Alibaba’s BABA journey as a public company hasn’t exactly been a smooth one. In a short span of 6 months, it has been charged for allowing bribery, fraud and illicit behavior as well as fake goods to proliferate on its sites.
To make things worse, The Wall Street Journal reported that the Chinese e-commerce giant is being beleaguered by "brushers."
“Brushing”— A Form of False Advertising
Brushers are users that are paid by vendors to buy their goods online, at a cost, and then write positive reviews about the goods.
These users receive the cost of the products ordered and a fee. The brushers pay for the goods using this money. The vendors then ship boxes that are empty or filled with invaluable things. The process ends with the user writing positive reviews about the goods.
According to the interview conducted by The Wall Street Journal of more than two dozen vendors, brushers and e-commerce brushing is widespread among sellers struggling to make a mark on the country’s increasingly competitive shopping sites. The vendors engage in the practice to move their listings higher up in search results.
In fact, the November column in China's state-owned Xinhua News Agency predicted that 17% of the sellers on Alibaba's Taobao site had faked $1.6 billion worth of transactions in 2013.
This process is prohibited in the U.S. and China as it is considered to be a form of false advertising.
The Art of Perfecting Fake Transactions
What is really surprising is that some brushers list their services on Alibaba’s sites. That's not all; some also offer classes on aping real shoppers and dodging auditors.
One of the vendors also admitted to the WSJ that he took classes to perfect these fake transactions.
To discover and eliminate fake transactions from its financials, Alibaba uses sophisticated tools, according to Daniel Zhang, Alibaba’s chief operating officer.
How Does It Affect Alibaba?
These vendors are putting Alibaba deeper into regulatory scrutiny. Besides, it also puts a question mark on the volume of genuine transactions on its platforms. The e-commerce giant says that it doesn’t overlook false transactions and that it removes these while reporting merchandise volume.
Following the report, on Tuesday, shares of the company, dipped as low as $80.03, the lowest since its record breaking IPO in September.
The WSJ report on the use of fake orders by merchants to pad their sales and thus boost their position on Alibaba’s marketplaces clearly hasn’t gone down well with investors.
Alibaba on the other hand responded by saying that it penalizes sellers found guilty. It also said that it analyzes IP and mailing address data to spot anomalies.
Recently, Chinese regulator SAIC published a report condemning Alibaba for counterfeit goods listings and other illegal business done on its sites. Alibaba blasted the report and it led to the regulator backtracking.
Last Word
They say one man's loss is another’s gain.
It just took Richard Liu Qiangdong, founder and chief of JD.com JD, a week’s time after Alibaba ran into trouble with Chinese regulators to roll out a novel project that flaunts its products’ merits and authenticity.
While Alibaba reported earnings in January that were weaker than expected, according to Bloomsberg, JD.com reported a strong fourth quarter.
Since hitting its highs in early November, Alibaba shares are down more than 30% presently.
As Alibaba continues to lose share, will the other Chinese e-commerce giants benefit? Or will Alibaba come back stronger from all this scrutiny. Only time will tell.
Amid all this, investors should remember that Alibaba has a variable interest entity (VIE).
VIE means Beijing can permit Chinese businesses to raise capital from abroad while retaining the authority to crack down on their activities.
So investment in Chinese companies always involves a certain amount of risk and while it’s a good idea to ride the growth wave, a better plan could be to get out while the going’s still good.
Alibaba currently holds a Zacks Rank #3 (Hold).
Stocks That Warrant a Look
Investors can also consider better-ranked stocks in the industry like PetMed Express, Inc. PETS and and Autobytel Inc. ABTL. Both of them sport a Zacks Rank #1.
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