November 1, 2011 - The Ministry of Commerce (MOFCOM) has recently issued a set of guiding opinions on the development of e-commerce. According to MOFCOM, during the 12th Five-Year Program period, support will be given to traditional distribution enterprises to fully utilize online and offline resources to develop online sales, while online retailers will be encouraged to seek innovative business models and open their platform completely to all types of retail formats.

Development of e-commerce in China has entered its 11th year. Following the rise of various B2C platforms such as 360buy and Dangdang, Taobao is facing unprecedented threats. The recent emergence of the anti-Taobao alliance reflects the intense competition in the online retail market.

Currently, a fierce online battle revolving around Tmall.com, the largest online shopping mall in China, is waging between the small and medium-sized vendors, and the big sellers.

Tmall.com recently announced two fee hikes which are to be implemented in January next year. One is technical service fee, which will be raised from Rmb6,000 a year to between Rmb30,000 and Rmb60,000 a year.

The other is breach of contract liability deposit. Next year, when a merchant joins Tmall.com, it has to pay Taobao a deposit on liability for breach of contract, the amount of which ranges from Rmb50,000 to Rmb150,000. In the event that acts of violation occur, at least Rmb10,000 will be deducted from the deposit. Compared with the current deposit of Rmb10,000, the new amount is five to 15 times higher.

The fee hikes have triggered an online battle organized by small and medium-sized vendors with small business scale and low profit margin against big vendors who can afford to accept the new terms. At present, the anti-Taobao alliance has 50,000 members and, up to 11 October, seven merchants were under attack.

Ma Yun is the founder of Alibaba.com and the icon of e-commerce in China. By insisting on the principle of charging low fees, Taobao defeated eBay, a multinational giant from the US, a few years ago and rose to prominence gradually.

However, troubles came on the heels of success. First of all, the surge in Tmall.com customers has caused operation and service costs to rocket. This, coupled with the fierce fight for equity of Alibaba.com under Ma Yun, has created an integrity crisis for its B2B business, causing business performance to go downhill and pressures on capital and management to rise. Secondly, since Tmall.com houses a great variety of small and medium-sized merchants, problems of product and service quality have continued to surface and commercial swindling is rampant. If this situation continues, the Taobao brand is bound to suffer.

As the online market grows in leaps and bounds, this sector has become a new battleground for investors. And Taobao, which has already established its oligopoly position in the market, needs to produce a handsome performance report and turn its strengths into success. In order to do so, Taobao decided to shift its own cost and the cost of its customers to the vendors. As a result, the friendly relationship between Taobao and its vendors turned sour overnight.

In the face of such great pressure, Ma Yun stood firm and announced that he would not budge. Taobao even reported the attack initiated by some people to the police.

Since the conflict involves core interests, it can be expected that this online battle will not subside in the short term. Regrettably, it is a fight without an umpire, and at the end of the day the fundamental interests of the consumer would be undermined.

Commenting on the Tmall.com incident, MOFCOM spokesman Shen Danyang said the incident is attributable to the weak legal basis of online management in China, where legal loopholes exist in the online retail sector and supervision is unsound. In this connection, efforts will be made to strengthen guidance for third-party trading platforms and introduce the Rules for Online Retail Management as soon as possible.

Shen said action will be taken to expedite the establishment of a legal system for the management of online retail. MOFCOM will take the lead in drafting the Rules for Online Retail Management and advance their early implementation. Under these rules, a third-party trading platforms market access and exit system will be set up; market game rules will be improved; the rights, liability and obligations of participants in the online retail market will be clarified; the duties of relevant departments will be clearly defined; and efforts will be made to promote the healthy and sustainable development of the online retail market.

On the latest measures introduced to settle the Tmall.com incident, Shen pointed out that the incident is now developing in a rational and positive direction. He added that MOFCOM hopes that the authority concerned can deal properly with the aftermath of the Tmall.com incident as well as strengthen guidance and services for third-party trading platforms. In formulating operation measures concerning online retailers and consumer interests, the opinions of stakeholders should be sought. Efforts would be made to carry out consultation on an equal footing, and maintain the continuity, stability and predictability of the measures.

One critical issue in China is, while the Internet develops rapidly, related systems are rather backward and even non-existent. For instance, there is a vacuum in laws and regulations, arbitration, and consultation system with regard to online business operation. Although China’s Law on the Protection of Consumer Rights and Interests came into force 17 years ago, there are no regulations governing the new online consumption. As such, once a dispute is brought to court, the judge is either faced with difficulties in investigation and evidence collection or the absence of clear legal basis, making it impossible to settle a case.

At present, the only effective way is self-discipline by the trade and supervision by the relevant departments. However, in the face of vicious competition and the lack of supervision by the government, the legal rights and interests of consumers are not protected. In this incident, not only small and medium-sized businesses and big vendors are affected, but also hundreds of millions of customers.