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Alibaba’s Taobao has been a massive success—now it needs to grow up

A man walks past an advertising billboard showing the mobile app of Alibaba’s Taobao consumer-to-consumer site at a subway station in Beijing Thursday, Sept. 18, 2014. Alibaba Group's U.S. stock offering is a wakeup call about an emerging wave of technology giants in China's state-dominated economy.
AP Photo/Vincent Thian
A man walks past an advertising billboard showing the mobile app of Alibaba’s Taobao consumer-to-consumer site at a subway station in Beijing Thursday, Sept. 18,…
Published Last updated This article is more than 2 years old.

E-commerce platforms like Alibaba’s Taobao—where just about anyone can sell goods to just about anyone—have created markets and fortunes across China over the past decade. Look no further than country’s “Taobao Villages”—rural clusters of craftspeople who have escaped the depths of poverty by selling their wares via Alibaba’s shopping site. One, Donggaozhuang village in Hebei province near Beijing, has more than 400 online shops dedicated to selling yarn alone. Aside from retailers, e-commerce in China has made other businesses, like electronic payments and express delivery, significant industries. The increased demand for delivery alone has created millions of courier jobs for young people across the country. The growth is happening so fast that drivers now have more bargaining power with shipping companies because of a shortage of couriers in some places.

It’s impossible to deny the good that comes from this new type of commerce and the prosperity it brings. Specifically, Taobao has been a leader in empowering millions of female entrepreneurs across China—either housewives working as part-time sellers to supplement their family’s income, or as full-fledged businesswomen, often directly targeting other women with clothing, cosmetics, and other beauty products. A good example is Ao Luojia, an entrepreneur from Chongqing. She opened her first Taobao shop in 2012 and has since gone onto become something of a celebrity for marketing Tang Dynasty costumes to plus size women.

Taobao has also empowered small merchants. Zhang Yiwei in Zhuhai, across the border from Macau, sold more of his hand-crafted robots on Singles Day than he usually sells in a month. Zhang started making robots several years ago from gathering discarded nuts, bolts, and bits of metal from factories in southern China and now has a turnover of around 100,000 yuan ($14,600) worth of product per month.

“If I chose a physical store when I started this business, the cost and the risk would have been too high,” Zhang says. “Now I have my own company. I have a house, I’m married, and I own a car. I live a lot better than people who aren’t entrepreneurs around me in Zhuhai.”

But Taobao also has a dark side that regulators are just beginning to address. Much of the platform’s success has been built on illicit trade, with thousands of shops selling counterfeit goods or reselling goods brought into China that have evaded customs duties. There are also countless instances of intellectual-property infringement (Mickey Mouse and Peppa Pig are on all kinds of unofficial t-shirts and coffee cups, to name a couple of well-known brands). It’s the kind of thing that would get traditional brick-and-mortar shops shut down within a few days, but it’s been going on for years on Taobao with little cost, except for some bad PR.

“I think they want to reduce counterfeiting, and I think it’s difficult. They built their whole empire on that stuff,” says Matthew Brennan, a China tech expert and author of The Story of WeChat: China’s Super App “If you went to Taobao 10 years ago, pretty much everything was counterfeit.”

Alibaba says it takes these issues seriously and is using artificial intelligence to scan shops for brand infringements. But talk to online sellers and they say people adapt by obscuring images and words so they’re not easily discovered. This doesn’t even get into the illicit wildlife trade that’s appeared in online marketplaces like Taobao, JD.com and WeChat—things like pangolin scales, elephant ivory, rhino horn, lion’s teeth pendants, and endangered rosewood from Southeast Asia that’s prized as hongmu furniture in China. Taobao and other platforms have banned these materials, and Alibaba has partnered with environmental groups on these issues as well, but sellers simply adapt or go to other online-sales platforms now that Taobao is getting stricter.

Taobao has been listed as a “Notorious Market” in 2016 and 2017 by the Office of the United States Trade Representative for failing to curtail these abuses. The 2018 report has not come out at this point; Alibaba has requested Taobao be removed from the list but, given the current climate of trade disputes between the two countries, it’s far from certain that will happen.

“Cyberspace cannot be regulated exclusively by government but requires the cooperation of the private sector, which is inherently more interested in profit than in good governance,” writes Louise Shelley, professor of international affairs at George Mason University in Virginia, in her recently published book Dark Commerce: How a New Illicit Economy Is Threatening Our Future. “Alibaba does retain former Chinese law enforcement officers to vet its sellers and sales, but it needs to do more as it faces pressure for selling many counterfeit items on the internet.”

China’s first e-commerce law, which went into effect on January 1 of this year, could provide a way for combating some of this illicit trade, if it’s enforced. One of its targets are daigou, or the million or so shoppers who go overseas to buy items and bring them back to China without paying customs duties. The new law aims to register these people and require customs duties payments, but people are already finding ways around the restrictions.

Another major target of the new law is taxing sellers who are not declaring their income. Legitimate sellers with their own intellectual property, like Ao and her dresses and Zhang and his robots, say they are registered and are paying tax, but these are outliers. Ask most smaller sellers, and they’ll tell they’re not paying a fen or a yuan in tax, and don’t have any idea how to do so.

A seller of fruit and produce hadn’t even heard about the law or the tax situation when I asked. Another who works with a Taobao shop selling clothing said her shop will likely end up paying taxes since they’ll have to register as a business, like the registered and verified shops on Tmall have had to for a few years now. A relative of mine, with three shops on Taobao, said she has no idea what to do about taxes and has not been given any guidance by Alibaba about how to comply.

It’ll be interesting to see how much the tax law is enforced, since many sellers have slim profit margins and the government likely doesn’t want to put a lot of those shops out of business. But bigger sellers could be a target. Like the case with major Chinese actress Fan Bingbing, who had evaded taxes through a process of signing double contracts (one the government would see, the other that is the real contract), it will likely take major crackdowns of big tax evaders to get the multitudes to comply.

If Alibaba really wanted to follow the law and both educate and help enforce the tax rules, it could easily do so. In early January, the company moved to punish thousands of online sellers at the bequest of India after it was found people were evading taxes by marking shipments as gifts instead of items for sale. Whether Taobao will do the same largely depends on how serious China’s tax authorities are about raking in the billions in taxes that are being avoided.