Alibaba, Tencent Sites Added to U.S. 'Notorious Markets' List

Sites run by Alibaba Group Holding (BABA) and Tencent Holdings (TCTZF) have been identified by the U.S. government as "notorious" for selling pirated and counterfeit goods. The blame pointed at China's highest-profile tech companies reignites the smoldering fire that is Sino-U.S. trade.

The designation, which already applies to Asian e-commerce sites such as Bukalapak and Tokopedia in Indonesia as well as Singapore-based Shopee, highlights a key U.S. concern that Asian governments do not do enough to prevent intellectual property theft and the production and sale of fake goods.

The "Notorious Markets List" is compiled annually by the Office of the U.S. Trade Representative (USTR). The 2021 edition was released overnight in Asian trading hours. It covers 35 physical markets selling fake goods as well as 42 e-commerce sites selling knockoff and pirated wares. You can find the full list here.

This is the first time the e-commerce ecosystem inside Tencent's "superapp" WeChat has been included on the list. You basically need to use Weixin, the Chinese version of WeChat, inside China, where many merchants no longer accept physical cash. In a new take on selling fakes, the USTR said some Weixin merchants promote counterfeits through livestreams, WeChat Moments and other short-run flash sales, then provide a QR code that takes a buyer to an official account.

Alibaba's AliExpress service has also been slapped on the list for the first time. It's often compared to eBay (EBAY) as a way to link small businesses with consumers inside China and overseas.

Although the list is global, the 2021 release of the review specifically calls out China, and only China, as a country that's home to such notorious sites.

Besides AliExpress and WeChat, the notorious-markets list already included the Chinese sites Baidu Wangpan, DHGate, Pinduoduo (PDD) and Taobao. DHGate is privately held but the others are all run by U.S.-listed companies.

Baidu (BIDU) is the Chinese equivalent of Alphabet (GOOGL) , branching out from a dominant Web browser to artificial intelligence, cloud computing and autonomous cars. Baidu Wangpan is its cloud-storage service. The USTR said users store pirated movies, TV shows and books, then share them with others.

Pinduoduo is the leading grocery and group-buying site in China and is particularly popular in smaller cities, similar perhaps to an online-only Walmart (WMT) . Taobao is by far the largest Chinese e-commerce marketplace, run by Alibaba, and the Chinese equivalent of Amazon.com (AMZN) .

Calling such Big Tech icons out - even if it's often a subsection of their sites or services - is, effectively saying that the Chinese tech sector enables IP theft and piracy.

Alibaba said it's working with authorities to improve intellectual property concerns. Tencent protests with WeChat's inclusion on the list and said it is "committed to working collaboratively to resolve this matter."

Nine "real-life" physical markets in China are also cited. Although the notorious-markets list includes file-sharing sites around the world that facilitate copyright piracy of digital products, it's the sale of physical trademark counterfeiting that's the primary concern in China.

The business-to-business and consumer-to-consumer portal Indiamart (NSE) , based in the Uttar Pradesh city of Noida, is also included for the first time on the 2021 version of the list. The compilers believe that existing anti-counterfeiting measures aren't really deployed or are very slow. Meanwhile, "large volumes" of allegedly fake pharmaceuticals, electronics and clothing are sold on the site, the USTR alleges.

Bukalapak (JK:BUKA and BKPTY) has 100,000 users in Indonesia. According to the USTR, the "majority" of branded products on the site are fake, often labeled as "replicas." Sellers who are taken down often have multiple accounts or just register a new one and continue doing business, the trade office says.

Longstanding problem

The USTR started identifying problematic markets in 2006 and has updated the "Notorious Markets List" each year since it first published it separately in 2011. It's a way of naming and shaming sites in the hope that they'll clean up their acts. While some file-sharing sites have piracy as their sole reason for being, the USTR notes that other operators simply turn a blind eye to counterfeiting.

Pinduoduo appears to be moving in the wrong direction when it comes to combating counterfeit goods. There's a lack of transparency topped off by delays in the process of taking down problem merchants, according to the USTR, as well as less-effective vetting and reduced cooperation from the site with brands that are trying to bring legal action or launch investigations.

Likewise, Shopee, which is a subsidiary of New York-listed Sea Ltd. SE, has "very high levels of counterfeits" on all its platforms, the report states, except in Taiwan. Its process of vetting sellers doesn't keep counterfeiters off the sites, the USTR said, and there are insufficient penalties for those that are caught; it said Shopee doesn't cooperate if legitimate companies want details on the supply chain.

Another reason for a publicly compiled list is to encourage regulators and law enforcement in the relevant jurisdictions to act. Inclusion doesn't carry any specific penalties and isn't based on legal proceedings, but reflects the U.S. government's "analysis of the general intellectual-property protection and enforcement climate in the country concerned," the USTR states. It cautions that its list is not exhaustive.

Some responsiveness

On the positive side, the authorities in Brazil and the United Arab Emirates have swooped on and seized counterfeit goods. In Asia, the Thai Consumer Protection Police seized more than 38,000 counterfeit cosmetics from a warehouse in Bangkok and arrested the owner. The Thai police arrested a Chinese national who brought counterfeit batteries from Shenzhen to sell online in Thailand.

The Philippines has acted at a local level at a mall in Pasay City, at the national level in the form of the Philippines Bureau of Customs and at an international level by signing several agreements such as with the International Trademark Association, pledging to improve scrutiny and law enforcement of problem products.

India took down a notorious torrent-based file-sharing site TamilRockers, as well as several copycats with similar names. The Vietnamese police are pursuing a case against the streaming site Phimmoi.net.

Alibaba has admitted to a widespread problem with fakes on its e-commerce sites and has acted to try to remove or block them. While the USTR praises Alibaba for having "some of the best anti-counterfeiting processes and systems in the e-commerce industry," it says trademark holders are reporting a "vast increase" in the last year in the number of sellers offering fake goods openly on AliExpress, sometimes falsely advertised as genuine.

Although Alibaba insists that AliExpress sellers provide a business license to operate on the site, the company isn't vetting them carefully enough in the eyes of the USTR. It also says the penalty system is too lenient, with a removals process that doesn't stop companies from getting listed again.

This is a long-running problem for the Internet site operators, so it's not something that's instantly reflected in share-price movements. Alibaba shares fell 2.9% in Hong Kong here on Friday after the list came out, and Tencent stock declined 1.9%, but that was in keeping with the 1.9% decline in the Hang Seng benchmark index.

China on its end has been putting extreme pressure on Big Tech companies for the past year. Chinese President Xi Jinping undoubtedly fears the sector has too much influence, but the express purpose is to make Chinese society more egalitarian and to protect consumers.

Chinese food-delivery group Meituan   (MPNGF)  plunged 14.9%, suggesting a tough day of trade in New York for Pinduoduo. The Chinese state planning agency, the National Development and Reform Commission, issued new rules today to boost service-sector COVID recovery. They include guidance for online food-delivery platforms to lower service fees.

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At the time of publication, McMillan had no positions in the stocks mentioned.