Alibaba Tries to Restore Confidence Amid Fraud Case

Alibaba.com's CEO resigned Monday, hoping to restore the company's image after the Chinese e-commerce giant revealed how its suppliers had defrauded its customers -- but analysts say his abrupt departure only raises further questions about what is really going on.

Alibaba Group's business-to-business trading platform Alibaba.com identified fraudulent transactions involving 2,326 suppliers who were committing the crimes against the site's buyers.

The fraud cases caused Alibaba.com's CEO and COO to both resign from the company, even though the two were not found to be involved with the fraud cases. An investigation, however, found that 100 sales people, along with several supervisors and sales managers were responsible for allowing the fraud to evade detection.

"The investigation concluded that the pursuit of short-term financial gain at all cost had tainted parts of our sales organizations, risking serious damage to our Company's core values," Alibaba said in a statement on Monday.

Alibaba has already shut down the virtual storefronts of the suppliers. At the same time, the company has paid US$1.7 million to 2,249 customers who were victims of the fraud.

But the loss of Alibaba.com's top executives came as a major surprise to China's IT industry. The CEO David Wei was contacted, but would not comment on his resignation. However, in a letter to employees, Wei had said his resignation was a necessary one, even though it might cause shock.

"Without such a shock, it would not be enough to reawaken our sense of mission and our values," he wrote. Wei urged employees to do the right thing, without getting tied down to simply making business.

Alibaba.com currently dominates China's business-to-business (B2B) e-commerce market, with a 69.7 percent market share, according to Beijing-based research firm Analysys International. China's thriving B2B market generated 2.09 billion yuan (US$318 million) in income last year, growing by 32 percent from the year before.

Alibaba's move to be transparent and disclose the fraud cases, rather than hide them has been seen as a "positive step," said Cao Junbo, the chief analyst at iResearch. "In this way, the negative impact of the news will be easier to control," he added.

Wei had been at Alibaba since 2006 and had been leading a company expansion strategy to help small online business in the U.S. to source their products from China. The loss of Wei, however, was seen as necessary move in order to preserve confidence in the company, Cao said. "The value of the company is the bigger than the person," he added.

The disclosure of the fraud cases, however, could still drive customers away from Alibaba.com. Not only did Alibaba.com fail to prevent the fraud with its protective measures, but members of its sales groups were found to be liable, said Ma Rongsong, an analyst at Analysys International. The fraud cases could now make it more of a challenge for Alibaba.com to become a supplier for small businesses overseas like in the U.S., Ma added.

The abrupt resignation of Wei as CEO, however, did seem strange to some. "It feels like there is more going on here," said Mark Natkin, managing director for Beijing-based Marbridge Consulting. "What's the last major scandal you can remember where the CEO claimed to have no direct involvement and then stepped down? In Japan, all the time. But here, in China, I just don't see it that much."

"The way this has played out is surprising and we feel like there might be more details to come," he added.

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