Alibaba is NOT Your Answer for Product Sourcing

More than three years ago, I did a post, entitled, I Hate Alibaba, voicing my concerns with foreign companies thinking they were safe sourcing through Alibaba. My concern at that time stemmed from the many calls my law firm’s international dispute resolution attorneys get regarding really bad or never delivered product people had sourced through Alibaba:

Just back from China (Hong Kong, actually), where I saw a television interview with Jack Ma of Alibaba. He never fails to impress the hell out of me and every time I see him my first thought is BUY.

But then I think about all the harm Alibaba has caused to so many Western SMEs and I change my mind about calling my broker/brother. Alibaba makes the naive think China sourcing is easy. I realize blaming Alibaba for the mistakes companies make in using its site is not fair to Alibaba, but at the same time, I do not see much use for the site beyond its serving as a really good directory of potential manufacturers of particular products.

Sourcing from China is not easy and my concern with Alibaba is how so many who use it think it is easy and then fail to take necessary precautions and then they call my law firm because they are out hundreds of thousands of dollars.

Seems it is even worse than I thought.

Now we learn from Time Magazine that not the companies that list on Alibaba are fraudulent, but Alibaba itself engaged in fraud as well:

An internal investigation by independent board member Savio Kwan revealed that beginning in late 2009, Alibaba had noticed an increase in fraud claims against sellers designated as “gold suppliers,” which means they had been vetted by an independent party as legitimate merchants. The investigation revealed that about 100 Alibaba sales people, out of a staff of 5,000, were responsible for letting fraudulent entities evade regular verification measures and establish online storefronts.

The company said it uncovered fraudulent transactions by 1,219 of the “gold suppliers” registered in 2009 and 1,107 of those in 2010, accounting for about 1% of the total number of gold suppliers during those years. It further said that “the vast majority of these storefronts were set up to intentionally defraud global buyers” by advertising consumer electronics at cheap prices with low minimum-order requirements.

Whether you use Alibaba or not, there are certain “rules” you should follow when sourcing products from China and those rules include (1) conducting due diligence on your potential supplier, (2) protecting your IP, and (3) having a good contract with your supplier. And yes, all of this applies no matter what the color of star by the supplier’s name. See China Product Outsourcing: The Legal Basics.

Alibaba. A force for good or for evil? What do you think?

UPDATE: Michael Zakkour of the China Business Blog did a post, entitled, “Alibaba Fraud Case Not Surprising,” [link no longer exists] in which he talks of visiting two “inferior factories that looked just great on Alibaba.” Makes for some good (and funny) reading.