Jack Ma, co-founder and executive chairman of Alibaba, China’s largest e-commerce platform, announced his unexpected retirement as chief executive earlier this month. The company’s main e-commerce platform, Taobao, could face more problems, however.
As new e-commerce laws were passed by the National People’s Congress at the end of August and will come into effect in 2019, stricter regulations could lead to a decrease in the market dominance of Taobao, now the largest service provider. of electronic commerce between companies and customers. Thanks to the latest version of the e-commerce law, the platform is at risk of facing more lawsuits, losing more sellers and, as a result, declining business.
China’s new e-commerce law, which was passed after four rounds of debates, is said to have consulted different stakeholders in the legislative process. Under the new law, online shoppers will be more protected against counterfeit products and low-quality goods on different online platforms. China’s e-commerce law requires e-commerce platforms to take more responsibility for the items that sellers put on the platform.
In addition, the new law prioritizes intellectual property concerns and requires online platforms to be responsible for ensuring that all items sold on the platform must comply with intellectual property laws and regulations. The new law also says that platforms should take responsibility for any customer-seller disputes that take place on the platform, which would lead to more legal risks.
The new law aims to help empower e-commerce platforms. This makes it easier for consumers to sue the sellers and the platform for any unresolved disputes. E-commerce platforms, on the other hand, would face more legal challenges and, therefore, higher costs. Platforms like Taobao and PinDuoDuo are expected to hire more staff to verify and guarantee the qualities and legitimacy of products sold by their sellers, resulting in higher personnel costs and lower profit margin under the new regulations.
Unlike JD.com, a large ecommerce platform that relies heavily on established brands that also have real physical stores, platforms like Taobao and PinDuoDuo both rely on retail sellers and family businesses that keep the number of transactions on the platform active at the end. . However, the most critical impact that the new e-commerce law will bring to platforms is the future taxation of these retailers.
Over the past decade, individual sellers have lurked in a tax-free paradise on the Internet. There is no law that requires individual sellers to pay taxes on their online sales. It offers e-commerce platforms advantages over brick-and-mortar stores: without paying taxes, companies could lower the price to gain market share and thus increase their sales. Physical stores, on the other hand, are tightly regulated by taxes and cannot offer such a low price to compete with online sellers.
But for these online sellers, aside from paying taxes and making lower profits, more importantly, higher prices seem to be a matter of life and death on the platform. Many individual sellers on platforms such as Taobao and PinDuoDuo sell price sensitive products. To some extent, these products have low barriers to entry and are therefore in a perfectly competitive market, giving sellers very little pricing power. The economic profits are therefore reduced to zero and the products could easily be replaced in a situation of perfect competition. The taxes that will be levied on these sellers can be fatal: short-term economic loss can drive many sellers out of the market.
With online sellers being excluded from e-commerce platforms, Taobao could see a drop in active transactions as retail sellers lose pricing power and buyers can buy the same product with a similar price elsewhere. Neither favors e-commerce platforms like Taobao. Regulations now offer incentives for buyers and sellers to bypass the platform and try to come to a deal for lower prices and higher profits. The loss of transactions, buyers and sellers could soon affect the profitability and therefore the future prospects of the platforms.
There are also other factors that are hurting Taobao’s business prospects: courier deliveries.
Fast and cheap courier services have long been the lifeblood of Taobao businesses, but in the near future, it might not be. However, thanks to the latest tax reform, companies are now required to pay the full amount of social insurance to their employees. Those who did not meet the standards will be required to pay the missing amount as a lump sum payment. This means a higher personnel cost for companies. Such costs will soon manifest themselves on Chinese courier services: cheap labor will no longer be available, and high operating costs will result in higher delivery costs.
That said, courier services that today depend on cheap labor would face a dilemma. They either have to lay off some delivery people to reduce costs but slow down the service, or to keep a sufficient number of staff but bear higher operating costs. As courier companies no longer benefit from cheap labor, they are left with a difficult choice between its quality of service and profitability. And they would always choose the latter.
The choice that courier services make will have a direct impact on Taobao. To make things work, delivery couriers may end up charging online sellers more for package deliveries. Sellers could no longer afford to exempt buyers from paying shipping costs. Buyers, on the other hand, are unwilling to pay an even higher courier fee than the cost of the product itself. Online shopping may not be as competitive anymore with brick and mortar stores where shoppers don’t have to wait and pay for delivery costs.
That said, China’s new e-commerce law will transform Taobao into a physical, online-only mall-like platform. Despite a huge size and massive number of sellers on board, Taobao will have to work very hard to keep up with the pace of business in order to maintain its users and merchants in order to secure its profits. Future leaders of Alibaba will need to find effective solutions to manage higher legal risks, lower profit margins and rising logistics costs in order to ensure its competitiveness in the future business world.