China: Tmall Incident - Another Chinese Internet Giant Accused of Abusing Market Dominance

In early November, Taobao Mall (Tmall), part of the e-commerce operations of Alibaba Group and considered as China's biggest business-to-consumer (B2C) retail platform, suffered from a stormy protest from small vendors against its new rules.  Meanwhile, antitrust concerns arise in relation to its suspected abuse of dominance in the e-commerce industry.

This article provides an overview of the whole incident, outlines details to do with Tmall' s conduct and examines whether such conduct could be considered as an abuse of dominance in violation of the Anti-monopoly Law of China (AML).

Facts

• About Tmall

Launched in April 2008, Tmall (www.tmall.com) is an online B2C retail platform wholly owned by Alibaba Group¹ .  In June 2011, it was separated from Alibaba Group's online customer-to-customer (C2C) platform – Taobao Marketplace (www.taobao.com) and became an independent business.  According to information on Alibaba Group's website, Tmall contributes to 48.5% of China's B2C online retail market as of 2011 Q2 and is also the most visited B2C online retail website in China².   Tmall currently features more than 70,000 major multinational and Chinese brands from more than 50,000 merchants.

• Triggering event – Tmall's new rules

On October 10th, Tmall announced its new merchant rules which, among other things, are set to charge significantly higher annual technical support fee and security deposit to vendors on Tmall.   Under the new Tmall rules, the annual technical support fee of 2012 would hike 5-10 folds, from RMB6,000 in 2011 to RMB30,000 to RMB 60,000 (varied by the size of the B2C stores) in 2012; the security deposit of 2012 would hike 5-15 folds from RMB10,000 of 2011 to RMB50,000 to 150,000 (also varied by the size of the B2C stores) in 2012.  Both fees are fully or partially refundable depending on a store's sales.

The new rules also include terms on a seven-day return period for all purchases, stricter rules on shipping time upon order confirmation, and stricter policies against selling of fake products.  According to Tmall, the new rules are purely for motivating vendors on Tmall to provide quality goods and better services to customers.

• Small vendors'fight against Tmall

The new rules immediately angered smaller vendors, which would be under huge cash flow pressure and might find it hard to survive. At the night of October 11, several large vendors on Tmall were attacked by some 4000 well-organized attackers, most of which are smaller vendors on Tmall. These smaller vendors placed massive orders with the large vendors and then immediately returned the products demanding refunds, while giving the large vendors poor ratings simultaneously.  The online protest escalated later with more large vendors affected and the number of attackers growing to over 40,000. The online attacks were said to bring losses of up to CNY 10 million to some of the large Tmall vendors.

• Government intervention

On October 15, the Department of Electronic Commerce and Information of the Ministry of Commerce (MOFCOM) started to intervene and ordered mediation.  Tmall then changed its uncompromising attitude and started to open online discussions with the attackers, who immediately suspended online attacks.  On October 17, Tmall announced that it would delay implementation of the new rates, and commit to invest RMB1.8 billion to help small Tmall vendors.  The Tmall incident appeared to have temporarily settled.

Analysis

After its occurrence, the Tmall incident instantly hit the newspaper headline in China. It also ignites heated discussions of whether Tmall's new rules might itself constitute an abuse of dominance that is in breach of the AML.

• Does Tmall have a dominant market position?

For all abuse of dominance cases, the threshold issue would be to define a relevant market and then to explore whether the business operator at issue has a dominant position in the relevant market.

There is no easy answer here as to whether the relevant market shall be defined as the B2C market, B2C and C2C markets as a whole, or even all retail channels including both online platforms and  brick-and-mortar stores.

Even if the relevant market is defined as the relatively narrow B2C market, the abovementioned market share data (48.5%) is not able to support a presumption of dominance under Article 19 of the AML.  Under Article 19, only if a single company holds more than 50% share of a relevant market could a (rebuttable) presumption of dominance be established.

• Does Tmall's conduct constitute an abusive act?

Each of the abusive conducts listed under Article 17 of the AML requires a "reasonableness" test.  In other words, a conduct will become abusive only if it is implemented by a dominant company without a valid reason.  Since the charged fees are refundable, it will be reasonable for Tmall to argue that the new rules are designed for valid reasons, namely, to improve the overall quality of Tmall vendors and to combat selling of fake goods on Tmall for the ultimate benefits of consumers.

Comments

This is yet another incident where a giant internet company in China is accused of abusing its market power.  In order to avoid becoming the antitrust target, it is crucial for big companies to watch out for antitrust risks before making any potentially controversial business decisions.

Moreover, prompted by the incident, MOFCOM announced that it would promulgate new rules regulating the online retail market, to delineate the rights and responsibilities of each of the market players.  We will keep a close watch on any legislative development in this regard.

Footnotes

¹Alibaba Group is a China-based company group running Internet-based businesses, including online retail, wholesale and payment platforms, a shopping search engine, and data-centric cloud computing services.  Alibaba.com is said to be the world's largest online business-to-business trading platform for small businesses.

² Please refer to http://news.alibaba.com/specials/aboutalibaba/aligroup/index.html.

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