Perfect Storm: Can Big Data Help Alibaba Win The Government Fight?

Alibaba is caught in a perfect storm between investors and the Chinese regulators. Can big data help its way out? In response to the Chinese regulator’s report on Alibaba’s lax oversight of fake goods, billionaire Jack Ma has vowed to fight the problem with big data and claimed that solving it would be crucial to his company’s survival. Indeed, investors sent Alibaba’s stock tumbling nearly 9% on Thursday amid concerns with falling profits and its showdown with the Chinese government. While the company claimed that it has poured in $160 million (over RMB 1 billion) to tackle counterfeit, the question remains: how effective is Alibaba’s big data strategy in fighting fake goods? To understand the scale of the e-commerce giant’s biggest headache, we need to first look at its massive transaction volumes. In the quarter ended on December 31, the company’s gross merchandise volume on its various sites reached $127 billion, a 49% jump from the same period last year. Such an enormous amount of data requires Alibaba to have a system in place that samples and analyzes thousands of transactions beyond keyword search. Since 2013, the company has focused on developing image recognition technology to scan photos of merchandise in real-time and detect the items’ brands by logos. Today, the company has more than 1 million images of fake goods in its database and processes 300 million visual checks a day on its system, according to Chinese media reports. However, the ability to detect counterfeit goods online is only the first step. Another key for Alibaba would be tracking the sources of fake products, since vendors could simply change the storefront on Taobao or TMall and still sell the same items. With its data-mining technology, the company maps out the locations to identify potential suppliers of fake goods. According to the company’s internal data, 90% of the problematic transactions come from 10 regions, with the top spots including major commercial hubs like Pearl River Delta in Southern China and Yangtze River Delta in Eastern China. But no matter how smart Alibaba’s technology gets, the counterfeit war in China requires enormous resources offline and close collaboration with the government. That’s why Alibaba announced on Wednesday to assemble an additional 300-person special team that focuses on nothing but battling counterfeit. Prior to that, the company already had a task force of 2,000 employees and enlisted over 5,400 volunteers to assist the efforts. While China’s State Administration of Industry and Commerce ( SAIC SAI +0%) called out Alibaba as the worst performer among its e-commerce peers in the now-deleted white paper, the company insisted that it has accomplished significantly in 2014. About 400 suspects were arrested and 200 stores were shut down in 2014 among the 1,000 counterfeit cases that Alibaba and law enforcement collaborated on. But further tightening control over counterfeit products would likely have a significant impact on Alibaba’s sales, which failed to miss analysts’ expectations this quarter despite the record-breaking Single’s Day sale. Even if Alibaba eventually pleases the Chinese regulator, could it still convince investors with its growth story? Jack Ma may be right – the company is perhaps the biggest victim coming out of the high-profile counterfeit battle.