US brands suffer in Chinese corporate war
The rivalry is so notorious it’s been called the “great cat-and-dog war.” On one side towers Alibaba Group Holding Ltd., China’s e-commerce market leader, embodied by the black cat mascot of its Tmall platform. On the other is JD.com Inc., a fast-growing upstart represented by its white dog logo.
Brands now caught in the cross-fire say they were punished by Alibaba after refusing exclusive deals as the e-commerce giant tried to muscle out the competition – a charge Alibaba denies. Executives from five major consumer brands told The Associated Press that after rebuffing Alibaba, traffic to their Tmall storefronts fell, hurting sales. Three are American companies with billions in annual revenue that rely on China for growth. All spoke only on condition of anonymity for fear of reprisals.
“Many brands complained about this to us,” said Wang Hongbo, a consultant who helps Chinese brands sell online. “Because they didn’t fall in line, they faced restrictions on Tmall.”
Tmall serves as a gateway to China for large foreign brands.
Alibaba called the charges of coercion “completely false” and said pursuing exclusivity is a common industry practice.
As the Trump administration pushes China to play by fair-trade rules, companies in China are caught in a no less crucial struggle for rules-based access to a $610 billion online marketplace.
The platforms that control access to Chinese consumers online wield such enormous power that even multibillion-dollar foreign brands can have trouble fighting back, the AP found in interviews with more than 30 industry players. The AP also reviewed two Alibaba contracts that contain previously unreported exclusivity clauses.
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 the products in question are manufactured in the United States - and some are - constricting China sales can also deepen the imbalance of trade between China and the U.S., a gap that has been a top concern for the Trump administration.
In a statement, Alibaba acknowledged it offers benefits to companies that sign exclusivity contracts, in line with Chinese law, but said merchants are free to work with whatever e-commerce companies they choose.
“Like many e-commerce platforms, we have exclusive partnerships with some of the merchants on Tmall,” Alibaba said. “The merchant decides to choose such an arrangement because of the attractive services and value Tmall brings to them.”
Alibaba said its business practices comply with Chinese law. It is not clear whether the evidence of coercion brands have managed to collect would hold up in court.
Under China’s anti-monopoly laws, companies with a dominant market position cannot demand exclusivity without justification. A 2015 regulation also bars e-commerce companies from restricting participation in promotions on competing platforms.
The contracts AP reviewed offered a suite of benefits designed to drive sales, in exchange for exclusivity. One specified brands must not operate storefronts on other platforms without Tmall’s permission. The other barred brands from sales promotions on rival platforms without Tmall’s permission.
Executives said after they rebuffed Alibaba, their brand’s banners vanished from prominent spots in Tmall sales showrooms and products stopped appearing in top search results.
Two companies told AP they granted concessions to Alibaba and traffic to their Tmall shops rebounded. One company said it ultimately closed its flagship on Alibaba competitior JD.com to salvage Tmall sales.
“This is certainly a problem for the development of retail sales channels,” said Zhuo Saijun, who until 2015 was a general manager of research at Analysys Ltd., a Beijing-based consultancy. “It is a business ethics problem, and this is how monopolies develop.”