Investors have been asking questions about Alibaba’s accounting for months. Now the U.S. Securities and Exchange Commission is too. The Chinese e-commerce group has disclosed it is under investigation. The scrutiny has already prompted Alibaba to reveal more information about its investments to outside investors. That is a big push in the right direction as long as the fallout ends there.
The SEC probe into the $187 billion web giant is wide-ranging. It focuses on how Alibaba accounts for its affiliates, particularly its loss-making logistics firm Cainiao Network, related party transactions, and operating data from Singles’ Day, a giant annual sales event that dwarfs the U.S. equivalents of Black Friday and Cyber Monday. News of the probe wiped out $14 billion in market value on May 25.
Alibaba is treading a fine line. Take logistics. Unlike its domestic archrival JD.com, Alibaba doesn’t handle warehousing, shipping or delivery. Instead, most merchants choose from a network of couriers on a data and logistics platform operated by Cainiao. Alibaba says because it has a 47 percent stake and less than half of the board seats, it does not control the business.
Yet logistics is critical to Alibaba’s core business and Cainiao’s Chief Executive Officer Judy Tong is a member of Alibaba’s powerful partnership committee, which nominates the majority of the e-commerce group’s board. If the SEC decides that Alibaba’s influence constitutes control, and forces it to consolidate the unit, that will drag down the parent’s margins. It would also make Alibaba look, on paper, less like an asset-light company and more like the capital-intensive JD.com.
The numbers for Singles’ Day may be a problem too. During last year’s event, the group said gross merchandise volume – the value of goods and services transacted – topped $14 billion. Some merchants have questioned whether sellers place fake orders on the site to improve their visibility to potential customers. Alibaba could be vulnerable to fines and even class action lawsuits if the SEC concludes that it knowingly reported inflated numbers.
It is possible that the regulator takes no action but investors should hope for something in between. In the year ending March, the company splashed over $8 billion investing in Cainiao and acquiring stakes in companies ranging from food delivery to virtual reality. Investors, who are already fretting about the impact of a slowdown in the Chinese economy, are typically left in the dark on the details. If the outcome is increased transparency, everyone will be better off.