The founders of eBay used to say that their real accomplishment was neither their clever technology nor the marketplace they created. Rather, it was to build trust between people who had never met.
Alibaba, China's leading e-commerce platform, faces the same challenge, but more so. It operates in a country where fraud is rife. And it has grown at a dizzying pace: 56 million people use its business-to-business website, it claims, and 370 million use Taobao, its online mall.
But last month, it ran into trouble. On Feb. 21, in a filing with the Hong Kong Stock Exchange, Alibaba admitted that it had granted "gold" status (a mark of supposed integrity) to 2,236 dealers who subsequently defrauded buyers.
David Wei, the CEO of Alibaba.com (the listed part of Alibaba Group, which is mostly private) and Elvis Lee, the chief operating officer, resigned to accept responsibility. Neither was personally implicated, but the company said an internal investigation had found that about 100 sales staff and "a number of supervisors and sales managers" were "directly responsible in either intentionally or negligently allowing the fraudsters to evade" various controls.
The fraud started coming to light in 2009. The company set up a compensation fund, which has so far paid out $1.7 million to 2,249 buyers. More claims are inevitable, and Alibaba has not yet offered an estimate as to how much it will have to pay out. Whatever the number, it will be dwarfed by the damage to Alibaba's reputation as a place to find reliable Chinese suppliers and buyers.
The scandal has generated conflicting responses. One view, which the company favors, is that Alibaba's reaction demonstrates its underlying integrity. It investigated the reports of fraud thoroughly and was forthcoming in publishing details, in sharp contrast to some other scandal-tainted Chinese firms.
Skeptics retort that Alibaba had little choice. The scams struck at the heart of its brand: Traders on its website who pay a fee and submit to third-party checking can be labeled "gold" suppliers. This tells buyers that they are trustworthy. Had Alibaba done nothing, this verification system would quickly have become worthless. As it was, the firm's shares dropped nearly 15 percent after the announcement.
Alibaba's investigation attributed the fraud to "the pursuit of short-term financial gain at all cost" by salespeople and others. No doubt, but it emerged at a time when Alibaba's business prospects seem to be dimming. The firm has been wooing new customers at a terrific pace, but even before the scandal broke its shares had fallen by more than half from the bubbly days of 2007.
