given that Chinese consumers are generally quite price-sensitive and less averse to purchasing fakes. But it isn't helpless. For one thing, it could simplify its procedures for brand owners to report instances of counterfeiting. It could also use its global profile and political leverage to push the government to prosecute more counterfeiters.

Although that might be risky for Alibaba, the alternative is to resign itself to a reputation befitting a notorious flea market — not one of the world's most influential e-commerce companies. Given the choice, Alibaba shouldn't hesitate to prove it's better than the counterfeiters.