How Would the New Chinese E-commerce Law Change Taobao?

Jack Ma, co-founder and executive chairman of Alibaba, China’s biggest e-commerce platform, has announced his unexpected retirement as chief executive officer earlier this month. The company’s core to-customer e-commerce platform Taobao, however, may be facing more hiccups.

As new e-commerce laws were passed by the National People’s Congress this late August and will become effective in 2019, stricter regulation may lead to a fading market dominance of Taobao, now the largest business-to-customer e-commerce service provider. Thanks to the latest version of the e-commerce law, the platform may be at risk of facing more lawsuits, losing more sellers and, consequently, a decline of business.

The new Chinese e-commerce law, which was passed after four rounds of debates, is believed to have consulted different stakeholders in the legislative process. Under the new law, online shoppers will be further protected from fake products and low-quality merchandises on different online platforms. Chinese e-commerce law requires e-commerce platforms to shoulder more responsibilities on the items that sellers put up on the platform.

Furthermore, the new law prioritizes concerns about intellectual properties and asks online platforms to be responsible for ensuring that all the items sold on the platform should comply with related intellectual property laws and regulations. The new law also contends that platforms should take responsibilities in the customer-seller disputes that take place on the platform, which would lead to more legal risks.

The new law is aimed to help hold e-commerce platforms accountable. It makes it easier for consumers to sue both sellers and the platform for any unsolved disputes. E-commerce platforms, on the other hand, would be exposed to more legal challenges and consequently higher costs. Platforms like Taobao and PinDuoDuo would need to hire more staff to verify and ensure the qualities and legitimacies of the products their sellers sell, which leads to a higher personnel cost and lower profit margin under the new regulations.

Unlike, a big e-commerce platform that heavily relies on established brands that also have real physical stores, platforms like Taobao and PinDuoDuo both rely on retail sellers and family businesses who keep the number of transactions on the platform active in the end. The most critical impact that the new e-commerce law will bring to the platforms is the future taxation on those retail sellers, however.

In the past decade, individual sellers are like hiding in a tax-free heaven on the Internet. There was no law that requires individual sellers to pay income taxes on their online sales. It offers e-commerce platforms edges against brick-and-mortar stores: without paying taxes, businesses could set the price lower to win market shares and thus increase their sales. Physical stores, on the other hand, are strictly regulated by taxes and cannot give such a low price to compete with online sellers.

But for those online sellers, apart from paying taxes and gaining lower profit, more importantly, higher prices seem to be a matter of life and death on the platfrom. Many individual sellers on platforms such as Taobao and PinDuoDuo sell price-sensitive products. To some extent, those products have low barriers of entry and thus is situated in a perfect competitive market, giving the sellers very little pricing power. Economic profits are therefore squeezed to zero and products could be easily replaced in a perfect competitive situation. Taxes that will be levied on these sellers can be fatal: the economic loss in the short run can drive many sellers out of market.

Online seller being edged out of e-commerce platforms, Taobao may find a decline of active transactions as the retail sellers lose the pricing power and buyers can buy the same product with a similar price elsewhere. Neither favor e-commerce platforms like Taobao. Regulations now offer incentives for both buyers and sellers to get around the platform and try to reach a deal for lower prices and higher profits. The loss of transactions, buyers and sellers may hurt the profitability and thus the future prospects of the platforms soon.

There are also other factors that hurt Taobao’s business prospects: courier deliveries.

Timely and cheap courier services have long been the cornerstones for Taobao’s businesses, but in the near future this might not be the case. Thanks to the latest tax reform, however, companies are now required to pay the full amount of social insurance to their employees. Those that did not meet the standards will be required to pay the missing amount in a balloon payment. It means a higher personnel cost for companies. Such costs will soon manifest on China’s courier services: cheap labors will be no longer available and high operating costs will lead to higher delivery fees.

That said, courier services that today are dependent on cheap labors would have to face a dilemma. They have to either fire some deliverymen to cut costs but slow down the service or keep a sufficient number of staff but bear more operating costs. As the courier companies no longer take advantage from cheap labor, they are left with a hard choice between its service quality and profitability. And they would always choose the latter.

The choice that courier services make will have a direct impact on Taobao. To keep things work, delivery couriers may end up charging more from online sellers for parcel deliveries. Sellers could no longer afford to exempt buyers from paying the postage. Buyers, on the other hand, would not like to pay a courier fee that is even higher than the cost of the product itself. Online shopping may be no longer that competitive against brick-and-mortar stores where buyers don’t need to wait and pay delivery fees.

That said, the new Chinese e-commerce law will turn Taobao into a platform similar to a physical shopping mall and it is just online. Despite having an enormous size and massive number of sellers on board, Taobao will need to work very hard to keep up with business to maintain its users and merchants in order to secure its profits. Alibaba’s future executives will need to come up with effective solutions to handle higher legal risks, lower profit margin, and increasing logistic costs to secure its competitiveness in the future world of businesses.