Despite regulatory travails, Alibaba’s C2C e-commerce platform is steadily finding a niche with young, bargain-hunting shoppers.

When she wants to shop for clothes, Carrie Chen picks up her smartphone and clicks on the Taobao app. The Chinese e-commerce portal – which is owned and operated by e-commerce giant Alibaba – lists hundreds of thousands of fast-fashion items, many priced below US$20.

“The prices are much lower than at most stores in Taiwan, and there is a much larger variety of items,” says Chen, a Taipei-based international sales associate. “Of course, you can’t expect high quality at those prices, but it’s so cheap that you often want to just try anyway.”

In the past, Taiwanese shoppers would have gone to a night market to hunt for cheap clothes, but buying on Taobao is easier. An internet connection is all you need. If something doesn’t fit properly, the buyer can exchange it for the same item in the correct size or even get a refund. And many shoppers prefer to try on clothes in the comfort of their bedroom rather than a cramped night-market fitting room.

Taobao entered the Taiwan market in September 2012 in a bid to test the waters for global expansion. It has carved out a niche here as the first e-commerce platform to offer a huge selection of inexpensive products. Shoppers on Taobao can find everything from fashion to kitchenware to stationery at rock-bottom prices.

Data tracking Taobao’s Taiwan business is scarce, but market observers say the platform has developed a dedicated user base here. A July 2013 report by Taiwan’s Central News Agency said Taobao had 600,000 members in Taiwan and that transaction volume on the site from Taiwan was NT$50 billion (US$1.67 billion) in 2012.

Analysts say they see increasing use of the platform. In a recent survey, the state-backed Market Intelligence & Consulting Institute (MIC) found that nearly 59% of Taiwan’s internet users had used Taobao in 2016, up from 23% a year earlier.

Taobao did not respond to requests by Taiwan Business TOPICS for comment on its Taiwan business.

Finding a niche

Jamie Lin, founder of the Taipei-based AppWorks accelerator and an expert on Taiwan’s e-commerce market, likens Taobao to “a digital Walmart for Taiwanese consumers,” adding that the platform “has built a strong following here” among young people shopping on shoestring budgets.

Taiwan’s perennially low salaries – particularly for younger workers – make Taobao attractive here. Fresh graduates earn an average monthly income of NT$26,250, according to a survey published in November by the local job-search website Job Bank 1111. That figure is down NT$1,074, or almost 4%, from 2015.

In the online-to-offline (O2O) segment, Taobao has found a niche as well. Small retail vendors, especially those operating stalls in Taiwan’s night markets, are turning to Taobao for their sourcing needs, observes Jamie Lu, a marketing manager at PChome, Taiwan’s largest e-commerce portal. In the past, those vendors typically had to buy in bulk from physical wholesale stores that impose minimum order requirements. “With Taobao, small vendors have more flexibility,” Lu says. “They can order exactly what they need, which means lower costs.”

Although Taiwan is not a major revenue source for Alibaba, the island is important to Alibaba’s international ambitions. “Alibaba’s global expansion strategy is still focused mainly on Mandarin-speaking markets, including Taiwan,” says Rosa Chang, an analyst at MIC.

At the same time, Taiwan is an attractive market for Taobao since it caters to a different market segment than local e-commerce juggernauts PChome and Yahoo. Those platforms sell higher-end consumer electronics, housewares, and lots of locally made food and beverages. “I am not sure I can trust snacks made in China,” says Taobao user Carrie Chen, who has never bought anything edible on Taobao in more than four years of using the platform.

PChome and Yahoo have “long developed the Taiwanese market and have good reputations,” MIC’s Chang says. Their advantages include more intuitive user interfaces as well as the capability to launch new products faster and conduct marketing campaigns catering to the specific needs of Taiwanese consumers. Counterfeit goods are also less of a problem on PChome and Yahoo, she notes.

Taobao has a long history of peddling counterfeits, which was reflected in its appearance for several years on the list of “notorious markets” maintained by the Office of the U.S. Trade Representative (USTR). Taobao was removed from the list in 2012, but returned in the latest review in December 2016. In a statement, USTR said that “current levels of reported counterfeiting and piracy [on Taobao] are unacceptably high.”

Taobao’s return to the list followed Alibaba chief executive Jack Ma’s praise of pirated goods at an investor conference in Hangzhou last year. “The problem is the fake products today are of better quality and better price than the real names,” he said. “They are exactly the same factories, exactly the same raw materials, but they do not use the names.”

Chen says that she does not buy counterfeit goods herself but has seen fakes bought on Taobao that are comparable in quality to the real thing. She believes there is a market in Taiwan for such products.

Trouble with regulators

As a Chinese company operating in Taiwan, Taobao has inevitably been carefully watched by the Taiwan authorities. It first came under scrutiny in 2013 as Democratic Progressive Party legislators alleged that small businesses and individuals were using the platform to evade taxes, taking advantage of a loophole that allows goods purchased online valued at less than NT$3,000 to be imported tax free.

To exploit this loophole, a seller in Taiwan might order multiple small packages of a particular item rather than one large parcel, being sure to keep the value of each shipment below NT$3,000.

In response, the Ministry of Finance (MOF) set up a Taobao task force to crack down on tax evasion. The efforts bore fruit, according to MOF data indicating that from April to October 2014, more than 338,000 Taobao packages were sent to Taiwan. Import duties levied on those parcels totaled NT$447.3 million.

The MOF also promulgated new rules that make it harder to illegally import commercial goods in small amounts. Three criteria are used for determining suspected illegal imports of multiple packages: the same recipient, arrival flight, and address. The finance ministry can now investigate a buyer in Taiwan if two of those three criteria are present.

More serious trouble surfaced in March 2015 when regulators alleged that Taobao owner Alibaba breached Taiwanese trade law by registering via its Singapore-based subsidiary (Alibaba.com Singapore E-commerce Private Ltd.) instead of as a mainland Chinese company, a process that typically takes two months and requires approval from Taiwan’s Investment Commission. The Investment Commission said Taobao had violated the same regulation, as it registered in 2013 as its Hong Kong-based affiliate, Taobao Hong Kong.

The Investment Commission moved to fine Alibaba NT$120,000 and Taobao NT$240,000, and ordered both companies to withdraw their investments from Taiwan by the end of August 2015. The Investment Commission also told Taobao to change its business registration in Taiwan to that of a mainland Chinese company. Both Alibaba and Taobao filed appeals with the Executive Yuan’s Administrative Appeals Commission and were granted the right to continue operating in Taiwan while the Administrative Appeals Commission reviewed the case.

Emile Chang, executive secretary of the Investment Commission, was quoted in the English-language Taipei Times at the time as saying that regulators “may need more time to review our punishment against Alibaba, as once we ask the company to leave, it cannot easily return to Taiwan.”

Alibaba could point to its New York listing and foreign shareholders to argue it should not be considered a Chinese firm. Yet its management structure ensures Chinese control by empowering a small group of Chinese managers to nominate most of Alibaba’s directors.

In June, the Taipei High Administrative Court ruled in favor of the Investment Commission in Alibaba’s case, noting that Alibaba’s charter states that Jack Ma and his three partners have the right to decide five of the nine company board seats, giving them effective control of the firm. Alibaba should thus be considered as a Chinese company, the court said. Alibaba appealed the decision.

In contrast, the court ruled against the Investment Commission in Taobao’s case, saying that irrespective of the control Taobao’s Chinese shareholders may have over the company, no legislation in Taiwan can force Taobao to change its business registration. Consequently, the court concluded that the Investment Commission couldn’t fine Taobao Hong Kong or compel the company to exit the Taiwan market.

The Investment Commission said it would appeal the court’s ruling and change its investment regulations. The proposed amendment would require foreign companies controlled by Chinese investors to apply for new business permits in Taiwan.

Tentative truce

Despite its recent legal travails, Taobao’s prospects in Taiwan look considerably better than those of other foreign internet firms that have clashed with regulators. Indeed, ride-hailing giant Uber – seen as a threat to the local taxi industry – suspended its Taiwan operations February 10 after accruing fines of NT$1.1 billion in the first two months of the year. To comply with local regulations, home-sharing site Airbnb, which competes with local travel booking sites, is no longer focusing on the lucrative apartment-sharing market.

A likely reason for that disparity is Taobao’s lack of direct local competitors. “The market segments served by PChome and Taobao are totally different,” says PChome’s Lu. “We don’t see Taobao as competing with us.”

Many consumers would be unhappy without Taobao as well. Crystal Chou, 30, a web designer, shops on Taobao for everything from fashion to stationery. “I would be very disappointed to no longer be able to shop on Taobao as I do now,” she says. “I don’t know where else I would be able to find the same variety of unique items I want at such low prices.”

For its part, Alibaba has struck a conciliatory note. When the Investment Commission first ordered it to leave the Taiwan market two years ago, chief executive Jack Ma told reporters that Taiwan is important to his company and emphasized that Alibaba would comply with local laws wherever it operates globally. “We have around 300,000 entrepreneurial clients here in Taiwan and we can’t just leave,” he said.

For the time being, the Taiwan government and Taobao have come to an understanding, observes Lin of AppWorks. “Taobao will be allowed to continue to operate here, but it needs to keep a low profile, taking into consideration that anti-China sentiment remains prevalent in Taiwan.”

Lin believes economic considerations weighed heavily on the decision of the Taiwanese government. “Many small businesses and individuals rely on Taobao to import merchandise,” he says. “A shutdown of the platform here would threaten their livelihood.”