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At war with Alibaba: Top brands fight China e-commerce giant

  • A U.S. clothing company that was expecting a 20 percent jump in online sales on Alibaba's Tmall,saw sales plummet 10 to 20 percent after the company refused to sign an exclusive contract with Alibaba, instead participating in a promotion with archrival, JD.com.
  • Tmall punished them by taking steps to cut traffic to their storefront, two executives told The Associated Press.
  • They said advertising banners vanished from prominent spots in Tmall sales showrooms, the company was blocked from special sales and products stopped appearing in top search results.
  • Alibaba denied punishing the companies.
Jack Ma reacts during a session at the Boao Forum for Asia Annual Conference 2018 on April 9, 2018 in Boao, China.
VCG | Getty Images
Jack Ma reacts during a session at the Boao Forum for Asia Annual Conference 2018 on April 9, 2018 in Boao, China.

It was looking like a banner year for business in China. The U.S. clothing company was expecting a 20 percent jump in online sales on Alibaba's Tmall, thanks to the e-commerce giant's massive reach.

But executives soon learned that what Alibaba gives, it can also take away.

The company refused to sign an exclusive contract with Alibaba, and instead participated in a big sale promotion with its archrival, JD.com. Tmall punished them by taking steps to cut traffic to their storefront, two executives told The Associated Press.

They said advertising banners vanished from prominent spots in Tmall sales showrooms, the company was blocked from special sales and products stopped appearing in top search results.

The well-known American brand saw its Tmall sales plummet 10 to 20 percent for the year.

"Based on our sales record, we should have been in a prominent position, but we were at the bottom of the page," said the brand's e-commerce director, who spoke only on condition of anonymity for fear of further retaliation. "That's a clear manipulation of traffic. That's a clear punishment."

As the Trump administration pushes China to play by fair trade rules, companies are caught in a quieter but no less crucial struggle for rules-based access to a $610 billion online marketplace, an AP investigation has found.

Executives from five major consumer brands told the AP that after they refused to enter exclusive partnerships with Alibaba, traffic to their Tmall storefronts fell, hurting sales. Three are American companies with billions in annual sales that rely on China for growth.

Alibaba Group Holding denied punishing the companies.

In a statement, Alibaba said pursuing exclusive deals is a common industry practice and called the charges of coercion "completely false."

"Alibaba and Tmall conduct business in full compliance with Chinese laws," Alibaba said. "Like many e-commerce platforms, we have exclusive partnerships with some of the merchants on Tmall. The merchant decides to choose such an arrangement because of the attractive services and value Tmall brings to them."

The executives spoke to the AP only on condition of anonymity for fear of reprisals, but their concerns were echoed by a U.S. industry group, brand consultants and policy makers in China and JD.com itself.

In a speech about cyberspace last week, Chinese president Xi Jinping said ensuring free and fair competition online was a regulatory priority, citing the need "to cultivate a fair market environment, strengthen intellectual property protection, and oppose monopoly and unfair competition," state media reported.

In its months-long investigation, the AP interviewed more than 30 people and reviewed two contracts from Alibaba that contained the previously unreported exclusivity clauses. The AP found that the platforms that control access to Chinese consumers online wield such enormous power that even multi-billion dollar foreign companies can have trouble fighting back.

"We urge the authorities to quickly investigate and take steps to ensure such practices are eliminated from the growing Chinese marketplace," said Stephen Lamar, executive vice-president of the American Apparel & Footwear Association, adding that members of his industry group had complained about unfair competitive practices by Alibaba.

JD.com is a member and sponsor of the trade group.

Imagine a company twice as profitable as Amazon that each year serves more people than live in all of North America. That's Alibaba. It claims to be the marketplace for nearly $550 billion a year in sales — more than is sold online in the entire U.S. economy.

The trials of the affected companies offer a rare window onto a bruising business culture forged in China that could spread as Alibaba takes its aggressive, innovative and hugely profitable model of e-commerce global. To the extent that their products are manufactured in the United States — and some are — constricting sales in China's critical growth market can also deepen the imbalance of trade between China and the U.S., a gap that is a top concern for the Trump administration.

The competition between Alibaba and JD.com is so infamous in China — and so dirty — it's been dubbed the "great cat-and-dog war," after Tmall's black-cat mascot and JD.com's white dog.
Wang Hongbo, a consultant who helps Chinese brands sell online abroad, echoed the problems cited by the companies who spoke to AP.

"Many brands complained about this to us. Because they didn't fall in line, they faced restrictions on Tmall," he said.

JD.com said that over 100 Chinese brands defected last year due to pressure from its main rival, an assertion Alibaba and some brands have contested. The exodus appears to have had a lasting impact.

"Based on the feedbacks we received from these merchants, the move was mainly due to the coercive tactics from our competition, which if proven true would be illegal and clearly against the merchants' will," said Sidney Huang, JD.com's chief financial officer, said in a November earnings call.

Peacebird, a Chinese fashion company, is among those that left JD.com last year. But Weng Jianghong, the company's general manager of e-commerce, said Alibaba had not coerced them and the decision to focus on Tmall was strategic.

"We will centralize and develop the limited resources of our company on Tmall," he said.
Many companies, including JD.com, do exclusive deals. However, JD.com maintains that it doesn't strategically push merchants for exclusivity.

"We support fair and open competition because greater choice is always better for brands and users," JD.com said in a statement. "We are winning over customers by providing a superior shopping experience, rather than by limiting the options of brands or consumers."

JD.com is still trying to get brands to return. "We do believe there will be more merchants coming back," Huang said in a call last month with analysts. "But I do not expect a very quick fix."

Play or pay

Tmall controlled six of every ten dollars spent overall for business-to-consumer sales online in China in the second half of last year — and even more for sectors like apparel — giving it enormous power over companies that rely on Alibaba for access to Chinese consumers online.

The contracts reviewed by AP offered a suite of benefits in exchange for exclusivity. One contract specified that brands must not operate storefronts on other e-commerce platforms without Tmall's written permission. The other contract mandated that new products not be launched on competing platforms and barred brands from sales promotions on other platforms without Tmall's written permission.

Such sales events are the lifeblood of online commerce in China. The country's massive Singles Day promotion in November, which started as an anti-Valentine's Day gimmick, is now the world's largest e-commerce event. Last year, Alibaba said $25 billion worth of merchandise was sold on its platforms alone, compared with just $14.5 billion in total online sales in the U.S. for Thanksgiving Day, Black Friday and Cyber Monday combined, according to data from Adobe Systems.

Brands cited commercial, ideological and legal reasons for refusing to cut off business with JD.com.

Some said that different people shop in different ways on JD.com and Tmall, so cutting off JD.com means cutting off access to a pool of potential shoppers.

"It's clear from the data we look at these are distinct consumer pools," said the China head of a publicly-traded company. "If I lost the JD business I would lose a certain part of that business. Another part is on principle: This is blatant anticompetitive behavior."

Others cited legal concerns. "We didn't want to go for it in part because we thought it might be an illegal agreement in restraint of trade," said an executive for a second publicly-traded company.

"We're chided when we participate in promotional events on other platforms," he added. "What's never said but actually happens when we don't cooperate in the way they want us to is our traffic falls. It's not a coincidence."

Two companies said they granted concessions to Alibaba, agreeing to exclusive product launches, raising their prices on JD.com, or removing ads promoting JD.com sales. Traffic to their Tmall shops rebounded. One company said it ultimately closed its flagship on JD.com to salvage Tmall sales.

"You have to go beg," said the China director of a multi-billion dollar publicly-traded company.

The great cat-and-dog war

Tmall and JD.com have different business models but they are increasingly pushing onto each other's turf.

Alibaba's online marketplaces connect buyers and sellers. Alibaba earns money from advertising, as well as commissions and fees. JD.com runs a similar marketplace but, like Amazon, also buys products from brands, then sells and distributes the merchandise itself.

Alibaba has taken aim at JD.com's long-standing dominance in electronics, while JD.com hopes to cut into Tmall's core apparel category. Both have expanded into groceries and poured hundreds of millions of dollars into acquisitions to extend their reach into brick-and-mortar businesses.

The result is an escalating turf fight that carries a chilling message for brands: Either you're with us or against us. The Chinese have a name for this unwritten rule, "er xuan yi," choose one of two.

"'Choose one of two' is a tacit understanding that has been reached by everyone, but you do not say it directly," said Zhuo Saijun, who until 2015 was a general manager of e-commerce research at Analysys, a Beijing-based big data consultancy. "This is certainly a problem for the development of retail sales channels. It is a business ethics problem, and this is how monopolies develop."

Some policymakers have raised concerns about monopolistic tendencies in Chinese e-commerce and called for more effective regulation and enforcement.

"Unfair competition still exists," Wang Bingnan, a deputy director at China's Ministry of Commerce, said in a June speech about China's e-commerce market. "Behaviors like forced `choose one of two,"' he added, "are hard for regulators to define, prove or deal with accurately."

It's not clear whether Alibaba's actions would be illegal, nor is it certain that the evidence of coercion that brands have managed to collect would hold up in court.

Under China's anti-monopoly laws, companies that dominate a market cannot demand exclusivity without justification. A 2015 regulation also specifically bars e-commerce platforms from restricting brands' participation in promotions on other platforms.

The rules are designed to prevent dominant players from squeezing out the competition, which could ultimately hurt both brands and consumers by giving a single, monopolistic player absolute control over prices.

JD.com has complained about anticompetitive tactics before. In 2015, the company filed a complaint with the State Administration for Industry and Commerce, a corporate regulator, accusing Alibaba of pressuring brands into doing exclusive Singles Day sales promotions -- a charge Alibaba denied. The complaint was kicked to a regional office in Zhejiang province, where Alibaba has its headquarters.

Nothing more was ever heard about it.

The regulators did not respond to requests for comment.

Alibaba said that while JD.com focuses "on groundless complaints to explain why they are losing brands, we at Alibaba are squarely focused on making our platform the best for our merchants."

Mr Ma goes global

The battles now being waged within China's e-commerce sector could well impact the culture and norms of e-commerce globally — at least if Alibaba's chairman, Jack Ma, has his way.

Alibaba aims to serve 2 billion consumers by 2036 — or about one in four people now on the planet. Already, the value of goods sold on Alibaba's platforms in fiscal year 2017 was $547 billion, larger than the gross domestic product of Sweden.

In June, Ma told investors that his company will rank as the fifth largest economy in the world. "Just say USA, China, Europe, maybe Japan and us," Ma said.

The company has been aggressively recruiting foreign brands to sell on its platforms, and they have come, in droves. Alibaba said it signed up 60,000 international brands for its massive Single's Day sale in November, up from 5,000 in 2015.

Alibaba's retail sales outside of China also are growing fast — they more than doubled last fiscal year to 7.3 billion yuan ($1.1 billion), or 5 percent of total revenue.

America remains at the heart of Ma's ambition. He told president-elect Donald Trump in Jan. 2017 that he would create a million U.S. jobs by facilitating trade between businesses in the U.S and consumers in China — a pledge he now says is imperiled by the brewing trade war between the two countries.

Brands now caught in the great cat and dog war have adopted different strategies to avoid becoming collateral damage.

An e-commerce manager at a major European brand said she'd be happy to offer totally different products on Tmall and JD.com to stay out of trouble, but worries her bosses won't go for it because it cuts off potential buyers.

Sometimes, she said, it feels "like we're working for those platforms."