For Alibaba’s Small Business Army, a Narrowing Path

As Chinese e-commerce giant Alibaba plans an initial public offering (IPO) on the New York Stock Exchange expected to raise approximately $20 billion as early as Sept. 18, celebration is surely in order for the company’s executives. But for millions of small entrepreneurs who’ve invested blood and sweat to build their business on Taobao, Alibaba’s consumer-to-consumer e-commerce platform, life has gotten harder, leading many to inflate sales, operate at a loss, or abandon the platform altogether. In that sense, Alibaba is increasingly a microcosm of modern Chinese development: The initial gold rush that has allowed a great number of enterprising upstarts to improve their stations in life has yielded to a game in which those with the most capital win.

Since its founding in 1999, Alibaba has provided one hopeful avenue for many Chinese with start-up ambitions. For aspiring entrepreneurs with little start-up funding, including students, housewives, and moonlighters, Taobao — which literally means “sieving for treasure” — provides a sliver of space in a virtual bazaar where millions of visitors click each day. Chinese media often reports on new graduates who make thousands of dollars a month from Taobao, while their friends toil at mundane jobs for a few hundred. Jack Ma, Alibaba’s flamboyant founder, claimed in his letter to investors on Sept. 5 that “we fight for the little guy” because the mission of the company is to “help small businesses grow by solving their problems through Internet technology.” The IPO’s promotional video features several smiling and grateful Taobao sellers from all over China who claim that the site has bettered their lives.

But many other small-timers have seen their dreams of Taobao wealth thwarted. After investing their meager savings to stock inventory and design virtual storefronts, they have to pay high advertising fees to Taobao, stay up nights answering customer inquiries, and even resort to cheating to keep up their store ratings. According to estimates in an August 2013 article in Enterprise Observer, a Chinese newspaper, over 80 percent of sellers on Taobao did not turn a profit; thousands of shops close down each day. (Alibaba has not responded to Foreign Policy’s request for comment on the treatment or success rate of small Taobao sellers.)

With more than one billion products and services from which to choose, Taobao customers usually rely on the site’s search function to find what they want, which means that items placed on the first few pages of search results get the lion’s share of attention, while the rest usually languish. As a result, shop owners routinely pay high marketing fees to Taobao to keep their wares on top so as to have a chance at making sales, even when Taobao hikes advertising rates or charges high fees for participation in promotional events. The Enterprise Observer describes the advertising and search optimizing costs on Taobao as a “bottomless pit” for small-time sellers who pay Taobao high marketing rates for traffic until they run out of funds.

Taobao’s dominant market position gives it commanding pricing power over the small shop owners. “If I make $50 dollars in gross profit each day, advertising costs on Taobao take $30 out of that,” wrote one self-identified shop owner on Tianya, a Chinese discussion forum. “But if I don’t advertise, I won’t even be able to make enough money to buy lunch.” Another self-identified shop owner and blogger complained, “Taobao changes its rules constantly to make money out of the entrepreneurial zeal of one group of young people after another.” The conclusion: Sellers “are nothing but crop in [Alibaba’s] field: they are reaped and burned, then their ash becomes the fertilizer for a new batch.” Alibaba made an eye-watering $2.5 billion in revenue in the second quarter of 2014, according to its filings with the SEC, approximately 53 percent of which are from online marketing services where sellers pay Taobao to make their merchandise more visible. According to the disclosures, Taobao boasts 8.4 million active sellers, who peddle everything from shampoo to boyfriend coupons to live scorpions.  

Given the harsh competitive environment, many Taobao sellers intentionally cheat to inflate sales, leading to higher store ratings and the increased visibility and credibility that comes with them. (Taobao gives out ratings like “crown,” “diamond,” or “gold medals” to shops that have high sales turnover or stellar customer reviews.) Many shop owners resort to falsifying sales in a practice known as shuadan or shuaxiaoliang, literally “running up orders.” Tutorials abound on the Chinese Internet on the “correct” ways to shuadan and sidestep Alibaba’s inspections. Family, friends, and other Taobao sellers are often enlisted in the effort, while professional scammers advertise to shop owners to help them run up fake sales. “If I don’t run up fake sales, my store won’t rank high, which means no traffic,” wrote one seller on Tianya. He sounded pessimistic about his future on Taobao, writing, “If I don’t run up fake sales, my shop will die a quick death; but if I do, it’ll die a slow death.”

Small-time sellers also gripe about Taobao’s inherent conflict of interest with Tmall, Alibaba’s business-to-consumer platform for established brands and the virtual equivalent of a gleaming virtual shopping mall. Tmall merchants pay a commission to Alibaba and collectively enjoy a better chance of converting browsing users to customers, according to a research report cited in a Sept. 2 Wall Street Journal article. The research report recommends that Alibaba turn Taobao into a showroom window while directing traffic to Tmall. That strategy seems to have already been implemented — well-heeled businesses now dominate the front page and top search results on Taobao and redirect traffic to their shops on Tmall. That’s not surprising; because of higher fees it collects on Tmall sales, Alibaba has an incentive to direct customers from the bazaar to the mall, potentially further eroding traffic and sales for small-time Taobao sellers.

The sellers have noticed. In December 2013, thousands of them banded together to “lay siege” to large merchants on Tmall like the Japanese clothing brand Uniqlo by placing orders and cancelling them immediately, wreaking havoc on the merchants’ store ratings and order logistics. Alibaba dismissed the attack as reaction against a crackdown against fake sales, but the Taobao sellers who took part demanded “equal shares of traffic” and “equal treatment of Taobao and Tmall” in their respective online bylaws. This was Taobao sellers’ second action against Tmall since 2011; state-run China Daily called the 2011 action an “online riot.”

To be sure, Taobao’s crackdown on fake sales and optimization of traffic in favor of Tmall are positives for its reputation and revenue. The reshuffling of small-time sellers could also reduce the number of counterfeit goods on the platform and ensure the rest play by the rules, which ultimately serves customers well.

None of that will comfort the millions of Taobao shop owners struggling in China’s e-commerce landscape. In a March 2014 article entitled “Why has Alibaba abandoned small sellers on Taobao?” IT Age Weekly calls small sellers the “bottom of the food chain” because their numbers are swelling and the market is becoming more competitive. The platform has given mom-and-pop upstarts a chance to jump on the site’s giant bandwagon to broaden their entrepreneurship, but the fare to board that wagon is getting increasingly expensive, with many elbowed off by better-funded competitors. Alibaba still says it wants to help small businesses, but as the company steps into the glare of Wall Street’s spotlight, it remains to be seen whether that will stay true.