Alibaba Group Holding Ltd risks being blacklisted in the United Stated after a clothing trade group filed a complaint against the company alleging that the e-commerce giant has tolerated the sale of counterfeit and pirated goods on its Taobao platform.
The American Apparel and Footwear Association has asked the Office of the U.S. Trade Representative and the Securities and Exchange Commission to add Taobao to the Notorious Market list, an official report that identifies Internet marketplaces dealing in infringing goods.
The USTR removed Alibaba from the blacklist in 2012. But the AAFA said that the addition of Taobao in this year's list could put pressure on the company to take more effective measures to tackle fakes on its websites.
Local media reported that the association, which represents more than 1,000 brands in the U.S., noted that the significant presence of counterfeit products on Taobao has resulted in millions of dollars of lost sales, reputational damage, legal costs and "exhaustion of internal resources" in the U.S. apparel and footwear industry.
The AAFA was not available for comment.
Alibaba has defended itself against the accusations and stressed that the company has made great efforts to curb counterfeit goods on its platform.
An Alibaba spokeswoman said: "We work closely with our government partners, brands and industry associations to tackle this issue at its source."
As part of a plan to eliminate fake goods on Taobao, Alibaba has conducted random checks, used data-mining technology and offered an online complaint forum.
Despite these efforts, it is possible that investors in Alibaba could see the complaints as a negative indicator that the company is not taking the right measures to eradicate the problem.
Neil Flynn, portfolio manager at Alcuin Asset Management, said: "This incident certainly has the potential to negatively affect Alibaba's share price in the short term, because these will be the same firms that directly sell to Chinese consumers through Alibaba's Tmall."
Analysts agreed that it is important for Alibaba to continue its battle to eliminate fake goods to maintain its dominance of the lucrative Chinese e-commerce market and its reputation abroad.
Neil Shah, research director at market research firm Counterpoint Technology Market Research, said: "Alibaba will have to identify and take action against the notorious counterfeits, which are not only hurting other brands but Alibaba's platform and reputation as well. Trust is the cornerstone for any e-commerce platform to grow and succeed."
The company is aware that it is the subject of increasing international scrutiny since its listing in the U.S. last year. Concerns over the authenticity of products sold on its platforms have been a recurring issue raised by investors and consumer associations.
In January, the State Administration for Industry and Commerce said the company had failed to protect consumer rights as it did little to tackle unlicensed merchants. The regulator said it found many products on sale on Alibaba's online platforms that infringed on trademarks
"Alibaba is not the only firm to have issues with counterfeit products, as every firm in the industry does. But Alibaba is often singled out because it is significantly larger than its rivals. Investors should be aware that this problem is endemic to the industry as a whole," said Flynn.
Alibaba's size is a key reason why it has struggled to prevent small vendors from selling fake goods on its Taobao platform.
"Taobao has more than 7 million merchants. The size of the platform is so huge that it makes it extremely difficult to tackle the glaring issue of fake products.
"It's still early days and Alibaba could face even more challenges as the platform expands cross-border and more consumers shop on the platform," said Shah.
