Alibaba: When Blockchain meets Supply Chain

Although behind in market capitalization, JD.com (JD) is making Alibaba uncomfortable. Alibaba, the largest e-commerce firm in China, has been losing market share to JD. [1] Both companies have the same target customer, but slightly different business models. Unlike Alibaba, who acts as a marketplace that connects consumers with merchants, JD directly sells to consumers and relies primarily on its own delivery network. It is this vast logistics network that makes Alibaba nervous, as it gives JD a competitive advantage when it comes to selling groceries, meat, and dairy. [2]

In 2015, these two giants embarked in the business of selling fresh produce sourced from around the globe [3]. This move was positively received by consumers, as imported foods are associated with high quality [4]. However, food safety remains a concern in China. [5]

The country has experienced severe cases of food fraud in the last years, with its climax in 2008 when adulterated milk translated into the death of at least six babies [6]. According to the UNODC, identifying the source of a counterfeit product entails a daunting task in China. The country possesses a decentralized manufacturing system, which means that products have several suppliers contributing to their production. [7] Accountability is difficult to enforce, and the culprit becomes difficult to pinpoint. With the introduction of more imported products, the risk of food fraud and counterfeits does not dissipate but increases.

With little oversight over a complex distribution system and a reputational risk around the corner, Alibaba has been exploring potential solutions.

In March 2017, Alibaba partnered with PwC to pilot a project that aims to improve trust in the supply chain by enhancing traceability in the products imported into China from Australia and New Zealand. [8] According to Maggie Zhou, managing director for Alibaba in these countries, “this project is the first step in creating a globally respected framework that protects the reputation of food merchants and gives consumers further confidence to purchase food online.”

But how will Alibaba address the problem? Through the blockchain.

Although there are no details on implementation, Alibaba could potentially replicate the technologies adopted by Provenance and Everledger, UK tech startups, whereby they combine blockchain with QR codes and RFID tags [9], which Alibaba already uses to process payments from customers, to record a product’s movement. Each product, with its own digital identity reflected in a code, will have its own data record. At every stage, employees involved in the transaction will scan the tag and record additional details, including location, timestamp, temperature and other conditions of interest, onto the product’s digital passport. The final customer could access this information via Alipay, Alibaba’s online payment platform, to corroborate whether the product is original or a counterfeit.

Blockchain will help Alibaba improve food trust practices and integrity across the supply chain, but the benefits go beyond increased accountability. Blockchain will deter firms from engaging in fraudulent activities, as these firms will have to worry not only about recreating the product, but also the entire digital infrastructure that comes with it. Other benefits include improving inventory management, minimizing courier costs, reducing delays from paperwork, and identifying and isolating issues faster. [10]

In the medium to long term, if the project proves successful, Alibaba may want to expand the use of blockchain to the rest of its business as a means to protect its reputation. Alibaba has been accused of selling counterfeit goods, and faced, in 2015, a lawsuit from Gucci, Balenciaga, and Yves Saint Laurent, among others, for selling fake products on its online platform. [11] As a result of these accusations, several customers opted to shop on JD’s platform instead. [12]

While Alibaba implements and tests the aforementioned project, I would recommend that it continue to invest in developing its own logistics network. Having a centralized warehousing and delivery network will help Alibaba collect data on both logistics and merchants. These data can be used to improve the relationship with the latter and to increase control over the conditions in which products are being transported and delivered. Ideally, Alibaba would start introducing merchants to the concept of blockchain ahead of a potential rollout.

Despite its potential, the adoption of blockchain in supply chain management still raises a few questions. How fast will the process of adoption be and what changes in our current social, economic and governmental institutions will be necessary? Will there be a robust infrastructure -in terms of size/storage, speed, and reliability- to accommodate for the increasing volume of transactions?

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[1] Wong, Jacky (2017). How to Fight a Giant Like Alibaba? Lots of Friends.

[2] Ibid.

[3] Noble, Josh (2015) Alibaba and JD Online take fresh approach to China food shopping https://www.ft.com/content/bfaa55da-be4d-11e4-a341-00144feab7de

[4] Ibid.

[5] Zhang, Wenjing; Xue, Jianhong (2016). Economically motivated food fraud and adulteration in China: An analysis based on 1553 media reports. Elsevier

[6] PwC Press Release (2017). PwC explores blockchain solutions with Alibaba and food industry stakeholders to help address supply chain fraud and build trust in the food industry. https://www.pwccn.com/en/press-room/press-releases/pr-240317.html

[7] United Nations Office on Drugs and Crime. https://www.unodc.org/documents/data-and-analysis/tocta/8.Counterfeit_products.pdf

[8]  O’Brien, Emma; Liu, Jiefei; Chen, Lulu Yilun; Nakamura, Yuji; Dodge, Samuel; Niu, Shuping; Qiu, Yue. Inside the Secret World of Global Food Spies (2017). https://www.bloomberg.com/news/articles/2017-08-06/spies-blockchain-and-alibaba-beating-china-s-fake-food-scourge

[9] Trust In Trade. Toward stronger supply chains, IBM Institute for Business Value. https://www-01.ibm.com/common/ssi/cgi-bin/ssialias?htmlfid=GBE03771USEN&

[10] Blockchain for Supply Chain. https://www.ibm.com/blockchain/supply-chain/

[11] Wong, Gillian (2015). Alibaba Sued Over Alleged Counterfeits. https://www.wsj.com/articles/alibaba-sued-over-alleged-counterfeits-1431877734

[12] Li, Cao (2016). Alibaba faces Growing Pressure Over Counterfeit Goods. https://www.nytimes.com/2016/12/22/business/alibaba-ustr-taobao-counterfeit.html