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Alibaba’s Record breaking IPO

Could Alibaba have an Achilles heel?

09·09·2014

Alibaba’s Record breaking IPO

Could Alibaba have an Achilles heel?

09·09·2014

Alibaba’s initial public offering on the New York Stock Exchange is going to be huge. Just how huge, however, remains a matter for debate. China’s biggest e-commerce platform, which accounts for 80 percent of China’s online retail sales, still faces some major questions about its transparency and governance. In particular, the e-giant still has not gained control over the the fake luxury goods that proliferate across its platforms.

According to its updated SEC filings,  Alibaba plans to release of more than 320 million shares and raise more than 20 billion dollars on the New York Stock Exchange. The shares will be priced on September 18 and available for sale the following day. Individual shares, listed under BABA, are to sell for between 60 and 66 USD.

If Alibaba meets expectations, it will be one of, if not the largest, IPO ever brought to market. To put the size of the IPO in perspective, note that Alibaba is almost guaranteed to raise more money than Facebook did in its highly anticipated IPO. And if shares trade at the high end of the proposed range, then Alibaba will be worth more than 162 billion USD,  making it worth more than Amazon, which is currently valuated at just under 160 billion dollars. All in all, Alibaba’s owner and China’s richest man, Jack Ma, is all but guaranteed to become even more extraordinarily wealthy.

What makes Alibaba worth so much? Alibaba owns Taobao.com, China’s largest online shopping network, Tmail.com, China’s largest brand and retail site, as well as wholesale websites, a cloud computing platform, and its own version of Paypal. In short, Alibaba is the dominant Chinese s online sales platform by a considerable margin.

However, although Alibaba has been on a two week world wide publicity tour to raise investor confidence,  it may sell slightly less well than some breathless commentators predict. For instance, according to Fortune, Yahoo, which currently owns 154 million shares of Alibaba, only had a five percent increase in stock value. This modest increase indicates that investors except Alibaba’s stock to sell at the low end of its predicted range, more likely trading at between 60 and 63 USD a share, as opposed to Alibaba’s proposed 66.

Why might Alibaba, which has a hugely dominant market share in the world’s 2nd largest economy, still make some investors skittish? Although Alibaba is all but guaranteed to have a huge IPO, persistent questions about piracy threaten to dampen investor enthusiasm. One of the risks of investing in Alibaba was made apparent July 10,when, according to The Wall Street Journal, the luxury conglomerate Kering SA, which owns Gucci, Balenciaga, Bottega Veneta, and Yves St. Laurent, sued Alibaba in U.S. federal court for enabling piracy and profiting to the tune of billions of dollars.

According to the lawsuit, Alibaba vendors sold fake goods to both Chinese as well as international customers, and one vendor that was known to sell fake Gucci products to American buyers was even designated a Gold Supplier and Assessed Supplier by Alibaba. The Wall Street Journal reported that Alibaba offered to expeditiously remove merchants who violated intellectual property,  but with a catch–those who issued complaints had to open a store with Alibaba and pay an annual fee. Otherwise, Alibaba would instigate a slow investigation, which may have or may not have ended up removing the offending merchant.

The problem of fakes is not limited to luxury clothing; fake art is also a major problem on the site. Art Net News reported in late July that incredibly realistic fake Jeff Koons Balloon Dogs imitation pieces were being sold on Alibaba for between2,000 and 5,000 USD. The real orange Balloon Dog, it is worth noting, sold at Christie’s New York auction house in 2013 for 58.4 million USD, the highest price ever paid for the work of a living artist. When Art News contacted Alibaba’s seller of the fake balloon dogs, the vendor replied that they could add a mark indicating that the dogs were merely replicas, but it was not in any way standard practice to do so.

As its IPO draws nearer, Alibaba is taking serious steps to fight back against its reputation as a enabler of fake and pirated goods. VLA sculptures, which offered the fake Koons dogs, has since been pulled from Alibaba’s sites. According to Bloomberg, Kering SA has agreed to withdraw its civil suit against Alibaba and the two companies will instead work together to find ways to reduce piracy across Alibaba’s platforms. Alibaba has also teamed up with the China-Britain Business Council to help educate British businesses about how to report vendors who infringe on their intellectual property rights. The French and Italian governments have also inked deals with Alibaba in an attempt to protect their luxury sectors.

However, it remains to be seen if Alibaba, which until 2012 was designated by the American Government as a notorious market, (a company that allowed and/or encouraged piracy), will be able to completely shake off its reputation and its trade in pirated and counterfeit merchandise.  If Alibaba becomes too restrictive, the market may just move elsewhere, damaging Alibaba’s sales. Although Alibaba may imply otherwise to investors, according to the Business of Fashion, the core of Alibaba’s luxury good market remains fake goods or resold goods of questionable providence. The reality is that Alibaba has, along with other Chinese retailers, trained Chinese consumers to pay far less than the real price of luxury goods, and therefore might have difficulty switching to selling real luxury goods with their accompanying sticker shock, without driving away the consumers who led to Alibaba’s rise.

As anyone who has spent time in China can attest , both physical and online fake and pirated markets are prolific throughout the country. In no way is the problem of piracy unique to Alibaba, which is certainly taking serious steps to try to address the issue. Still, it will be interesting to see if as Chinese companies, such as Alibaba, become more powerful there will be a shift away from piracy. Will Chinese consumers be willing to pay the price for authentic goods? And will Alibaba pay a large financial price if it tries to force the issue? Only time will tell.

Image courtesy of Alibaba