Alibaba.com Ltd, owner of China's largest online-commerce site, has been the go-to marketplace for Western companies seeking gaskets, garden gnomes and gelatin. Disclosures that its salespeople helped defraud buyers may send business to rivals Google Inc and Global Sources Ltd.
Since Alibaba announced the scam on Feb 21, its chief executive officer and chief operating officer have resigned, and the company has lost about $1 billion in market value. The flagship of Alibaba Group Holding Ltd, which counts Yahoo Inc as its biggest shareholder, also may struggle to sign up new clients, analysts said.
"This will hurt the company's reputation and its ability to attract global buyers," said Paul Wuh, head of Internet research at Samsung Securities Co Ltd in Hong Kong. "This could be positive for its competitors."
Alibaba.com shares have fallen 14 percent in Hong Kong trading since the announcement, and three analysts downgraded their recommendations from buy to hold. Wuh, the top Alibaba analyst over the past year, according to Bloomberg Absolute Return Rank, maintained his sell recommendation.
The scandal hasn't changed Alibaba's prospects, said John Spelich, the company's Hong Kong-based spokesman.
"We are the same company today that our customers have known for the last 11 years, and the whole point of the announcement earlier this week was to demonstrate our sacrosanct commitment to integrity," he said last week. "We believe, over time, our customers will understand that."
Alibaba.com, founded in 1999 by Jack Ma, is a business-to-business website. Its target audience is companies in the United States and Europe buying from low-cost manufacturers in China, Vietnam and Pakistan, among others.
The company operates marketplaces in Chinese, English and Japanese. Buyers use the services for free while suppliers pay an annual fee of 29,800 yuan ($4,500) to appear on the English-language website as a "Gold Supplier", Spelich said.
The site offers tips for avoiding fraud and hosts a forum where users can notify each other of potential scammers. Alibaba also posts the names of suppliers who have been banned.
Alibaba.com may have been a victim of its own success, Wuh said. Sales more than tripled to $567.2 million in 2009 from $171.1 million in 2006, according to the data compiled by Bloomberg.
That growth was fueled by company claims that a third party verifies the credibility of all suppliers with paid memberships. Its database of registered suppliers almost tripled to 108,000 last year from about 30,000 in 2008, Wuh said.
The recently disclosed frauds involved vendors offering small quantities of electronics at attractive prices, with payments settled using "less reliable" methods, Spelich has said. Alibaba employees either intentionally or negligently allowed the vendors to evade authentication and verification measures, the company said.
"During that period, it was more difficult to manage and harder to check the quality of all the people on your network," Wuh said. "There have to be some bad eggs in there."
The strength of Alibaba's model has been called into doubt, said Dane Chamorro, managing director for North Asia at Control Risks Group in Shanghai. His company does background checks for companies.
"They didn't do their homework and weren't monitoring their own platform," he said.
