Caixin
Oct 28, 2011 12:31 AM

Angry Vendors, Jack Ma and a Chinese Cyberwar

Only a few hundred people were logged on when small businessman Xiaobei joined a group of online chatterers seething over a decision by e-commerce portal Taobao to dramatically hike vendor fees.

It was October 11, a day after a campaign by the Anti-Taobao Union campaign forum opened on yy.com, a Chinese website for live-voice, topical chatting.

Within days, the forum audience had mushroomed with upwards of 60,000 listeners and speakers, mainly small vendors who, like Xiaobei, were vehement about Taobao's surprise decision.

taobao

Taobao, a consumer shopping branch of China's largest e-commerce concern Alibaba, announced the hikes for companies with online shops October 10. Technical service fees were to jump to as much as 60,000 yuan from 6,000 yuan a year. And cash deposits as steep as 150,000 yuan, compared to the current 10,000, would be required from each vendor.

A clothing distributor on Taobao since 2004, Xiaobei expressed opinions and soon found himself at the center of the debate, as fellow protesters gave him a forum administrator job, praising his articulate style and clear thinking.

Yet as Xiaobei's popularity flared on the forum, which was still online with thousands of participants as of October 26, a public falling out was taking shape for Taobao and Alibaba chief Jack Ma.

The undisputed king of China's e-commerce sector, Ma is the wealthy founder and chairman of privately held Alibaba.

Ma is seen as a champion of China's online industry. Business acumen helped him wrest full control of Alibaba subsidiary Alipay last year, squeezing out U.S.-based Yahoo and Japan's Softbank. And he recently voiced interest in buying Yahoo outright, cheering investors amid preparations for a possible initial public offering by Alibaba. Lu Zhaoxi, chief executive of a unit of Alibaba that's already listed in Hong Kong, said in August that the group also favors a listing, but gave no details.

But Ma's star fell on the Taobao fee-hike announcement. Small vendors like Xiaobei across the country denounced the sudden hit to their businesses, and took aim at Ma.

The vendors were especially incensed by what appeared to be a change of heart at Ma's company, which for years had promoted itself as a loyal partner of small business owners.

Raging Battle

The protest got ugly. Thousands of angry vendors teamed up and started placing phony orders with Taobao's biggest online retailers, gumming up the system.

The protesters then canceled their orders and demanded refunds, taking advantage of a Taobao rule that lets buyers without reason receive refunds within seven days. They also stuffed customer satisfaction surveys, trashing big vendors' online reputations.

The first wave of attacks targeted apparel retailer HStyle "because we all knew" Ma is an HStyle investor, Xiaobei told Caixin.

"We hoped to use this event to express our feelings," he said.

Vendors might have tried venting opinions by phone or personally if not for the fact that they're never allowed to speak with Taobao management, Xiaobei said. Their only real-person access to the company is through the customer satisfaction desk.

Through postings on a personal microblog, HStyle CEO Zhao Yingguang announced the cyber attack against his online shop. He then blasted the unhappy vendors.

"As an ordinary business, what are we guilty of? On what basis do they want to smash the rice bowls of our more than 1,000 employees?" Zhao wrote. "We need to eat. We need to survive."

Taobao snarled at the vendors as well. A company statement accused them of "evil online behavior, started by some vendors collaborating with a gang of evil forces." It said police in Hangzhou, Alibaba's hometown, had been alerted.

The conflict was escalating October 15 when the Ministry of Commerce intervened, expressing in an online statement concerns about the protest. It also said the ministry would support the small businesses.

At a Taobao press conference two days later in Hangzhou, the company said that over a four-day period it had clocked malicious attacks by 5,599 phony buyers, who targeted 112 big vendors. The protest involved some 7,230 transactions, it said, valued at a combined 94.6 million yuan.

Data Trickle

Alibaba and Taobao seldom share financial information. But the protest apparently motivated executives to open their books, at least a crack.

For example, Taobao Mall President disclosed that his 3-year-old Taobao subsidiary currently has more than 50,000 vendors and 70,000 brands. Ma said the entire Taobao operation has 8 million vendors, and that transaction volumes are expected to exceed 600 billion yuan this year.

Operating expenses are likely to reach 7 to 8 billion yuan this year and 10 billion yuan in 2012, Ma said at the press conference.

Ma did not release revenue or profit figures, but he boasted "we've never asked the government for a penny."

The company makes money by charging a 2 to 5 percent commission per transaction, depending on product category. Vendors can register and use an online payment service for free, but software needed to dress up web sites is sold by Taobao. The company also sells advertising space.

Since founding Taobao in 2003, Ma has built a public image of a company that, according to its promotional materials, "wholeheartedly supports small businesses." Indeed, it began with a no-fee model vendors loved, which helped Ma's company bury its chief consumer-to-consumer rival in China, U.S.-based eBay.

Ma said Taobao has suffered financially for the sake of its vendors. Indeed, the company liked to tell stories of small vendors who opened online shops and soared to success.

"When we were first founded," he told reporters, "we promised not to collect fees for three years. After three years, vendors still were not doing well, and we added another three years.

"Finally, it seemed we would be able to charge. But the financial crisis hit (in 2008) and we said it would be free for another three years," Ma explained.

Then the e-commerce king turned defensive. "You have problems," he said, referring to the angry vendors. "What company doesn't have problems?

"I've never been a hero of the Internet," Ma said. "I'm just a normal person who grew up in Hangzhou."

Backing Down

From the protesters' perspective, Ma caved in. At the press conference, he told reporters Taobao would delay the latest fee changes for established vendors until September 30, 2012. He also announced a 50 percent cut in the scheduled deposit requirement hikes, and implement the switch in January.

Although Ma denied that the decision to soften fee and deposit hikes was designed to placate protesters, Xiaobei and the rest of the angry vendors cooled their rhetoric, and the cyber attacks on big vendors ended.

Ma said the new fees all along were designed "to combat online counterfeiting and smuggling," not scalp vendors.

Nevertheless, the bitter dispute may have encouraged at least some vendors to head for Taobao's exit door. Some may switch to another e-commerce site, such as Taobao's chief competitors Shop QQ.

Taobao is still the sector leader. According to consultancy iResearch, 50.9 percent of China's B2C transactions by monetary value were made via Taobao Mall in the third quarter, while 360Buy.com, mainly an electronics and home appliance seller, accounted for 18.6 percent of total transactions. The online unit of the Suning Appliance chain accounted for 3.4 percent and Amazon-China ranked fourth with 2.9 percent.

Shop QQ, a platform under China's largest instant messaging provider Tencent Holdings, is a start-up. And it jumped into the action by announcing just days after Taobao's fee-hike statement a different fee system designed to attract vendors.

Shop QQ stressed in its fee announcement that it will not charge technical service fees, and requires deposits of only 20,000 yuan per vendor. The company also promised to "never betray partners."

Caixin's media columnist Xie Wen said Ma and his fellow executives are now eating bitter fruit from a tree they planted. Xie worked for Alibaba as general manager of the Yahoo China unit for one month, in October 2006.

"In the past, he wanted to be the spokesman for small businesses, saying ‘Taobao will never have fees,'" Xie said. "This became the basic starting point for Taobao's business model.

"But they planned to collect a variety of fees in recent years, with the most recent round announced on grounds of fighting counterfeiting," he said. "Its biggest cost has probably been a loss of integrity."

In the wake of the cyberwar with Taobao vendors, Ma has been responding to critics through microblog posts.

"A company that wants to make money is normal," he said in one post. "A company that doesn't want to make money is abnormal. Taobao has experienced nine years of abnormality!"

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