Mark Hu sells thousands of household appliances every month from his computer in a two-story factory complex in south China, using online shops run by Alibaba and Pinduoduo.
But in June the 28-year-old said he was forced to pick between them, after Alibaba allegedly told him that unless he shut his Pinduoduo site, online shoppers would no longer be directed to his products on its Tmall platform.
He said he was given two days to make his choice. “Pinduoduo was around one-third of our sales, while Tmall was two-thirds,” he said. “We are a factory; if we had shut down Pinduoduo immediately, we would have had problems,” he added.
In China’s hyper competitive online shopping market, Mr Hu’s experience is increasingly common. Alibaba is fighting back against Pinduoduo, which has rapidly built an annual customer base of 536m people, three-quarters of Alibaba’s 693m total in China, through heavy discounts, games and group-buying promotions. It is now Alibaba’s main competition, displacing JD.com, which has 334m customers.
In response, merchants say they are being asked by Alibaba to “erxuanyi”, or “pick one of two”, a tactic that has already drawn two lawsuits for anti-competitive behaviour.
One of those has come from the world’s largest microwave oven maker, Galanz Group, one of the few companies brave enough to speak out publicly against Alibaba’s pressure campaign.
The company, whose factories in Guangdong province produce more than 100,000 microwaves a day and employ 20,000 workers, said its troubles with Alibaba began when its president, Liang Zhaoxian, visited Pinduoduo headquarters and signed a co-operation agreement.
Alibaba’s algorithms began to divert shopper traffic away from its Tmall store shortly afterwards, the company said. A day before China’s mid-year sales on June 18, Galanz’s increasingly frantic head office began issuing statements denouncing Alibaba — eight altogether — along with a video showing how its top-selling microwaves had disappeared from Tmall’s search results.
Alibaba’s power to make or break a seller was clear. Galanz’s sales through its official Tmall store in June were half the total compared with the previous year, while visits to the online shopfront fell 37 per cent, according to data Alibaba provides to merchants. During November, when the site’s Singles Day event falls, Galanz sales dropped 69 per cent year-on-year.
This autumn Galanz filed a complaint in a court in Guangzhou. A company spokeswoman said that Tmall was abusing its dominant market position and violating China’s antitrust law. “It’s caused massive economic harm to our company,” she said.
Pinduoduo claimed in a call with analysts in November that more than 10,000 sellers on its site had seen their business affected by a rival “forcing merchants to take sides”.
A spokesperson for Alibaba said: “It’s understandable that smaller platforms with fewer and limited resources and services, who can’t match what we offer, feel overwhelmed. Some have chosen to ‘cry foul’ as a business tactic, appealing to regulators and the courts, trying to slow the market down. That ultimately won’t work.”
The spokesperson added: “If a brand’s product offering is relevant, and their price is competitive on our marketplace, it will organically show up. It’s not about other platforms.”
Nevertheless, Midea, the air conditioner giant, chose to cut ties with Pinduoduo and has since seen its sales on Alibaba’s Tmall continue to climb.
“They were definitely pressured by Alibaba, there is no other reason to offend a sales channel like Pinduoduo,” said Li Chengdong, chief executive of tech-focused think-tank Haitun. “Forced exclusivity is an open secret in China’s ecommerce industry,” he said. A spokesperson for Midea denied it had been pressured by Alibaba.
Five years ago, Alibaba successfully leveraged the same playbook to prevent clothing brands from selling on JD.com, Mr Li claimed. “JD’s clothing business never fully developed,” he said.
JD.com filed a 2017 lawsuit against Alibaba for abusing its position to prevent merchants from selling on its platform. Pinduoduo and Vipshop later joined the lawsuit according to one person familiar with the process — all three companies have received investment from Alibaba’s biggest rival, Tencent.
But the court case has dragged on as Alibaba’s lawyers spent two years arguing that jurisdiction over the case should be moved from Beijing to its hometown of Hangzhou, an argument that was quashed last July.
The glacial pace of the courts has been matched by regulators struggling to tackle the issue. Last year a new ecommerce law that sellers had hoped would curb the coercive power of the platforms they depend on went into effect — but lawyers say its implementation remains unclear.
One of the law’s drafters, Peking University professor Xue Jun, said an effective regulatory approach remained elusive. “Offline these types of exclusive agreements are very common but now we’re in the platform era,” Mr Xue said.
So far the only penalty for forcing merchants to choose between platforms was a series of fines against local partners of Meituan Dianping, the food delivery company, who forced restaurants off Alibaba’s Ele.me app.
But in November, market regulators made clear they were turning their focus to ecommerce. In a meeting with Alibaba and other leading platforms, Liang Aifu, head of the State Administration for Market Regulation’s internet arm, told attendees the regulator would launch an investigation and said, “choose one of two and forced exclusivity in the internet arena is expressly prohibited under the ecommerce law and violates the antitrust law”, according to state-owned news outlet The Paper.
This month regulators proposed revisions to the antitrust law that could help them better rein in the massive internet companies that have sprouted over the past decade.
Mr Hu said traffic to his factory’s Tmall storefront began to fall after the two-day ultimatum passed. In June, traffic dropped by half, according to Alibaba’s numbers. By November, his sales dropped to one-third of the total compared to the previous year.
The factory has already been forced to cut back production and Mr Hu asked for its name not to be revealed for fear of inciting further retaliation. “Otherwise we’ll have bigger problems. If they hit us again, our company will go bankrupt,” he said.