ITEM 4 INFORMATION ON THE COMPANY
A. History and Development of the Company
Alibaba Group Holding Limited is a Cayman Islands holding company established under the Companies Law of the Cayman Islands (as amended) on June 28,
1999, and we conduct our business in China through our subsidiaries and variable interest entities. Our ADSs are listed on the NYSE under the symbol "BABA."
Our
significant subsidiaries, as that term is defined under Section 1-02 of Regulation S-X under the Securities Act, include the following
entities:
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Taobao Holding Limited, an exempted company incorporated with limited liability under the laws of the Cayman Islands, which is our wholly-owned
subsidiary and the indirect holding company of the PRC subsidiaries relating to Taobao Marketplace and Tmall.
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Taobao China Holding Limited, a Hong Kong limited liability company, which is the direct wholly-owned subsidiary of Taobao Holding Limited and
the direct holding company of the PRC subsidiaries relating to Taobao Marketplace and Tmall and operating entity for the overseas business of Taobao Marketplace and Tmall Global.
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Taobao (China) Software Co., Ltd., a limited liability company incorporated under the laws of the PRC, which is an indirect
subsidiary of Taobao Holding Limited and a wholly-foreign owned enterprise, and provides software and technology services for Taobao Marketplace.
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Zhejiang Tmall Technology Co., Ltd., a limited liability company incorporated under the laws of the PRC, which is an indirect
subsidiary of Taobao Holding Limited and a wholly-foreign owned enterprise, and provides software and technology services for Tmall.
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Alibaba.com Limited, an exempted company incorporated with limited liability under the laws of the Cayman Islands, which is our wholly-owned
subsidiary and the indirect holding company of the PRC subsidiaries relating to Alibaba.com, 1688.com and AliExpress.
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Alibaba.com Investment Holding Limited, a company incorporated with limited liability under the laws of the British Virgin Islands, which is
the direct wholly-owned subsidiary of Alibaba.com Limited and a lower level holding company of the PRC subsidiaries relating to Alibaba.com, 1688.com and AliExpress.
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Alibaba Investment Limited, a company incorporated with limited liability under the laws of the British Virgin Islands, which is our
wholly-owned subsidiary and the principal holding company for our strategic investments, including Youku Tudou.
The
principal executive offices of our main operations are located at 969 West Wen Yi Road, Yu Hang District, Hangzhou 311121, People's Republic of China. Our telephone number at
this address is +86-571-8502-2077. Our registered office in the Cayman Islands is located at the offices of Trident Trust Company (Cayman) Limited, Fourth Floor, One Capital Place,
P.O. Box 847, George Town, Grand Cayman, Cayman Islands. Our agent for service of process in the United States is Corporation Service Company located at 1180 Avenue of the
Americas, Suite 210, New York, New York 10036. Our corporate website is
www.alibabagroup.com
.
We
have a demonstrated track record of successful organic business creation. In addition to organic growth, we have made, or have entered into agreements to make strategic investments,
acquisitions and alliances that are intended to increase our product and service offerings and expand our capabilities. See "Item 5. Operating and Financial Review and
Prospects A. Operating Results Recent Investment, Acquisition and Strategic Alliance Activities" for more information.
Share Repurchase Program
On August 12, 2015, we announced the implementation of a share repurchase program in an aggregate amount of up to US$4.0 billion
over a period of two years, or the 2015 Share Repurchase Program. We have repurchased ADSs representing our ordinary shares on the open market under purchase plans adopted to implement the 2015 Share
Repurchase Program. In addition, Jack Ma, our executive chairman, and Joe Tsai, our executive vice chairman, have jointly entered into our plans as affiliated purchasers. On May 18, 2017, we
announced the adoption of a new share repurchase program in an aggregate amount of up to US$6.0 billion over a period of two years, or the 2017 Share Repurchase Program. The new program
replaced, and cancelled the remaining amount under, the 2015 Share Repurchase Program. See "Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers."
In
June 2016, we also repurchased shares from SoftBank in a privately negotiated transaction. See "Item 7. Major Shareholders and Related Party
Transactions B. Related Party Transactions Transactions and Agreements with SoftBank and
Yahoo Our Repurchase of Ordinary Shares from Yahoo and SoftBank."
B. Business Overview
Our Mission
Our mission is to make it easy to do business anywhere.
Our
founders started our company to champion small businesses, in the belief that the Internet would level the playing field by enabling small enterprises to leverage innovation and
technology to grow and compete more effectively in the domestic and global economies. We believe that concentrating on customer needs and solving their
problems whether those customers are consumers or merchants ultimately will lead to the best outcome for our business.
We have developed a large ecosystem for online and mobile commerce that enables participants to create and share value on our platforms. Our decisions are guided by how they serve our mission over the
long term, not by the pursuit of short-term gains.
Our Vision
We aim to build the future infrastructure of commerce. We envision that our customers will meet, work and live at Alibaba, and that we will be a
company that lasts at least 102 years.
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Meet @ Alibaba.
We enable hundreds of millions of commercial and social interactions among our users, between consumers and merchants, and among
businesses every day.
Work @ Alibaba.
We empower our customers with the fundamental infrastructure for commerce and data technology, so that they can build businesses and
create value that can be shared among our ecosystem participants.
Live @ Alibaba.
We strive to expand our products and services to become central to the everyday lives of our customers.
102 Years.
For a company that was founded in 1999, lasting at least 102 years means we will have spanned three centuries, an achievement
that few companies can claim. Our culture, business models and systems are built to last, so that we can achieve sustainability in the long run.
Our Values
Our values are fundamental to the way we operate and how we recruit, evaluate and compensate our people.
Our
six values are:
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Customer First
The interests of our community of
consumers and merchants must be our first priority.
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Teamwork
We believe teamwork enables ordinary people to
achieve extraordinary things.
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Embrace Change
In this fast-changing world, we must be
flexible, innovative and ready to adapt to new business conditions in order to survive.
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Integrity
We expect our people to uphold the highest
standards of honesty and to deliver on their commitments.
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Passion
We expect our people to approach everything
with fire in their belly and never give up on doing what they believe is right.
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Commitment
Employees who demonstrate perseverance and
excellence are richly rewarded. Nothing should be taken lightly as we encourage our people to "work happily and live seriously."
Company Overview
To fulfill our mission "to make it easy to do business anywhere," we enable businesses to transform the way they market, sell and operate. We
provide the fundamental technology infrastructure and marketing reach to help merchants, brands and other businesses to leverage the power of the Internet to engage with their users
and customers.
Our
businesses are comprised of core commerce, cloud computing, digital media and entertainment, and innovation initiatives and others. Through investee affiliates, Cainiao Network and
Koubei, respectively, we participate in the logistics and local services sectors. In addition, we have a profit sharing interest in Ant Financial Services, the financial services group that operates
mainly through Alipay, the leading third-party online payment platform in China.
Core Commerce
We are the largest retail commerce company in the world in terms of GMV in the twelve months ended March 31, 2017, on the basis of
publicly available comparable transaction value data for the most recent fiscal year.
We
operate Taobao Marketplace, China's largest mobile commerce destination, and Tmall, China's largest third-party platform for brands and retailers, in each case in terms of GMV in
2016, according to iResearch. Taobao Marketplace and Tmall (including Juhuasuan), which comprise our China retail marketplaces, generated a
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combined
GMV of RMB3,767 billion (US$547 billion) in the twelve months ended March 31, 2017. There were 454 million annual active buyers on these marketplaces in the twelve
months ended March 31, 2017. In March 2017, the various mobile apps that consumers use to access our China retail marketplaces had 507 million mobile MAUs.
In
fiscal year 2017, we generated 72% of our revenue from our retail commerce business in China. The revenue on our China retail marketplaces is generated from merchants through online
marketing services, commissions on transactions and fees for other online services. In fiscal year 2017, we generated 80% of this revenue through mobile devices.
We operate a China wholesale marketplace, 1688.com, which matches wholesale buyers and sellers in categories such as general merchandise,
apparels, electronics, raw materials, industrial components and agricultural and chemical products. A significant number of merchants on our China retail marketplaces source their inventory
on 1688.com.
We operate AliExpress, our global retail marketplace with approximately 60 million annual active buyers from around the world in the
twelve months ended March 31, 2017, buying directly from manufacturers and distributors in China. Tmall Global is our platform within Tmall for overseas brands and retailers to reach Chinese
consumers without the need for physical operations in China. In April 2016, we acquired a controlling stake in Lazada, which operates e-commerce platforms in Indonesia, Malaysia, the
Philippines, Singapore, Thailand and Vietnam. In the twelve months ended March 31, 2017, Lazada had approximately 23 million annual active buyers.
We operate Alibaba.com, China's largest global online wholesale marketplace in 2016 by revenue, according to iResearch. As of March 31,
2017, buyers on Alibaba.com were located in over 200 countries and regions all over the world.
Cloud Computing
We operate Alibaba Cloud Computing, or Alibaba Cloud, China's largest provider of public cloud services in 2016 by revenue, according to IDC.
The technologies that power Alibaba Cloud grew out of our own need to operate the massive scale and complexity of our core commerce business. In 2009, we founded Alibaba Cloud to make these
technologies available to third-party customers. Alibaba Cloud offers a complete suite of cloud services, including elastic computing, database, storage and content delivery network (CDN), large scale
computing, security, management and application services, big data analytics and a machine learning platform. As of March 31, 2017, Alibaba Cloud had approximately 874,000 paying
customers.
Digital Media and Entertainment
Based on the strength of our relationship with consumers and our capability in leveraging commerce data that can be applied to serving the
broader interests of consumers, we have established our digital media and entertainment business, mainly through acquisitions. In 2014, we acquired UCWeb, which operates UC Browser, one of the top
three mobile browsers in the world and the number one mobile browser in India and Indonesia by page view market share as of May 2017, according to StatCounter (all StatCounter
data quoted in this annual report available at: http://gs.statcounter.com). UCWeb also provides mobile value-added services to users including news feeds, mobile web navigation and mobile search.
Shenma (
), its mobile search business, is the second largest mobile search engine in China as of May 2017, according to StatCounter.
In April 2016, we acquired Youku
Tudou, a leading multi-screen entertainment and media company in China, enabling users to search, view and share high-quality video content quickly and easily across multiple devices. Youku Tudou and
UC Browser serve as
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the
two key distribution platforms for our digital media and entertainment business. These businesses and our other media and entertainment-related businesses, including news feeds, mobile app
distribution, music, sports, literature and games, provide a comprehensive digital media and entertainment ecosystem for users to discover and consume content and engage and interact with
each other. In March 2017, our digital media and entertainment businesses had over 500 million mobile MAUs, including overseas users.
Innovation Initiatives and Others
We continue to develop new service offerings to find new ways to meet the needs of our customers and expand the reach of our ecosystem. For
example, YunOS is our cloud-based, data and service-oriented operating system that can be used on a wide range of smart devices, including automobiles, mobile phones, TVs and set-top boxes. AutoNavi
provides digital map, navigation and real-time traffic information to users in China and serves as an open platform powering mobile apps and fundamental services in our ecosystem. DingTalk, our
proprietary enterprise communication and collaboration platform, unifies the critical tasks of communication and collaboration in the work place, offering text, photo, voice and video communication,
collaboration features and workflow management, such as convenient attendance recording and expense approval.
An
ecosystem has developed around our platforms and businesses that consists of consumers, merchants, brands, other businesses, third-party service providers and strategic alliance
partners. At the nexus of this ecosystem are our technology platform, our marketplace rules and the role we play in connecting these participants to make it possible for them to discover, engage and
transact with each other and manage their businesses anytime and anywhere. Much of our effort, time and energy is spent on initiatives that are for the greater good of the ecosystem and on balancing
the interests of its participants. We feel a strong responsibility for the continued development of the ecosystem and we take ownership in this development. Accordingly, we refer to this as "our
ecosystem." Our ecosystem has strong self-reinforcing network effects benefitting its various participants, who are in turn invested in our ecosystem's growth and success.
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The
following chart sets forth our key businesses, selected major investee companies and cooperative partners:
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Entities that are not consolidated.
Our Strategies
We believe that China and other markets will be deeply impacted by "Five New" trends of the future: New Retail, New Manufacturing,
New Finance, New Technology and New Resources. We have oriented our existing and new product and service offerings to leverage Internet technology to create business models that
can adapt to and benefit from future growth opportunities.
The
consumer retail industry as a whole is experiencing a radical disruption driven by digital technology. We believe "e-commerce" as we know it will be replaced by New Retail
where the distinction between online and offline retail becomes obsolete. The biggest trend we see is the integration of offline and online retail for a new, reimagined retail experience, where the
interactions among consumer traffic, inventory location and retail space are transformed by leveraging big data and mobile Internet technologies. For example, consumers can place orders via their
mobile phones as they shop for and try out products in a physical retail store, aided by location-based recommendations. We believe we will play a critical role in this transformation by leveraging
our consumer scale, data and technological capabilities to elevate the consumer experience and improve efficiency across the entire value chain.
We
aim to strengthen and expand our ecosystem in order to achieve long-term growth by:
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increasing active buyers and our wallet share through geographic expansion, new product and service categories, and improved consumer
experience by leveraging our data capabilities to better identify, analyze and serve their needs through personalization across channels anytime and anywhere;
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expanding product and service offerings to consumers beyond physical goods, including digital entertainment, healthcare and
local services;
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reinventing our platforms as go-to destinations for brands to lift awareness and affinity, manage and engage with customers, expand channels
and innovate on products;
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creating value for merchants, brands, retail operators and other businesses in our ecosystem through online and offline integration,
omni-channel marketing and distribution, retail space reinvention and operational efficiency improvement driven by big data and world-class technology;
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applying data and cloud computing technologies in everything we do for our customers and for ourselves; and
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continuing to be an innovator in products and technology as well as a disrupter of business models and existing industry value chains.
Our
long-term strategic goal is to serve two billion consumers around the world and support ten million businesses to operate profitably on our platforms. We have embarked on three key
initiatives to achieve this strategic goal: globalization, rural expansion and big data and cloud computing.
Globalization
Cross-border commerce is the focus of our globalization initiative. We aim to address each of the three pillars of cross-border commerce
as follows:
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From the world to China.
Our China retail marketplaces provide the gateway
for international brands, retailers and small businesses to gain access to Chinese consumers. Through Tmall Global, overseas brands and retailers can reach Chinese consumers and build brand awareness
without the need for physical operations in China. Taobao Global further facilitates cross-border commerce by helping Taobao merchants to engage Chinese consumers with a rich variety of global
products that they have sourced from suppliers outside of China.
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From China to the world.
Through our Alibaba.com wholesale marketplace, we
facilitate global trade by connecting Chinese suppliers to importers, wholesalers and distributors across the world. On the retail front, AliExpress enables consumers worldwide to buy directly from
manufacturers and distributors in China.
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From the world to the world.
We operate e-commerce platforms in Southeast
Asia through Lazada. Our long-term vision is to build a global commerce platform that is virtual and borderless, which we refer to as the electronic World Trade Platform, or eWTP. Under eWTP, together
with the Malaysia Digital Economy Corporation, we launched a digital free trade zone, or e-hub, in Malaysia in May 2017, and we plan to create more e-hubs through public-private partnerships in
different countries. These e-hubs operate as one-stop service platforms which will allow small businesses in one country to sell to consumers in another, with fast customs clearance, accessible
payment and financing services and access to efficient logistics. When connected together, these e-hubs will create a global network of e-roads that serves as the foundation of the eWTP. Through the
power of the Internet, eWTP aims to build a more inclusive, free and innovative global trading platform for SMEs and consumers. To that end, we are investing in international talent and
infrastructure, and expanding our presence in key markets around the world to attract and serve international customers.
Rural Expansion
As of December 31, 2016, 590 million people in China reside in rural areas, according to the National Bureau of Statistics of
China. Their access to goods and services is highly constrained by geographic and infrastructural limitations. We aim to give rural residents greater access to a broader variety of higher quality
goods and services through our Rural Taobao program. At the same time, we help farmers earn more by selling agricultural products to urban consumers.
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Big Data and Cloud Computing
We believe our world is rapidly transitioning from an information technology, or IT, economy to a data technology, or DT, economy. Traditionally
unstructured, undiscovered and underutilized data can now be
activated and leveraged as a new fundamental energy source. From the development of personal computer, or PC, to mobile, to the Internet of Things, or IoT, the explosion of data is bringing about a
new era of opportunity. In the future, we believe that the Internet will play a fundamental role in social and commercial interactions, with cloud computing as a cost-saving public service, and data
as a value-enhancing resource. We will continue to implement our data strategy through the application of data intelligence, machine learning and deep learning technologies to several fields,
including marketplace design, user interface, search, targeted marketing, logistics, platform security, location-based services and financial services, among others. We will continue to invest in our
cloud computing platform to support our own businesses and those of third parties.
Our Businesses
Core Commerce
Our core commerce business is comprised of platforms operating in four areas: retail commerce in China; wholesale commerce in China; retail
commerce cross-border and global; and wholesale commerce cross-border and global.
Our retail commerce business in China is comprised of Taobao Marketplace, Tmall (including Juhuasuan) and Rural Taobao, empowered by our
commerce technologies and services. Our China retail marketplaces have become an important part of the everyday life of Chinese online consumers. According to CNNIC, 467 million Chinese
Internet users have experienced online shopping in 2016, out of a total of 731 million Internet users at the end of 2016. Our high penetration rate of China's online shopping population is
evidenced by the 443 million annual active buyers we had in the twelve months ended December 31, 2016.
We
believe consumers enjoy spending time on our China retail marketplaces because of the following value propositions:
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Broad selection.
Our China retail marketplaces had over 1.5 billion
listings as of March 31, 2017, presenting a comprehensive selection of products and services to consumers.
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Convenience.
Because of its 24/7 availability, its seamless user experience
and its ability to blur the lines between online and offline commerce, especially on mobile, users are rapidly adopting Internet shopping. Through Cainiao Network and its logistics partners, consumers
from cities to rural areas enjoy predictable and speedy delivery services.
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Engaging, personalized experience.
Our Taobao App and Tmall App provide
consumers a unique social commerce experience through highly relevant content, personalized shopping recommendations and opportunities for social engagement.
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Value for money.
Our marketplace business model ensures that merchants
offer competitive prices to consumers.
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Merchant quality.
Consumers can rate a merchant after completion of a
transaction based on whether the product matches its description, the merchant's service level and delivery timeliness. These customer feedbacks contribute to the detailed service rating, or DSR,
which is displayed on the merchant's storefront and is factored into the search algorithm that determines its ranking on search results pages.
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Authentic products.
Consumers can expect products purchased from our China
retail marketplaces to be protected by merchant quality ratings, clear return policies and the Alipay escrow system. These protections
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As
a result of our broad value propositions to consumers, we have seen increased engagement over time, as the longer consumers have been with us, the larger numbers of orders they tend
to place, across a more diverse range of product categories, and the more they tend to spend on our China retail marketplaces. For example, in the twelve months ended March 31, 2017, consumers
who have been with us for approximately five years placed an average of 123 orders in 24 product categories with average spending of approximately RMB12,000 in terms of GMV, whereas
consumers who have been with us for approximately one year placed an average of 38 orders in 9 product categories with average spending of approximately RMB3,000 in terms of GMV. In the
twelve months ended March 31, 2017, the average annual active buyer on our China retail marketplaces placed 85 orders in 17 product categories with average spending of
approximately RMB8,000 in terms of GMV.
With
data and technology, we are committed to enabling merchants, brands and retailers by delivering the following value propositions:
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Customer acquisition, retention and engagement.
In March 2017, the
various mobile apps that consumers use to access our China retail marketplaces had 507 million mobile MAUs. Consumers come to our platforms with strong commercial intent, which drives high
conversion rates and effective return on investment (ROI) for merchants and brands. The consumer behavior data from our platforms enable merchants and brands to acquire, retain and engage their
customers effectively, through campaign testing, targeted marketing and a personalized user interface.
Manufacturers
and retailers in China and rest of the world increasingly recognize that e-commerce is essential for survival and growth. As merchants and retailers turn to online channels for
distribution in China, our China retail marketplaces have become part of every conversation. The 454 million annual active buyers for the twelve months ended March 31, 2017 represent an
unparalleled amount of purchasing power.
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Brand identity.
Brands use their Tmall storefronts to distinguish their own
brands and build brand proposition and awareness. They leverage the multi-media capabilities of our platforms, such as social media, videos and dynamic graphics, to tell their unique brand story.
Brands, such as Oreo and Budweiser, are increasingly recognizing the power of our China retail marketplaces as top marketing platforms, where the life-time value of customers can be built to benefit
their businesses both online and offline. For example, Oreo used its Tmall storefront to host an interactive marketing campaign that allowed its customers to personalize cookie packaging with the aim
of strengthening brand loyalty levels.
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Efficient operations.
In addition to customer-facing storefronts and
product catalogues, merchants use our commerce technologies and services to improve their planning, marketing and sales activities, as well as our cloud computing services to lower their technology
costs.
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Omni-channel opportunities.
We offer omni-channel products and services to
enable merchants, brands and offline retailers to offer a seamless online and in-store shopping experience to consumers and improve their efficiency across their value chain. These solutions integrate
online and offline inventory, membership and services that enable retailers to fulfill online orders with store based inventories (store pick-up or delivery from the nearest store) and allow consumers
to purchase products unavailable in stores.
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Data insights.
Consumers come to our China retail marketplaces to browse
for ideas, look for new trends, receive merchant and product updates, compare products, share shopping experiences and be entertained. Consumer actions on our platforms, such as searching, browsing,
reading news feeds, bookmarking and adding products to shopping carts, generate valuable data about user intentions. The data insights provided by these actions are unique to our platforms and are not
easy for merchants to obtain anywhere else.
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A description of the various aspects of our China commerce retail business follows.
Taobao means "search for treasure" in Chinese. Through the website at www.taobao.com and the Taobao App, Taobao Marketplace is positioned as the
starting point and destination portal for the shopping journey. Consumers come to Taobao Marketplace, a commerce-oriented social platform, to enjoy an engaging, personalized shopping experience,
optimized by our big data analytics. Through highly relevant and engaging content and real-time updates from merchants, consumers can learn about products and new trends. They can also interact with
each other and their favorite merchants and brands on Taobao Marketplace.
Taobao
Marketplace provides a top-level traffic funnel that directs users to the various marketplaces, channels and features within our China retail marketplaces. For example, a search
result on Taobao Marketplace displays listings not only from Taobao Marketplace merchants but also from Tmall merchants, thereby generating traffic for Tmall.
Taobao
Marketplace reaches a vast consumer base, including consumers from large cities and beyond. The substantial majority of users access Taobao Marketplace through a mobile device.
Below is a visual presentation of various components of the Taobao App:
Taobao App Homepage
Starting point and destination portal for mobile commerce
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Taobao App Search
Search results are personalized and customized for different users
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Taobao App Good Find
Shopping recommendations based on consumer activities on our platforms and user profiles
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Taobao App Taobao Headlines
Personalized third-party news feeds for consumers to discover new trends and browse for ideas
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Taobao App Weitao (
)
Social media platform for merchants to engage and interact with consumers
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Taobao App Your Advice Please
Interest-based interactive platform for consumers to share shopping experiences, interact with one another and answer each other's questions
Taobao
Marketplace is also the entry point to verticals such as online travel booking, operated under the Fliggy name, or Feizhu (
) in Chinese,
meaning "flying pig" (formerly known as Alitrip), and second-hand auctions, operated under the Xianyu (
) name, both of which can also be accessed through their own independent mobile app. Fliggy offers a comprehensive selection of domestic and international airline tickets,
train and bus tickets, hotel bookings, vacation packages and tourist attraction tickets through online travel agencies and direct travel service providers. Xianyu users trade second-hand items using
the Xianyu mobile app which offers location-based information about products and merchant rating reviews.
Merchants
on Taobao Marketplace are primarily individuals and small businesses. The creation of storefronts and listings by merchants on Taobao Marketplace is free of charge. The escrow
payment services provided by Alipay are free of charge to consumers and merchants unless payment is funded through a credit product such as a credit card, in which case Alipay charges a fee to the
merchant based on the related bank fees charged to Alipay. Taobao Marketplace merchants can purchase P4P and display marketing services to direct traffic to their storefronts. In addition, merchants
can acquire additional traffic from third-party marketing affiliates. Taobao Marketplace merchants can also pay for advanced storefront software that helps to upgrade, decorate and manage their online
storefronts.
Tmall caters to consumers looking for branded products and a premium shopping experience. A large number of international and Chinese brands and
retailers have established storefronts on Tmall. According to iResearch, Tmall is the largest B2C platform in China in terms of GMV in 2016. It is positioned as a trusted platform for consumers to buy
both homegrown and international branded products as well as products not available in traditional retail outlets.
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In 2009, Tmall pioneered November 11, known as "Singles Day" in China, as an annual promotional shopping day. Singles Day has become the most important
shopping event in China and we believe it generated the highest one-day retail sales volume in the world: on November 11, 2016, our China and international retail marketplaces generated GMV of
RMB120.7 billion (US$17.5 billion) settled through Alipay within a 24-hour period, reflecting the strength of our infrastructure and the scale of the entire Alibaba ecosystem.
Tmall
is the partner of choice for brands. Brands and retailers operate their own stores on the Tmall platform with unique brand identities and look and feel, accompanied by full control
over their own branding and merchandising. Merchants on Tmall and Taobao Marketplace can customize their storefronts right down to the software code, without much constraint. As of March 31,
2017, there were over 100,000 brands on Tmall. Because of the presence of a large number of global brands and the stringent requirements for merchants to operate on Tmall, a presence on Tmall
has become a validation of quality, allowing merchants to take advantage of our significant traffic to extend and build brand awareness and customer engagement. Major international brands that have
physical operations in China, such as Apple, Zara, Bose, Estée Lauder, P&G and Unilever, are well represented on Tmall. And Tmall Global, an extension of Tmall, addresses the increasing
demand from Chinese consumers for international products and brands that don't have presences in China.
Brands
and retailers turn to Tmall not only for its broad user base, but also for its services and tools for customer acquisition, retention and engagement and to enhance the efficiency
of their operations. For example, Tmall provides one-stop branding and promotion services through different properties such as Juhuasuan. Juhuasuan is a sales and marketing platform for flash sales
where Tmall and Taobao Marketplace merchants can acquire new customers and raise brand awareness through special discounts and promotional events.
We
also seek to build our mind-share among consumers to position Tmall as the premier shopping destination for everyday items, highlighting value and convenience. For example, through
Tmall Supermarket, we offer consumers frequently purchased products, such as FMCG, in densely populated top-tier cities, where consumers can enjoy same-day delivery and next-day delivery coordinated
through the warehouse and delivery partners of Cainiao Network. In consumer electronics, we have leveraged Singles Day to strengthen consumer recognition of Tmall's value proposition through exclusive
promotions of high value items such as mobile phones, as well as high quality delivery, installation and after-sale services on home appliances, such as television sets, kitchen appliances,
refrigerators and washing machines, through our partners Ri Ri Shun (
), or RRS, and Suning.
Merchants
on Tmall pay commissions based on a pre-determined percentage of transaction value that varies by product category, typically ranging from 0.4% to 5.0%. Tmall merchants also
pay an annual upfront service fee, up to 100% of which may be refunded depending on sales volume achieved by the merchant within each year. Like Taobao Marketplace merchants, Tmall merchants have
access to P4P and display marketing services, third-party marketing affiliates and storefront software.
As of December 31, 2016, 590 million people in China resided in rural areas, according to the National Bureau of Statistics of
China. Consumption in the rural areas is highly constrained by geographic and infrastructural limitations, as the cost of distribution to geographically dispersed and remote locations is prohibitively
high. We aim to increase the level of consumption and commerce in rural China through our Rural Taobao program. We have established service centers in over 26,500 villages as of
March 31, 2017, to give rural residents greater access to goods and services and the ability to sell what they make to the cities.
Villagers
can place orders at service centers, and the goods, such as consumer goods, electronic appliances and agricultural supplies, ordered online are delivered to county-level
stations and then distributed by local couriers to service centers in the villages for pick up. Coordinated by Cainiao Network, almost all packages can be delivered from the county-level station to a
village service center the next day.
Our
Rural Taobao program also helps rural Chinese villages to create a production economy by enabling rural residents and businesses to sell high quality agricultural products to urban
consumers. For example, the Rural Taobao team worked together with local government, enterprises and kiwifruit farmers in Mei County, a county at
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the
foot of Qinling Mountains in Shaanxi province, to upgrade the planting, sorting and storage standards and technology to produce high quality kiwifruits targeting urban consumers. As a result, more
than 40 metric tons of kiwifruits were sold during a 3-day period in the 2017 Ali Chinese New Year Shopping Festival, helping the region establish its reputation for quality kiwifruits.
Through
our Rural Taobao program, we are pioneering a two-way distribution infrastructure to connect commerce between cities and rural areas in China. We believe Rural Taobao brings
significant benefits to rural residents by improving their quality of life, and to brands and retailers who wish to extend their reach by accessing China's vast rural population.
We have made substantial investments to enable merchants and brands to operate at the next level of efficiency through our commerce technologies
and services, including online software tools and a diverse array of essential services. We enable merchants and brands to acquire, retain and engage with consumers and operate more efficiently, which
helps to enhance merchants and brands' loyalty to our platforms. These commerce technologies and services include two key components:
Management
Control Panels
Core operations control panel.
We provide an integrated online control panel that allows merchants to conduct their core operations through
a unified interface. Through this control panel,
merchants can access online software tools and a wide range of services in product planning, marketing, fashion modeling and photography, supply chain management and fulfillment, among others.
Merchants
on our China retail marketplaces use this control panel to conduct day-to-day operations, such as managing their stores and product listings, fulfilling orders, managing their
inventory and transactions, conducting sales and marketing activities, servicing their customers, interacting and collaborating with other businesses and seeking credit financing services provided by
Ant Financial Services.
Big data control panel.
We provide an integrated online control panel that allows merchants and brands to utilize big data to manage their
customer relationships, formulate business
strategies and manage their private data bank.
-
-
Customer relationship management.
We provide merchants the capability to
tag and manage visitors to their online storefronts, fans who are following their stores, and loyal customers by attributes such as demographic characteristics and shopping preferences. This
capability enables the store owners to analyze and test the effectiveness of campaigns and to provide a personalized storefront and shopping experience for each visitor.
-
-
Private data bank and business strategy center.
We offer a secured cloud
data insight platform with a sophisticated private data bank and analytic services such as industry trend analysis, customer data aggregation, brand marketing and product cycle management services, to
help merchants and brands formulate business strategies and make timely, informed decisions.
Consumer
Engagement Interfaces
We
provide a suite of tools that assist storefront owners on Taobao Marketplace and Tmall in managing their storefronts, free of charge. Advanced versions of our storefront management
software with upgraded functionalities, such as dynamic data-enabled personalized interfaces, AI-assisted storefront design, and multi-media content support, are available for a
subscription fee.
In
addition to managing storefronts and editing product listings, these tools also allow storefront owners to manage their content across every digital channel on our platforms to
deliver a comprehensive consumer experience. These digital channels include product listing displays, instant messaging interfaces with customers
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and
multi-media news feeds on the Taobao App and Tmall App which allow consumers to follow the latest news and videos posted by merchants and brands.
The
tools also allow storefront owners to plan, approve and implement sales and marketing activities on their storefronts to further engage consumers, such as offering limited time
discounts or free gifts for certain customers, cross-selling related products and distributing coupons.
Wholesale Commerce in China
1688.com China domestic wholesale marketplace
1688.com is our online wholesale marketplace that connects buyers and sellers in China who trade in general merchandise, apparel, electronics,
raw materials, industrial components, and agricultural and chemical products, among others. A significant number of merchants on our China retail marketplaces source their inventory on 1688.com.
Listing items on 1688.com is free. Sellers may purchase a China TrustPass membership for an annual subscription fee to host premium storefronts with access to data analytics applications and upgraded
storefront management tools. Paying members may also pay for additional services, such as premium data analytics and online marketing services. As of March 31, 2017, 1688.com had over
961,000 paying members.
AliExpress is a global marketplace targeting consumers from around the world to buy directly from manufacturers and distributors in China. In
addition to the global English-language site, AliExpress operates sixteen local language sites, including Russian, Spanish and French. Consumers can access the marketplace through its websites or the
AliExpress App. Top consumer markets where AliExpress is popular are Russia, the United States, Brazil, Spain, France and the United Kingdom. In the twelve months ended March 31,
2017, AliExpress had approximately 60 million annual active buyers and generated GMV of US$10.1 billion.
Merchants
on AliExpress pay a commission, which is typically 5% to 8% of transaction value. We also generate revenue on AliExpress from merchants who participate in the third-party
marketing affiliate program and those who purchase P4P marketing services. In the twelve months ended March 31, 2017, AliExpress generated US$7.2 billion of transaction value.
Through Tmall Global, an extension of Tmall, we address the increasing Chinese consumer demand for international products and brands. Tmall
Global is the premier platform for overseas brands and retailers to reach Chinese consumers, build brand awareness and gain valuable consumer insights in forming their overall China strategy, without
the need for physical operations in China. For example, Costco, Macy's, Chemist Warehouse, Victoria's Secret, LG Household & Health Care and Matsumoto Kiyoshi have storefronts on
Tmall Global.
We acquired a controlling stake in Lazada, a leading operator of e-commerce platforms across Southeast Asia, in April 2016. Lazada
operates e-commerce platforms in Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam, with local language websites and mobile apps in each of the six markets. Lazada offers
third-party brands and merchants a marketplace solution with simple and direct access to consumers in these six countries through one retail channel as well as quick and reliable delivery. Lazada also
sells products owned by its retail operations. In the twelve months ended March 31, 2017, Lazada had approximately 23 million annual active buyers.
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In January 2017, we and the International Olympic Committee launched a historic long-term partnership through 2028. Joining The Olympic
Partner (TOP) worldwide sponsorship program, Alibaba has become the official "E-Commerce Services" Partner and "Cloud Services" Partner. Alibaba's contributions to the Olympic Movement will include:
-
-
the creation of a global e-commerce platform for Olympic stakeholders to engage and connect with fans seeking official Olympic licensed
products manufactured by the Olympic parties' official licensees, and selected sports products, on a worldwide basis;
-
-
leveraging Alibaba's leading digital media technologies and know-how to develop and customize the Olympic Channel for a Chinese audience; and
-
-
provision of cloud computing infrastructure and services.
Wholesale Commerce Cross-border and Global
Alibaba.com global trade marketplace
Alibaba.com is a leading wholesale marketplace for global trade. Sellers on Alibaba.com may pay for an annual Gold Supplier membership to host a
premium storefront with product listings on the marketplace. Sellers may also purchase an upgraded membership package to receive value-added services such as upgraded storefront management tools and
P4P marketing services. Buyers on Alibaba.com were located in over 200 countries and regions all over the world as of March 31, 2017. Buyers are typically trade agents, wholesalers,
retailers, manufacturers and SMEs engaged in the import and export business. Alibaba.com also offers its members and other SMEs import/export supply chain services, including customs clearance, VAT
refund, trade financing and logistics services. As of March 31, 2017 Alibaba.com had over 141,000 paying members.
Cloud Computing
Alibaba Cloud is China's largest provider of public cloud services in 2016 by revenue, according to IDC. The technologies that power Alibaba
Cloud grew out of our own need to operate the massive scale and complexity of our core commerce business. In 2009, we founded Alibaba Cloud to make these technologies available for third-party
customers.
Alibaba
Cloud offers a complete suite of cloud services, including elastic computing, database, storage and content delivery network (CDN), large scale computing, security, management
and application services, big data analytics and a machine learning platform. Products that differentiate Alibaba Cloud from our domestic peers include proprietary security and middleware products,
large scale computing services and analytic capabilities provided by our big data platform. These products enable customers to build IT infrastructure quickly on-line without having to work
on-premises.
We
offer our cloud computing services to all types of businesses, including merchants doing business on our marketplaces, start-ups, corporations and government organizations. We charge
fees that are primarily based on time and usage. As of March 31, 2017, Alibaba Cloud had approximately 874,000 paying customers. Customers, including China Railway and Weibo, use our
elastic computing services, security and AI capabilities for data storage, transmission and analysis. Customers, such as Sinopec and CITIC Group, also use our middleware services to upgrade their
application infrastructures. Media and entertainment platforms, including China Central Television and Mango TV, use our content delivery networks for their live and on-demand video business. China
Post and Ele.me use our big data solutions to improve efficiency. In 2016, we expanded our cloud computing services to Japan, Korea, Germany, the Middle East and Australia markets, to provide
customers worldwide with greater access to our diverse offerings, including elastic computing, data storage and analytics services and cloud security services.
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As
a major part of our partnership with the International Olympic Committee, Alibaba Cloud will provide cloud computing infrastructure and services, including big data analytics, to
empower the Olympic Games to operate more efficiently, effectively and securely.
Our
cloud computing segment information is presented after elimination of inter-company transactions. See "Item 5. Operating and Financial Review and
Prospects A. Operating Results Segment Information for Fiscal Years 2015, 2016 and 2017." Furthermore, in fiscal
year 2017, cloud computing revenue from related parties only contributed 9% of our total cloud computing revenue.
Digital Media and Entertainment
Leveraging our deep consumer insights to serve the broader interests of consumers, we have developed an emerging business in digital media and
entertainment through (i) two key distribution platforms, Youku Tudou and UC Browser, and (ii) diverse content platforms that provide TV dramas, variety shows, news feeds, movies,
music, sports and live events. In March 2017, our digital media and entertainment businesses had over 500 million mobile MAUs, including overseas users.
Youku Tudou, a leading multi-screen entertainment and media company in China, enables users to search, view and share high-quality video content
quickly and easily across multiple devices. The Youku Tudou brand is among the most recognized online video brands in China.
UC Browser is one of the top three mobile browsers in the world and the number one mobile browser in India and Indonesia by page view
market share as of May 2017, according to StatCounter.
We offer a diverse range of digital media and entertainment content using a sustainable production and acquisition approach that includes
self-produced content, jointly produced content and licensed content. First, we provide self-produced content, including both user-generated content, or UGC, and professionally-generated
content, or PGC. We also jointly produce content through arrangements with studios and directors that commit them to produce and distribute some or all of their content exclusively for our platforms.
Lastly, we also acquire rights to display content on our digital media and entertainment platforms pursuant to licensing agreements with rights holders.
UC Headlines is a consumer data-driven news feed platform that aims to provide users with quality targeted news information and participatory
media content, such as blogs and community media, and provide marketers with targeted online marketing services. In March 2017, UC Headlines had over 200 million mobile MAUs,
including overseas users.
Shenma, UCWeb's mobile search business, is the second largest mobile search engine in China as of May 2017, according
to StatCounter.
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Alibaba Pictures, our equity method investee, is principally engaged in the operation of an Internet-powered integrated platform that spans
entertainment content promotion and distribution, serving consumers, studios, and cinema operators. As of March 31, 2017, we hold an approximately 49.5% equity interest in Alibaba Pictures.
We operate various mobile app distribution platforms for users to download and install Android-based and YunOS-based mobile apps, providing
data-driven recommendation services and traffic to quality mobile apps.
Our other digital media and entertainment offerings include music, games, sports, and literature platforms. Our music platforms provide music
streaming services, online music publishing services and an online entertainment platform. Alibaba Games operates a game publishing platform for Android-based mobile games. Alibaba Sports offers
content including sporting events and e-sports contests. Our mobile digital reading platform allows authors to publish their literary work to a wide audience.
Innovation Initiatives and Others
YunOS is a cloud-based, data and service-oriented operating system for all kinds of smart devices. It is a highly scalable and compatible system
that can be used on a wide range of IoT devices, including automobiles, mobile phones, TVs and set-top boxes. With advanced technologies and sophisticated features such as a system level H5/Web
service, a dynamic linking service, a unified data platform, and a multi-level security framework, YunOS enables developers to deliver better scenario-driven Internet services and user experience to
our customers. YunOS provides the connection between cloud-based applications and hardware devices, with a focus on the data needs of users.
AutoNavi is a leading provider of digital map, navigation and real-time traffic information in China. Besides providing these services to end
users directly, AutoNavi also operates a leading open platform in China that powers many major mobile apps in different industries such as food delivery, ride service, taxi-hailing and social
networking with its location-based services. It also provides fundamental services to major platforms in our ecosystem including our China retail marketplaces, Cainiao Network and Alipay.
DingTalk is our proprietary enterprise communication and collaboration platform that enables text, photo, voice and video communication,
workflow management and collaboration among team members and enterprises of various sizes. It also offers a low-cost and secured Internet telephone service. With a built-in enterprise directory, users
can easily initiate text chats or voice and video conference calls as well as secured group chats with members of their organization. DingTalk unifies the critical tasks of communication and
collaboration in the work place. For instance, DingTalk enables enterprises to conveniently record attendance in the workplace and at external meetings. In addition, as a fully integrated
communications app, DingTalk supports HR, travel and expense approvals.
Branding and Monetization Platforms
We have developed a system that we call Uni Identity to track users across different properties and devices. For example, we are able to
identify a user watching a Youku Tudou video on a PC as the same user shopping on
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our
Taobao App. Our Uni Identity system takes disparate data and attributes the data to a single user, which enables us to provide marketers with valuable insights into user behavior and preferences.
Uni Identity enables brands to interact with consumers in the right place at the right time with the right content.
Drawing
on Uni Identity and our big data capabilities, we have developed a Uni Marketing approach that empowers brands to build robust relationship with consumers throughout their
lifecycles in our ecosystem. Our Uni Marketing methodology tracks brand-consumer relationships through each critical stage, from awareness to interest to purchase to loyalty. Consumer data is
generated, aggregated, analyzed and reactivated in brands' individualized databases. This data guides brands and marketing agencies across each phase of the brand-consumer relationship, providing
insights into strategy, communication planning and ad-serving. Our data-driven Uni Marketing approach effectively and efficiently promotes brand lift, sales generation and customer loyalty.
Uni
Marketing aims to capture consumer brand building touch points across internet media, including our marketplaces, Youku Tudou, UC Web, strategic partners in our ecosystem such as
Weibo, as well as other major third-party internet properties in China. We intend to become the key destination for brand building by creating an open, inclusive and transparent platform where brands
and marketing agencies are able to design, execute, track and optimize their brand building activities using our data and tools.
Alimama is our marketing technology platform that provides the publisher-side serving and demand-side functionalities for merchants and brands
to place various marketing formats on our marketplaces and other third-party properties. The platform supports P4P marketing based on keyword search rankings or display marketing in fixed positions
that are bid on through auctions, as well as cost per thousand impression (CPM)-based, time-based marketing formats, or individual campaigns at fixed cost, through the display of photos, graphics
and videos.
The
ranking of P4P search results on our core commerce platforms is based upon proprietary algorithms that take into account the bid price of keywords, the popularity of an item or
merchant, customer feedback ranking of merchants and quality of product displays. For display marketing, the Alimama platform serves marketing messages based on data from our ecosystem, including
transactions on our core commerce platforms, payment data from Ant Financial Services, logistics data from Cainiao Network, user navigation and behavioral data from our core commerce platforms and
media and entertainment properties, as well as demographic and location-based data. The relevance and comprehensiveness of data based on commercial activities and user activities around our ecosystem
provide a powerful and unique advantage for Alimama to target the most relevant information to the most relevant users.
The
Alimama technology platform supports marketing delivered through personal computers and mobile devices. Under Alimama's bidding system, marketers may set a higher or lower bid price
for mobile marketing than the bid price for marketing on personal computers. Alimama also has an affiliate marketing program to place marketing displays on third-party websites and mobile apps,
thereby enabling marketers, if they so choose, to extend their marketing and promotional reach to properties and users beyond our own marketplaces. We believe we have the largest online marketing
affiliate network in China in terms of revenue shared with third-party website properties and mobile apps. Our affiliate marketing program not only provides additional traffic to our core commerce
platforms, but also generates revenue to us. Under the Taobaoke program, merchants on Taobao Marketplace and Tmall can generate additional traffic and transactions from third-party websites and mobile
apps, and the marketers pay commissions based on a percentage of transaction value sourced from these third-party marketing affiliates. We share a significant portion of that commission with our
third-party affiliate marketing partners.
Alimama
operates the Taobao Ad Network and Exchange, or TANX, one of the largest real-time bidding online marketing exchanges in China. TANX helps publishers to monetize their media
inventories both on web properties and mobile apps. TANX automates the buying and selling of billions of marketing impressions on a daily basis. Participants on TANX include publishers, marketers and
demand side platforms operated by agencies.
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Our mobile search engine, Shenma (
), monetizes through a keyword bidding system
that enables marketers to reach users who search for information related to their products or services. We engage third-party
distributors to sell some of our mobile marketing services to marketers. UC Browser monetizes primarily through time-based display marketing where marketers place icons that link to their web pages or
apps in UC Browser. Its news feeds feature UC Headlines enables marketers to place marketing messages in news feeds on cost-per-click (CPC) basis or impressions on time basis. Our mobile marketing
platform enables marketers to launch targeted marketing for apps, games, web pages and services on mobile media including UC Browser, UC Headlines and third-party media partners, leveraging our deep
consumer insights.
Youku Tudou monetizes primarily through brand advertising. Its online advertising services include in-video, display, sponsorship and other
forms of advertisements. In-video advertisements appear at certain times during the playback of a video. These video advertisements can be pre-roll, post-roll, mid-roll or static advertisements.
Display advertisements can be delivered alongside a video and may take the form of graphical banners or text hyperlinks. Other forms of advertisements include product placements in the web video
series produced in-house, sponsored live events or viral videos produced in-house. Youku Tudou's advertising solutions present brand advertisers with attractive opportunities to combine the visual
impact and engagement of traditional television-like multimedia formats with the interactivity and precise targeting capabilities of the Internet.
Other Major Elements of our Ecosystem
Logistics Cainiao Network
Cainiao Network is a joint venture that we formed in May 2013 with other shareholders who are engaged in logistics, retail, and real
estate, including four major express courier companies in China. Cainiao Network does not deliver packages itself. It operates a logistics data platform that leverages the capacity and capabilities of
logistics partners to fulfill transactions between merchants and consumers at a large scale. Cainiao Network uses data insights and technology to improve efficiency across the logistics value chain.
The proprietary data platform provides real-time access to data for merchants to better manage their inventory and warehousing and for consumers to track their orders. In addition, Cainiao Network's
data platform helps logistics service providers to improve the efficiency and effectiveness of their services, such as leveraging data to optimize the delivery routes used by express courier
companies.
Cainiao
Network provides two major types of services delivery data and technology solutions and domestic fulfilment solutions.
-
-
Delivery data and technology solutions
are value-added services that link merchants to
logistics service providers and to consumers, provide real-time order tracking information and enhance logistics efficiency. Merchants select the services of particular logistics service providers
that rely on Cainiao Network's proprietary data platform for accuracy of delivery information and optimization of delivery routes. Under the delivery data and technology solutions model, merchants
assume the responsibility for order fulfillment out of their warehouses (usually one centralized location per merchant), and they pay for express courier companies to pick up, transport and sort
packages and make last-mile deliveries to the end consumers nationwide. This model does not require Cainiao Network to invest in capital intensive warehouses, transport or last-mile assets. Currently
the vast majority of packages from our China retail marketplaces are fulfilled and delivered under this model.
Through
its platform approach, Cainiao Network integrates the resources of logistics service providers to build out the logistics ecosystem. As of March 31, 2017, Cainiao Network's fifteen
strategic express courier partners employed over 1,800,000 delivery personnel in more than 600 cities and 31 provinces in China, according to data provided by them. Collectively
they operated more than 180,000 hubs and sorting stations.
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The
top six of these express courier partners handled the delivery of the majority of packages from our China retail marketplaces in the twelve months ended March 31, 2017. We believe that
orders from transactions generated on our marketplaces represented a significant portion of these express courier partners' total delivery volumes in the twelve months ended March 31, 2017.
Cainiao Network is still in an early stage of development. It has yet to monetize the majority of the value-added services it provides under the delivery data and technology solutions model.
-
-
Domestic Fulfilment Solutions
are services offered to merchants, especially medium to large
merchants, who require a nationwide warehousing network and supply chain management services for optimized inventory placement at multiple locations and package delivery to end consumers in a more
efficient and timely manner. Cainiao Network assumes responsibility of order fulfilment and package delivery to the end consumers, for which it charges a fee. Cainiao Network collaborates with
in-warehouse operation providers and uses a combination of owned and partner warehouses to fulfill orders. Cainiao Network then coordinates with line-haul and last-mile delivery service providers to
complete the package delivery. To provide a high quality solution, Cainiao Network oversees the entire logistics process and promotes standardization on efficiency metrics. As of March 31,
2017, Cainiao Network's same-day or next-day delivery services covered a total of 1,029 districts and counties, more than doubled compared with the coverage as of March 31, 2016. During the
process, logistics partners' capabilities are also improved and upgraded through technology and data insights provided by Cainiao Network.
In
addition to enabling the fulfillment and delivery of orders that fit in standard size packages, we and Cainiao Network also partner with specialized logistics service providers for
category-specific solutions where items require special handling and services. The following are examples of category-specific solutions that we and Cainiao Network have organized to enhance the
consumer experience:
-
-
Large appliances.
We have entered into a joint venture with Haier
Electronics to invest in its logistics subsidiary, RRS, to handle logistics services for large appliances. Partnering with RRS, Cainiao Network provides large appliances merchants with inventory
planning tools, data analytics, and logistics services that enhance consumer experience through more efficient inventory placement.
-
-
Consumer electronics.
In connection with our agreement to invest in Suning,
one of the largest electronics retail chains in China with over 1,500 stores and over 5.8 million sq.m. of logistics warehouse and ancillary facility space as of December 31,
2016, we and Cainiao Network are cooperating with Suning to leverage their retail and logistics assets relating to warehousing and delivery capabilities, and after-sale servicing and returns of
electronics products.
-
-
Tmall Supermarket.
Tmall operates a popular supermarket category that
generates high frequency purchases and builds consumer mindshare for high quality fresh produce, food and FMCG products. To fulfill the logistics demand, Cainiao Network partners with specialized
players in the fresh produce supply chain, cold chain transport, warehouse operations and last-mile delivery services.
As
extensions of the two major types of services mentioned above, Cainiao Network also provides the following services to merchants and consumers on our international and China retail
marketplaces, through collaboration with specialized logistics service providers:
-
-
Cross-border.
Cainiao Network provides import and export logistics services
to merchants on Tmall Global, our premier platform for overseas brands and retailers, and AliExpress, our global consumer marketplace, respectively.
-
-
Rural and Urban Last Mile.
In order to enhance consumer experience and
improve efficiency in last-mile delivery in both rural and urban areas, Cainiao Network has also developed technological solutions and operational standards for these settings. In rural areas, Cainiao
Network coordinates the delivery from county level Rural Taobao stations to villages. In urban areas, Cainiao Network provides smart pick-up stations around urban communities and on college campuses
as an alternative to delivery to end consumers' doorsteps.
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During
the twelve months ended March 31, 2017, Cainiao Network and its logistics partners enabled the delivery of 16.6 billion packages from our China retail marketplaces.
Currently, Cainiao Network primarily derives its revenue from domestic fulfillment solutions and generates a significant portion of its revenue from providing these services to Tmall Supermarket.
Cainiao Network operates a proprietary logistics data platform. This platform links consumers, merchants and logistics service providers and
allows them to share information relating to orders, delivery routes and time, and user feedbacks. The logistics data platform can interface with a broad range of systems including our marketplace
transaction systems, Alipay's payment system, third-party transportation management systems, and the CRM, ERP and warehouse management systems of merchants. Information generated from the data
platform serves many purposes: merchants can review the performance of delivery service providers on different routes; logistics service providers can compare their performance against peers; and
consumers can track orders, receive delivery time information, and stay in touch with delivery personnel.
Cainiao Network completed a round of equity financing of approximately RMB10 billion in March 2016. Existing shareholders and new
investors, including major sovereign wealth funds and private equity funds, participated in the financing. We subscribed for Cainiao Network's shares on an approximately pro rata basis. As of
March 31, 2017, we own an approximately 47% equity interest in Cainiao Network.
Financial Services Ant Financial Services
Ant Financial Services provides digital payment services and other financial and value-added services to consumers and SMEs in China and across
the world, such as payment, wealth management, lending, insurance and credit system. Ant Financial Services leverages its customer insights and technologies to help financial institutions, ISVs and
other partners on its platform to enhance experience of their users and improve their risk management capabilities. During the twelve months ended March 31, 2017, Ant Financial Services,
together with Paytm and Ascend Money, served over 630 million annual active users globally.
Alipay,
a wholly owned subsidiary of Ant Financial Services, provides payment and escrow services for transactions on Taobao Marketplace, Tmall, 1688.com, AliExpress and certain of our
other platforms. Alipay is the principal means by which consumers pay for their purchases on our China retail marketplaces. Except for transactions paid with credit products such as credit cards,
where Alipay charges the merchant, neither we nor Alipay charge any payment fees to merchants doing business on our platforms. Instead, we pay Alipay a fee for the payment and escrow services it
provides on our marketplaces pursuant to a commercial agreement with Ant Financial Services and Alipay.
Ant
Financial Services and its partners also provide wealth management, lending, insurance, credit system and other services to merchants and consumers in our ecosystem, such as working
capital loans to SMEs, consumer loans and logistics cost insurance for goods returned.
For
additional details on our commercial relationship with Ant Financial Services and Alipay, see "Item 7. Major Shareholders and Related Party
Transactions B. Related Party Transactions Agreements and Transactions Related to Ant Financial Services and its Subsidiaries."
Local Services
Through investee companies, we are engaged in the online-to-offline, or O2O, local services business involving restaurants, food delivery and
movie ticketing, among others.
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In 2015, we and Ant Financial Services set up the joint venture Koubei, one of the leading local services guide businesses in China. Koubei
operates O2O services in conjunction with Alipay by generating demand to local establishments such as restaurants, supermarkets, convenience stores and other offline lifestyle establishments by
offering consumers a "closed loop" experience, from acquiring information on mobile to finding the store to claiming discounts to payment. For the three months ended March 31, 2017, Koubei
generated RMB74.7 billion (US$10.9 billion) in GMV settled through Alipay with merchants.
In
January 2017, Koubei completed a US$1.1 billion equity financing led by Silver Lake, CDH Investments, Yunfeng Capital and Primavera Capital. This transaction provides
Koubei with a strong capital base to execute its aggressive growth strategy.
In March 2016, we jointly invested with Ant Financial Services in Ele.me (
),
a leading food delivery company in China. Consumers using the company's food delivery app can order meals, snacks and beverages on a mobile device. Through a delivery
network of employed and outsourced personnel, the
company's service covered over 1,500 districts and counties in China as of March 31, 2017. Under a cooperation agreement, Ele.me fulfills food orders generated from the Taobao App and
Alipay App.
Alibaba Pictures, our equity investee and the flagship unit of our movie business, operates the second largest online movie ticketing platform
in China in terms of mobile MAUs in March 2017, according to QuestMobile.
Customer Service for China Retail Marketplaces
Merchants on our platforms serve their customers with commerce technologies and services we provide. In addition, our customer service
representatives serve consumers and merchants on our marketplaces through telephone hotlines, real-time instant messaging and online inquiry systems. Our dispute resolution system's adjudication panel
of experienced consumers and merchants provides an easy way for consumers and merchants to resolve their disputes, while other more complicated disputes are referred to our customer service
representatives. In the twelve months ended March 31, 2017, we received dispute cases representing approximately 0.03% of orders placed on our China retail marketplaces.
With
certain exceptions, consumers on our China retail marketplaces may return the purchased goods within seven days from their receipt. Alipay's payment escrow services ensure efficient
refunds. In addition, for qualified consumers with good credit history, we may accelerate refund procedure by making the refund payment directly to the buyer upon the buyer's refund application and
providing of proof of shipment for the return goods.
Consumer Protection
We believe every consumer has the right to protection from false and misleading claims and harmful products. We encourage our merchants to make
product quality a priority and have set up various programs to this end. All Tmall merchants are required to contribute to and maintain a consumer protection fund for the benefit of consumers.
Consumer protection fund deposit requirements vary by product category and typically range from RMB10,000 to RMB500,000 per storefront. For Tmall Global merchants, the consumer
protection fund deposit requirement typically ranges from RMB150,000 to RMB300,000 for standard storefronts. The majority of Taobao Marketplace merchants maintain individual consumer protection
funds with minimum amounts ranging from RMB1,000 to RMB50,000. All Tmall and Taobao Marketplace merchants are required to sign agreements with us authorizing us to make deductions from their Alipay
accounts in the event of confirmed consumer claims. Merchants who have failed to maintain a minimum amount in their consumer protection funds are blocked from showing product listings in our search
results.
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The
consumer protection fund amounts are displayed on each merchant's information page. As of March 31, 2017, consumer protection funds deposited in the Alipay accounts of
merchants on our China retail marketplaces in aggregate totaled over RMB18 billion. Many merchants on Tmall and Taobao Marketplace provide a larger deposit than required and make additional
service commitments, such as expedited shipment, free maintenance for electronics and installation services for furniture purchases, to demonstrate to their customers their confidence in the quality
of their services and products. If the amount in a merchant's consumer protection fund is insufficient, we may still choose to compensate consumers ourselves for any losses, although we are not
legally obligated to do so. In addition, Alipay's escrow payment services offer consumers further protection by applying a risk-adjusted payment release schedule to merchants based on merchants'
historical track records including service level, product quality and dispute rate.
Transaction Platform Safety Programs
Preserving the integrity of our marketplaces is a top priority for us. We are committed to protecting intellectual property rights and
eradicating counterfeit merchandise and fictitious activities. Infringement of intellectual property, both online and offline, are industry-wide issues affecting brands and merchants globally. We work
on these issues with rights holders, trade associations and governments around the world. As of March 31, 2017, more than 100,000 brands operate on our marketplaces, a demonstration of
the trust they place in the integrity of our marketplaces.
Product Authenticity
We are committed to offering authentic, high quality products across our platforms, including high quality overseas products on Tmall Global,
grocery and FMCG products on Tmall Supermarket, and high
quality pharmaceuticals on Tmall. Together with our focus on providing authentic products across our platforms, we are also fully committed to working with brands, rights holders and law enforcement
authorities to monitor product authenticity and protect intellectual property both online and offline. We have called for collective efforts in the fight against counterfeiting that include stronger
law enforcement measures and harsher penalties for those found to be engaged in criminal activity. In addition, we also initiate civil actions against counterfeiters.
Our
product authenticity initiatives have produced effective results. As part of our commitment to allow only authentic product listings on our platforms, we employ big data and
technology to proactively identify and shut down storefronts selling infringing products and remove suspect product listings. These efforts resulted in our removal of approximately 29 times
more product listings than were requested by intellectual property rights holders during the twelve months ended March 31, 2017. Our offline product authenticity initiatives also have borne
tangible results as we have provided law enforcement authorities with evidence to successfully track down and arrest violators of intellectual property rights in a number of instances.
We
implement the following measures to monitor the authenticity of products offered on our platforms and fight illicit goods together with brands and law enforcement
agencies:
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Notice and take down system.
In order to safeguard our platforms and
promote product authenticity we operate a rigorous notice-and-takedown system that allows rights holders to request the removal of potentially infringing listings from our platforms. We offer
qualified rights holders a good-faith takedown program pursuant to which we process infringement takedown requests on a "good-faith" basis by expediting claims and simplifying the notification
procedure. We collaborate with rights holders in proactively identifying suspicious listings, giving them an opportunity to review these listings and submit takedown requests.
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Proactive monitoring (scanning and detection) powered by big data.
As part
of our commitment to allow only authentic product listings on our platforms, we utilize our proprietary algorithms to proactively detect the presence of suspicious goods. As of March 2017, our
algorithms had the capacity to process 100 million pieces of data per second, which enables us to conduct proactive scans on more than 10 million product listings a day. We also have
developed the capability to perform real-time scanning of suspicious product
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during a merchant's listing creation process, enabling us to stop merchants from uploading infringing content. We employ Optical Character Recognition (OCR) technology to conduct text
and logo detection on images used in product listings in order to ensure that the products offered are authentic. Our detection technology is capable of constantly improving through machine learning.
Our ability to quickly and efficiently monitor and remove problematic products enhances as more and more brands and rights holders contribute information about their intellectual property to our
systems. We collaborate with rights holders in this manner to protect their intellectual property.
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Offline enforcement.
We work closely with brands and law enforcement
authorities to assist in their offline investigations against counterfeiting. With insights drawn from our data analytics, we help law enforcement authorities to identify manufacturers and dealers of
suspicious goods so they can be brought to justice.
We
are committed to promoting authentic goods on our platforms in order to create a safe and healthy environment for commerce.
In January 2017, we announced the establishment of the AACA together with major international brands, such as Louis Vuitton, Swarovski,
and Dulux. The AACA is committed to using big data and technology to combat intellectual property infringement more effectively, efficiently and transparently.
In
April 2017, we and 30 leading global brands came together as members of the AACA for a series of meetings and constructive dialogue focused on combatting intellectual
property infringement through big data and technology. With the support of big data and technology, the AACA helps rights holders, e-commerce platforms and law enforcement agencies work together on
fighting intellectual property infringement both online and offline. The AACA believes all parties must work together in a collaborative fashion with increased communication and exchange of
information to halt the production of infringing goods.
We
are committed to supporting this industry-wide AACA effort through our big data and technology capabilities, and promoting ongoing industry cooperation for the establishment of a
healthy and safe environment for commerce.
Combatting Fictitious Transactions
With respect to fictitious activities, we have and will continue to invest significant resources in protecting the trust and credit system we
have built on our marketplaces. Measures to prevent, detect and reduce the occurrence of fictitious transactions on Taobao Marketplace and Tmall we have implemented include:
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requiring the use of merchants' real identities when opening accounts;
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analyzing transaction patterns to identify anomalies;
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offering dynamic password protection and engaging in real-time monitoring of user login behavior;
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enabling consumers and merchants to report suspicious transactions;
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maintaining a "blacklist" of merchants who have previously been involved in fictitious transactions; and
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collaborating with participants in our ecosystem such as Alipay and Cainiao Network as well as industry partners and law enforcement
authorities on Internet security.
Penalties
We aim to protect consumers by excluding suspicious merchandise and fictitious transactions from the ranking system, credit system and
transaction volume statistics. When these activities are confirmed, we penalize the parties involved through a number of means including: closing down storefronts, permanently banning merchants from
opening any accounts on our platforms, limiting merchants' ability to add listings, imposing restrictions on
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in promotional activities on our marketplaces, and placing merchants' product listings at the bottom in search ranking results.
Our Technology
Technology is key to our success in achieving efficiency for our business, improving the user experience, and enabling innovation. Our unrivaled
proprietary technology supports peak order volumes of up to hundreds of thousands per second, delivers tens of billions of online marketing impressions per day, and enables millions of merchants and
other businesses to conduct their operations efficiently and effectively. The uniqueness of our technology lies in the unparalleled large-scale application environment due to the scale of our
businesses. By constantly applying our technology across our businesses, we generate knowledge and innovations that drive improvements and further technological development.
As
of March 31, 2017, we employed a team of over 22,000 research and development personnel. Our research and development personnel play key roles in various international
standardization organizations in areas such as security, e-commerce and IoT. In addition, we are also active in open source communities and have contributed over 100 open source software
projects.
Key
components of our technology include those described below:
Technology Infrastructure
Our data centers utilize leading technologies in distributed structure, natural cooling, distributed power technology, high-density liquid
cooling and intelligent monitoring, and we believe we operate at the lowest power usage effectiveness, or PUE, ratio worldwide. The multi-region availability of our transaction system data centers
provides scalable and stable redundancy.
Cloud Operating Systems
Our cloud computing operating system, called Apsara, is a proprietary general purpose distributed computing operating system that provides
Alibaba Cloud customers with enhanced computing power to support their business growth in the data technology, or DT, era. We have also developed YunOS, a cloud-based, data and service-oriented
operating system for all kinds of smart devices. YunOS is a highly scalable and compatible system that can be used on a wide range of IoT devices, including automobiles, mobile phones, TVs and
set-top boxes.
Big Data Analytics Platform
We have developed a distributed data analytics platform that can efficiently handle complex computing tasks of hundreds of millions of data
dimensions, providing deep data insights to our businesses and our cloud computing customers. Our big data analytics platform includes MaxCompute, an offline data storage and computing platform,
StreamCompute, a real-time data storage and computing platform, and OneData, a data integration and management system.
Artificial Intelligence
With access to a massive amount of data and our involvement in diverse businesses involving a rich variety of consumer experiences, we believe
we are in a unique position to develop the large-scale commercial use of AI. To date, we have applied various AI technologies across our commerce platforms to enhance consumer experience, such as
personalized search results and shopping recommendations empowered by deep learning and data analytics, speech recognition and image analysis technology adopted in search functions, as well as
intelligent customer service.
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Machine Learning
We are one of the few companies in the world with a proprietary, distributed deep learning platform. Deep learning capabilities accelerate our
innovations in areas such as image and video recognition, speech recognition, text and voice interaction and machine translation.
Virtual Reality and Augmented Reality
We showcased our Buy+ virtual reality, or VR, shopping experience during Singles Day 2016, demonstrating the potential to change the way people
shop and how merchants and brands can reach consumers without physical stores. Consumers can enjoy an interactive shopping experience and complete transactions using VR devices.
We
also launched Tmall AR-GO for home furnishings, which allows consumers to use mobile devices to view nearly true-to-life images of how furniture will fit in their homes. Applying the
latest technology, Tmall AR-GO utilizes motion tracking, combined with life-like rendering effects and optimized 3D engines.
Security
We have established a comprehensive security infrastructure, supported by our network situational awareness and risk management system, that
spans from the individual end users across our entire network, covering our systems, apps, data and services. Our back-end security system handles hundreds of millions of instances of malicious
attacks each day to safeguard the security of our e-commerce and cloud platforms.
Sales and Marketing
As Taobao Marketplace is China's largest mobile commerce destination, we enjoy significant organic traffic through word-of-mouth and general
awareness of our brand and platforms. Although we employ a variety of methods to promote our platforms, we believe word-of-mouth, and the reputation and ubiquitous awareness of our brand and platforms
in China and, increasingly, abroad, provide us with the best and most cost-efficient marketing channel. Further, the large number of consumers on our marketplaces attracts a large number of merchants
who become customers for our online marketing services. As a result, we do not rely on a large sales force for our China retail marketplaces.
Corporate Social Responsibility
We believe the best approach to corporate social responsibility is through embedding elements of social responsibility in our business model.
Since our founding, we have been highly committed to sustainable corporate responsibility projects, both through charitable endeavors and by extending the benefits of our ecosystem to the community
at large.
Our
major achievements and initiatives in the areas of corporate social responsibility include those described below:
Creating Job Opportunities
The breadth of our ecosystem and the range of different types of service providers needed within it create employment opportunities. In addition
to providing direct business opportunities for merchants, our ecosystem has created new opportunities for service providers in logistics, marketing, consulting, operations outsourcing, training and
other online and mobile commerce professions. According to AliResearch, our research division, as of December 2016, it is estimated that our China retail marketplaces contributed to the
creation of over 33 million direct and indirect job opportunities in China, including people working directly for online storefronts, service providers to merchants and other businesses across
the value chain.
With
the power of the Internet, our platforms have leveled the playing fields for businesses in many aspects, helping to foster an inclusive economy for everyone to thrive and prosper.
In fiscal year 2017, approximately half
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the annual active sellers on our China retail marketplaces were female. In calendar year 2016, our China retail marketplaces supported the livelihoods of approximately 160,000 disabled sellers.
Supporting Rural Development in China
As we expand to rural areas in China and provide access to the urban consumer market, we have created opportunities for people living in rural
areas to elevate their standard of living. Our Rural Taobao program gives rural residents greater access to goods and services as well as the ability to sell what they produce to the cities. In
addition, communities of rural online entrepreneurs in impoverished areas have opened storefronts on our China retail marketplaces to effectively elevate their income levels. As of
December 2016, AliResearch, our research division, has identified over 1,000 of these rural e-tailer villages, over 200 of which were in state- and province-designated impoverished counties.
Charitable Donation and Participation
Since 2010, we have earmarked 0.3% of our annual revenue to fund efforts designed to encourage environmental awareness and conservation as well
as other corporate social responsibility initiatives. In 2011, we established the Alibaba Foundation, a private charity fund that focuses on supporting environmental protection in China and helping
the disadvantaged, such as children born with heart defects in underdeveloped areas of China. In fiscal year 2017, we and the Alibaba Foundation made over RMB110 million (US$16 million)
in donations to support more than 80 domestic and overseas charitable projects, including those hosted by the National Geographic Air and Water Conservation Fund, the Paulson Institute and the
Institute of Public and Environmental Affairs. We have also leveraged our platforms to enable other charitable organizations to raise over RMB235 million (US$34 million) in donations in
fiscal year 2017, which benefited over two million disadvantaged people.
Since
September 2015, we have encouraged our employees to perform a minimum of three hours of service activities every year. In fiscal year 2017, this program saw over
140,000 hours of social service activities performed by our employees. In addition, we recognize the immense influence of our ecosystem and leverage it to extend the reach of our charitable
work. In fiscal year 2017, our platforms facilitated approximately 4.7 billion charitable participations involving over 300 million consumers and over 1.7 million merchants. We
encourage our merchants, consumers and other ecosystem participants to participate in socially responsible activities. For example, charitable organizations can set up storefronts on our marketplaces
to raise funds and engage with volunteers. Merchants can designate a percentage of the sales proceeds generated on our platforms to go to charitable organizations. Consumers can contribute to
charitable causes by purchasing these products or participating in charity auctions hosted on our platforms.
Selected Efforts to Address Social Problems
In running our day-to-day business, we are at the forefront in witnessing and understanding the social problems in China. We are committed to
establishing a unique charitable ecosystem that focuses on innovation and scalability. We support and promote a number of charitable and socially responsible initiatives and programs in ways that we
believe are in alignment with our core values and our mission. In 2016, the Research Center for Corporate Social Responsibility of the Chinese Academy of Social Sciences named us one of the top
10 charitable enterprises in China and the top charitable private enterprise in China. In the same year, we were also among the first group of Internet platforms recognized for charitable
donations by the Ministry of Civil Affairs of the People's Republic of China.
We
believe corporate philanthropy should not be limited to charitable giving. With a view toward long-term, sustainable philanthropy, we take the approach of developing commercially
viable charity projects that are
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in products across a wide range of businesses in our ecosystem. In fiscal year 2017, we promoted 23 philanthropic products including:
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the "Reunion" platform that connects our mobile apps and those of our partners to help locate missing children across China; from the
implementation of the platform in mid-2016 to the end of 2016, law enforcement authorities successfully located 611 missing children based on 648 alerts broadcasted to the ecosystem of
mobile users, a 94% success rate;
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an anti-scamming app jointly developed with the PRC Ministry of Public Security that helps the public to report and identify scam calls and
text messages;
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barrier-free features of the Tmall App that enhance user experience for people with vision disabilities;
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providing subsidized cloud computing services to charitable organizations; and
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a new feature in the Cainiao Network App that allows users to send clothes and books for donation.
Competition
We face competition principally from established Chinese Internet companies, such as Tencent, Baidu and their respective affiliates, as well as
from certain offline retailers and e-commerce players, including those that specialize in a limited number of product categories, such as FMCG, global or regional cloud computing service providers and
digital media and entertainment providers. These competitors generate significant traffic and have established brand recognition, significant technological capabilities and significant financial
resources. The areas in which we compete primarily include:
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Consumers
We compete to attract, engage and retain
consumers based on the variety and value of products and services listed on our marketplaces, the engagement of digital media and entertainment content available on our platforms, the overall user
experience of our products and services and the effectiveness of our consumer protection measures.
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Merchants and Brands
We compete to attract and retain
merchants based on the size and the engagement of consumers on our platforms and the effectiveness of our products and services to help them build brand awareness and engagement, acquire and retain
customers, complete transactions, expand service capabilities, protect intellectual property rights and enhance operating efficiency.
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Marketers
We compete to attract and retain marketers,
publishers and demand side platforms operated by agencies based on the reach and engagement of our properties, the depth of our consumer data insights and the effectiveness of our branding and
marketing solutions.
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Talent
We compete for motivated and capable talent,
including engineers and product developers to build compelling apps, tools and functions for all participants in our ecosystem.
We
also face competition from major global Internet companies, including e-commerce companies around the world. Although foreign e-commerce companies currently have a limited presence in
China, we face significant competition from them in the areas of cross-border commerce.
As
we acquire new businesses and expand into new industries and sectors, we face competition from major players in these and other industries and sectors. In addition, as we expand our
businesses and operations into an increasing number of international markets, including markets in which we have limited or no experience and in which we may be less well-known, such as Southeast
Asia, India and Russia, we increasingly face competition from domestic and international players operating in these markets. See "Item 3. Key
Information D. Risk Factors Risks Related to Our Business and Industry If we are
unable to compete effectively, our business, financial condition and results of operations would be materially and adversely affected."
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Seasonality
Our overall operating results fluctuate from quarter to quarter as a result of a variety of factors, including seasonal factors and economic
cycles that influence consumer spending as well as promotional shopping activities we conduct.
Historically,
we have experienced the highest levels of revenues in the fourth calendar quarter of each year due to a number of factors, including merchants allocating a significant
portion of their online marketing budgets to the fourth calendar quarter, promotions, such as Singles Day on November 11 of each year and the impact of seasonal buying patterns in respect of
certain categories such as apparel. We have also experienced lower levels of revenues in the first calendar quarter of each year due to a lower level of allocation of online marketing budgets by
merchants at the beginning of the calendar year and the Chinese New Year holiday, during which time consumers generally spend less and businesses in China are generally closed. In addition,
seasonal weather patterns may affect the timing of buying decisions. For example, unexpectedly long periods of warm weather could delay the purchase of heavier clothing items that have higher average
selling prices. Moreover, as our business grows, we expect that our fixed costs and expenses, such as payroll and benefits, bandwidth and co-location fees, will continue to increase, which will result
in operating leverage in seasonally strong quarters but can significantly pressure operating margins in seasonally weak quarters.
Regulation
We operate in an increasingly complex legal and regulatory environment. We and our key service provider, Ant Financial Services, are subject to
a variety of PRC and foreign laws, rules and regulations across a number of aspects of our business. This section summarizes the principal PRC laws, rules and regulations relevant to our business and
operations. Areas in which we are subject to laws, rules and regulations outside of the
PRC include data protection and privacy, consumer protection, content regulation, intellectual property, competition, cross-border trade, taxation, anti-money laundering and anti-corruption. We may
also face protectionist policies and regulatory scrutiny on national security grounds in foreign countries in which we conduct business or investment activities. See "Item 3. Key
Information D. Risk Factors Risks Related to Our Business and Industry We and
Ant Financial Services are subject to a broad range of laws and regulations, and future laws and regulations may impose additional requirements and other obligations on our business or otherwise that
could materially and adversely affect our business, financial condition and results of operations."
Our
online and mobile commerce businesses are classified as value-added telecommunication businesses by the PRC government. Current PRC laws, rules and regulations generally restrict
foreign ownership in value-added telecommunication services. As a result, we operate our online and mobile commerce businesses and other businesses in which foreign investment is restricted or
prohibited through variable interest entities, each of which is owned by PRC citizens or by PRC entities owned by PRC citizens, and holds all licenses associated with these businesses.
The
applicable PRC laws, rules and regulations governing value-added telecommunication services may change in the future. We may be required to obtain additional approvals, licenses and
permits and to comply with any new regulatory requirements adopted from time to time. Moreover, substantial uncertainties exist with respect to the interpretation and implementation of these PRC laws,
rules and regulations. See "Item 3. Key Information D. Risk Factors Risks Related to Doing Business in the
People's Republic of China There are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations."
Regulation of Foreign Investment
The Guidance Catalogue of Industries for Foreign Investment, or the Catalogue, the latest version of which came into effect on April 10,
2015, was promulgated and recently amended by the MOFCOM and the National Development and Reform Commission and governs investment activities in the PRC by foreign investors. The Catalogue divides
industries into three categories "encouraged," "restricted," and "prohibited" for foreign investment. Industries not listed in the Catalogue are generally
deemed as falling into a fourth category,
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"permitted."
However, industries such as value-added telecommunication services, including Internet information services, are restricted from foreign investment. Among our significant subsidiaries,
Taobao (China)
Software Co., Ltd. and Zhejiang Tmall Technology Co., Ltd. are registered in China and mainly engaged in software development, technical services and consultations, which
fall into the encouraged or permitted category under the latest Catalogue. These two significant subsidiaries have obtained all material approvals required for their business operations. The Catalogue
does not apply to our significant subsidiaries that are registered and domiciled in Hong Kong, the British Virgin Islands or the Cayman Islands, and operate outside China. The businesses of our other
PRC subsidiaries including PRC subsidiaries of our significant subsidiaries are generally software development,
technical services and consulting, which fall into the encouraged or permitted category. Industries such as value-added telecommunication services, including Internet information services, are
generally restricted to foreign investment pursuant to the latest Catalogue. We conduct business operations that are restricted or prohibited to foreign investment through our variable interest
entities.
In
January 2015, the MOFCOM published a discussion draft of the proposed Foreign Investment Law, which embodies an expected PRC regulatory trend to rationalize its foreign
investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. The MOFCOM
has completed the solicitation of comments on this discussion draft, but substantial uncertainties exist with respect to its enactment timetable, the final version, interpretation and implementation.
For more details, see "Item 3. Key Information Risks Related to our Corporate Structure Substantial uncertainties
exist with respect to the enactment timetable, interpretation and implementation of draft PRC Foreign Investment Law."
In
addition, on January 12, 2017, the State Council issued the Notice on Several Measures for Expansion of Opening-up Policy and Active Use of Foreign Capital, or the Notice
No. 5, which purports to relax restrictions on foreign investment in sectors including service, manufacturing and mining. Specifically, the Notice No. 5 proposes to gradually open up
telecommunication, Internet, culture, education and transportation industries to foreign investors. However, there are still substantial uncertainties with respect to the implementing rules and
regulations of Notice No. 5.
Regulation of Telecommunications and Internet Information Services
Under the Telecommunications Regulations of the PRC, or the Telecommunications Regulations, promulgated on September 25, 2000 by the
State Council of the PRC and most recently amended in February 2016, a telecommunication service provider in China must obtain an operating license from the MIIT, or its provincial
counterparts. The Telecommunications Regulations categorize all telecommunication services in China
as either basic telecommunications services or value-added telecommunications services. Our online and mobile commerce businesses, as well as Youku Tudou's online video businesses, are classified as
value-added telecommunications services.
Foreign
investment in telecommunications businesses is governed by the State Council's Administrative Rules for Foreign Investments in Telecommunications Enterprises, or the Foreign
Investment Telecommunications Rules, issued by the State Council on December 11, 2001 and most recently amended in February 2016, under which a foreign investor's beneficial equity
ownership in an entity providing value-added telecommunications services in China is not permitted to exceed 50%. In addition, for a foreign investor to acquire any equity interest in a business
providing value-added telecommunications services in China, it must demonstrate a positive track record and experience in providing these services. However, according to the Notice on Lifting the
Restriction to Foreign Shareholding Percentage in Online Data Processing and Transaction Processing Business (Operational E-commerce) promulgated by the MIIT on June 19, 2015, foreign investors
are allowed to hold up to 100% of all equity interest in the online data processing and transaction processing business (operational e-commerce) in China, while other requirements provided by the
Foreign Investment Telecommunications Rules shall still apply. It is unclear how this notice will be implemented and there exist high uncertainties with respect to its interpretation
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and
implementation by authorities. The MIIT's Notice Regarding Strengthening Administration of Foreign Investment in Operating Value-Added Telecommunication Businesses, or the MIIT Notice, issued on
July 13, 2006 prohibits holders of these services licenses from leasing, transferring or selling their licenses in any form, or providing any resource, sites or facilities, to any foreign
investors intending to conduct this type of businesses in China.
In
addition to restricting dealings with foreign investors, the MIIT Notice contains a number of detailed requirements applicable to holders of value-added telecommunications services
licenses, including that license holders or their shareholders must directly own the domain names and trademarks used in their daily operations and each license holder must possess the necessary
facilities for its approved business operations and maintain its facilities in the regions covered by its license, including maintaining its network and providing Internet security in accordance with
the relevant regulatory standards. The MIIT or its provincial counterparts have the power to require corrective actions after they discover any non-compliance by license holders, and where license
holders fail to take those steps, the MIIT or its provincial counterparts have the power to revoke the value-added telecommunications services licenses.
On
December 28, 2016, the MIIT promulgated the Notice on Regulating Telecommunication Services Agreement Matters, or the Telecommunication Services Agreement Notice, which came
into effect on February 1, 2017. According to the Telecommunication Services Agreement Notice, telecommunication service providers must require their users to present valid identification
certificates and verify the users' identification information before provision of services. Telecommunication service providers are not permitted to provide services to users with unverifiable
identity or who decline identity verification.
As a subsector of the telecommunications industry, Internet information services are regulated by the Administrative Measures on Internet
Information Services, or the ICP Measures, promulgated on September 25, 2000 by the State Council and amended on January 8, 2011. "Internet information services" are defined as services
that provide information to online users through the Internet. Internet information service providers, also called Internet content providers, or ICPs, that provide commercial services are required to
obtain an operating license from the MIIT or its provincial counterpart.
To
the extent the Internet information services provided relate to certain matters, including news, publication, education or medical and healthcare (including pharmaceutical products
and medical equipment), approvals must also be obtained from the relevant industry regulators in accordance with the laws, rules and regulations governing those industries.
Regulation of Advertising Services
The principal regulations governing advertising businesses in China are:
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the Advertising Law of the PRC (2015, as amended);
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the Advertising Administrative Regulations (1987);
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the Regulations on Internet Information Search Services (2016); and
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the Interim Measures for Administration of Internet Advertising (2016).
These
laws, rules and regulations require companies such as ours that engage in advertising activities to obtain a business license that explicitly includes advertising in the business scope from the
SAIC or its local branches.
Applicable
PRC advertising laws, rules and regulations contain certain prohibitions on the content of advertisements in China (including prohibitions on misleading content, superlative
wording, socially destabilizing content or content involving obscenities, superstition, violence, discrimination or infringement of the public interest). Advertisements for anesthetic, psychotropic,
toxic or radioactive drugs are prohibited, and the
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of advertisements of certain other products, such as tobacco, patented products, pharmaceuticals, medical instruments, agrochemicals, foodstuff, alcohol and cosmetics, are also subject
to specific restrictions and requirements.
Advertisers,
advertising operators and advertising distributors, including the businesses that certain of the variable interest entities operate, are required by applicable PRC
advertising laws, rules and regulations to ensure that the content of the advertisements they prepare or distribute are true and in compliance with applicable laws, rules and regulations. Violation of
these laws, rules and regulations may result in penalties, including fines, confiscation of advertising income, orders to cease dissemination of the advertisements and orders to publish an
advertisement correcting the misleading information. In circumstances involving serious violations, the SAIC or its local branches may revoke the violator's license or permit for advertising business
operations. In addition, advertisers, advertising operators or advertising distributors may be subject to civil liability if they infringe the legal rights and interests of third parties, such as
infringement of intellectual proprietary rights, unauthorized use of a name or portrait and defamation.
On
June 25, 2016, the Cyberspace Administration promulgated the Administrative Regulations on Internet Information Search Services, or the Internet Search Regulations, which came
into effect on August 1, 2016. According to the Internet Search Regulations, Internet search service providers must verify paid-search service customers' qualifications, limit the ratio of
paid-search results on each webpage, and clearly distinguish paid-search results from natural search results.
The
Internet Advertising Measures, which were promulgated by the SAIC on July 4, 2016 and came into effect on September 1, 2016, define Internet advertising as any
commercial advertising that directly or indirectly promotes
goods or services through websites, webpages, Internet applications and other Internet media in the forms of words, picture, audio, video or others, including promotion through emails, texts, images,
video with embedded links and paid-for search results. The Internet Advertising Measures set out, among other things, the following requirements for Internet advertising
activities:
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online advertisements for prescription medicine or tobacco are not allowed, while advertisements for special commodities or services such as
medical treatment, pharmaceuticals, food for special medical purposes, medical instruments, agrochemicals, veterinary medicine and other health foods must be reviewed by competent authorities before
online publication;
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Internet advertisements must be visibly marked as "advertisement," while paid-search results must be obviously distinguished from natural
search results; and
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Internet advertisements must not affect users' normal use of the Internet; "pop-up ads" must be clearly marked with a "close" sign and be
closable with one click; and no deceptive means may be used to lure users into clicking on advertisements.
According
to the Internet Advertising Measures, Internet information service providers must prevent those advertisements they know or should have known to be illegal from being published
through their information services. Furthermore, according to the Internet Advertising Measures, Internet advertisers are responsible for the authenticity of the content of Internet advertisements,
while Internet advertisement publishers and advertisement agencies are required to verify the identities of Internet advertisers and their qualifications, review the content of Internet advertisement,
and employ inspectors who are familiar with PRC laws and regulations governing Internet advertising.
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Regulation of Online and Mobile Commerce
China's online and mobile commerce industry is at an early stage of development and there are few PRC laws, regulations or rules specifically
regulating this industry. The SAIC adopted the Interim Measures for the Administration of Online Commodities Trading and Relevant Services on May 31, 2010 and replaced those measures with the
Administrative Measures for Online Trading on January 26, 2014, which became effective on March 15, 2014. On December 24, 2014, the MOFCOM promulgated the Provisions on the
Procedures for Formulating Transaction Rules of Third Party Online Retail Platforms (Trial) to regulate the formulation, revision and enforcement of transaction rules for online retail marketplace
platforms. These measures impose more stringent requirements and obligations on online trading or service operators as well as marketplace platform providers. For example, marketplace platform
providers are obligated to make public and file their transaction rules with MOFCOM or their respective provincial counterparts, examine the legal status of each third-party merchant selling products
or services on their platforms and display on a prominent location on a merchant's web page the information stated in the merchant's business license or a link to its business license, and group
buying website operators must only allow a third-party merchant with a proper business license to sell products or services on their platforms. Where marketplace platform providers also act as online
distributors, these marketplace
platform providers must make a clear distinction between their online direct sales and sales of third-party merchant products on their marketplace platforms.
Since
the promulgation of the Administrative Measures for Online Trading, the SAIC has issued a number of guidelines and implementing rules aimed at adding greater specificity to these
regulations. The SAIC continues to consider and issue guidelines and implementing rules, and we expect that there will be further development of regulation in this industry. For example, three PRC
governmental authorities (the Ministry of Finance, General Administration of Customs and State Administration of Taxation) issued a notice on March 24, 2016 to regulate cross-border
e-commerce trading which has experienced rapid growth in recent years. The New Cross-Border E-commerce Tax Notice, which became effective on April 8, 2016, introduced the concept of the
Cross-Border E-Commerce Retail Importation Goods Inventory, or the Cross-Border E-Commerce Goods Inventory, which are to be issued and updated by the three authorities together with other relevant
authorities from time to time. Goods beyond the scope of the Cross-Border E-commerce Goods Inventory will have no tax codes and be effectively removed from cross-border e-commerce platforms. Two
batches of the Cross-Border E-Commerce Goods Inventory have been issued on April 6, 2016 and April 15, 2016, respectively. Cosmetics imported for the first time, nutrition supplements
and other special food products required to be registered with the State Food and Drug Administration are excluded from the Cross-Border E-Commerce Goods Inventory and will not be able to be sold on
the relevant cross-border e-commerce platforms. However, pursuant to a transition policy issued by the General Administration of Customs, goods which have been imported to or in transit to the bonded
areas and special regulated areas of customs before April 8, 2016 can still be sold on the cross-border e-commerce platforms no matter whether these goods are included in the Cross-Border
E-Commerce Goods Inventory or not. Further, pursuant to the Notice of Relevant Matters on Implementation of New Cross-Border E-Commerce Retail Importation Supervision and Administration
Requirements, or the New Cross-Border E-Commerce Tax Implementation Notice, issued by the General Administration of Customs on May 24, 2016, the implementation of certain provisions of
the New Cross-Border E-commerce Tax Notice will be suspended until the expiration of a transition period, which will conclude by the end of 2017. According to the New Cross-Border
E-Commerce Tax Implementation Notice, the requirement of presenting customs clearance for bonded goods purchased online is suspended in ten cities, and the requirement of presenting first-time import
license, registration or filing for online purchased cosmetics imported for the first time, nutrition supplements and other special food products, are suspended until the end of the transition period.
Further, according to an official MOFCOM news release issued on March 17, 2017, from January 1, 2018 retail goods imported on cross-border e-commerce platforms will be temporarily
treated as personal items which are not subject to stricter regulation and higher tax rates applicable to normal imported goods in 15 cross-border e-commerce trial areas.
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Regulation of Mobile Applications
On June 28, 2016, the Cyberspace Administration promulgated the Regulations for the Administration of Mobile Internet Application
Information Services, which came into effect as of August 1, 2016, requiring ICPs who provide information services through mobile Internet applications, or "Apps," to:
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verify the real identities of registered users through mobile phone numbers or other similar channels;
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establish and improve procedures for protection of user information;
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establish and improve procedures for information content censorship;
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ensure that users are given adequate information concerning an App, and are able to choose whether an App is installed and whether or not to
use an installed App and its functions;
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respect and protect intellectual property rights; and
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keep records of users' log-in information for 60 days.
If
an ICP who provides information services through Apps violates these regulations, mobile application stores through which the ICP distributes its Apps may issue warnings, suspend the release of its
Apps, or terminate the sale of its Apps, and/or report the violations to governmental authorities.
Regulation of Internet Content
The PRC government has promulgated measures relating to Internet content through various ministries and agencies, including the MIIT, the News
Office of the State Council, the Ministry of Culture and the General Administration of Press and Publication. In addition to various approval and license requirements, these measures specifically
prohibit Internet activities that result in the dissemination of any content which is found to contain pornography, promote gambling or violence, instigate crimes, undermine public morality or the
cultural traditions of the PRC or compromise State security or secrets. ICPs must monitor and control the information posted on their websites. If any prohibited content is found, they must remove the
content immediately, keep a record of it and report to the relevant authorities. If an ICP violates these measures, the PRC government may impose fines and revoke any relevant business operation
licenses.
On April 13, 2005, the State Council announced Several Decisions on Investment by Non-state-owned Companies in Culture-related Business
in China. These decisions encourage and support non-state-owned companies to enter certain culture-related business in China, subject to restrictions and prohibitions for investment in audio/video
broadcasting, website news and certain other businesses by non-state-owned companies. These decisions authorize the State Administration of Radio, Film, and Television, or the SARFT, the Ministry of
Culture and the General Administration of Press and Publication, or the GAPP, to adopt detailed implementing rules according to these decisions.
On
December 20, 2007, the SARFT and the MIIT jointly issued the Rules for the Administration of Internet Audio and Video Program Services, commonly known as Circular 56,
which came into effect on January 31, 2008 and was amended on August 28, 2015. Among other things, Circular 56 requires all online audio/video service providers to be either
wholly state-owned or state-controlled. According to relevant official answers to press questions published on the SARFT's website dated February 3, 2008, officials from the SARFT and the MIIT
clarified that online audio/video service providers that already had been operating lawfully prior to the issuance of Circular 56 may re-register and continue to operate without becoming
state-owned or controlled, provided that the providers have
not engaged in any unlawful activities. This exemption will not be granted to online audio/video service providers established after Circular 56 was issued. These policies have been reflected
in the Application Procedure for Audio/Video Program Transmission License.
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On
March 17, 2010, the SARFT issued the Internet Audio/Video Program Services Categories (Provisional), or the Provisional Categories, which classified Internet audio/video
programs into four categories. Category I is only open to state-owned broadcast media companies operating in the television section, and the other three categories are open to privately
held entities.
In
2009, the SARFT released a Notice on Strengthening the Administration of Online Audio/Video Content. This notice reiterated, among other things, that all movies and television shows
released or published online must comply with relevant regulations on the administration of radio, film and television. In other words, these movies and television shows, whether produced in the PRC
or overseas, must be pre-approved by the SARFT, and the distributors of these movies and television shows must obtain an applicable permit before releasing any of these movie or television shows. In
2012, the SARFT and the State Internet Information Office of the PRC issued a Notice on Improving the Administration of Online Audio/Video Content Including Internet Drama and Micro Films. In 2014,
the General Administration of Press and Publication, Radio, Film and Television, or GAPPRFT, formerly the SARFT and the GAPP, released a Supplemental Notice on Improving the Administration of Online
Audio/Video Content Including Internet Drama and Micro Films. This notice stresses that entities producing online audio/video content, such as Internet dramas and micro films, must obtain a permit for
radio and television program production and operation, and that online audio/video content service providers should not release any Internet dramas or micro films that were produced by any entity
lacking the permit. For Internet dramas or micro films produced and uploaded by individual users, the online audio/video service providers transmitting this content will be deemed responsible as the
producer. Further, under this notice, online audio/video service providers can only transmit content uploaded by individuals whose identity has been verified and the content must comply with the
relevant content management rules. This notice also requires that online audio/video content, include Internet drama and micro films, be filed with the relevant authorities before release.
On
October 28, 2011, the SARFT issued the Administrative and Operational Requirements for Licensed Internet TV Organizations, commonly known as Circular 181, which came
into effect on the same date. Circular 181 requires that Smart TVs must be exclusively connected to a specific licensed Internet TV organization and must not have access to the public Internet
or network operators' databases. Up to now, there are only seven licensed Internet TV organizations and all are state-owned companies.
On
September 2, 2014, the GAPPRFT promulgated a Notice on Further Implementing the Relevant Provisions for the Administration of Broadcasting Foreign Films and TV dramas. The
notice stresses that any foreign film or TV drama must have a License for Film Publication or a TV drama Issuance License before being broadcast online, and that the annual total number of foreign
films and TV dramas broadcast by a website must not exceed 30% of the total amount of domestic films and TV dramas broadcast by the relevant website in the preceding year.
Furthermore, online video operators are required to report their annual plans for the import of foreign films and TV dramas to the GAPPRFT before the end of the preceding year. If the online video
operators' import plans are approved, the samples, contracts, copyright certificates, plot summaries and other materials relevant to the foreign films and TV dramas are subject to further content
examination before the issuance of Licenses for Film Publication or the TV drama Issuance Licenses. The notice also requires these online video operators to upload information about the foreign films
and TV dramas to be broadcast to a unified platform for registration before March 31, 2015. Since April 1, 2015, unregistered foreign films and TV dramas are no longer allowed to be
broadcast online.
On
April 25, 2016, the GAPPRFT promulgated the Administration Measures on Audio/Video Program Services via Special Network and Directional Transmission, or Circular 6,
which came into effect on June 1, 2016 and replaced the Rules for the Administration of Broadcasting of Audio/Video Programs through the Internet and Other Information Networks, which was
promulgated in July 2004. Pursuant to Circular 6, providers of audio/video program services via special network and directional transmission, including content providing, integrated
broadcasting controlling and transmission and delivery, must obtain an audio/video program transmission license, with a term of three years, issued by the GAPPRFT and operate pursuant to the scope as
provided in such licenses. Foreign invested enterprises are not allowed to engage in these businesses.
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The GAPPRFT is responsible for nationwide supervision and administration of publishing activities in China. On February 4, 2016, the
GAPPRFT and the MIIT jointly promulgated the Online Publication Service Administration Rules, or the Online Publication Rules, which took effect on March 10, 2016 and replaced the Internet
Publication Tentative Administrative Measures, which was promulgated in June 2002. Pursuant to the Online Publication Rules, an online publication service provider must obtain the Online
Publication Service License from the GAPPRFT. The term "online publication service" is defined as the provision of online publications to the public through information networks. The term "online
publications" is defined as digital works characteristic of publishing such as editing, production or processing provided to the public through information networks, and primarily
include:
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original digital works such as texts, pictures, maps, games, cartoons and audio-visual reading materials in the fields of literature, art,
science, etc., which are of knowledge or ideology;
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digital works, the content of which is the same as that which has already been published, such as books, newspapers, periodicals and electronic
publications;
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digital works such as online document databases formed by way of selecting, compiling or collecting the abovementioned works; and
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other types of digital works determined by the GAPPRFT.
The
Online Publication Rules expressly prohibit foreign invested enterprises from providing online publication services. In addition, if an online publication service provider intends to
cooperate for an online publication services project with foreign invested enterprises, overseas organizations or overseas individuals, it must report to the GAPPRFT and obtain an approval in advance.
Also, an online publication service provider is prohibited from lending, leasing, selling or otherwise transferring the Online Publication Service License, or to allow any other online information
service provider to provide online publication services in its name.
Pursuant
to the Online Publication Rules, book, audio-visual, electronic, newspaper or periodical publishers who intend to engage in online publication services must have:
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a specific publishing platform, such as domain name and smart terminal application, for conducting online publication business;
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a specific online publication service scope; and
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necessary technical equipment for the provision of online publication services, with the related server and storage equipment located within
the territory of the PRC.
Other
entities which intend to engage in online publication services must have:
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a specific name and articles of association which is not identical to the name of any other publication service provider;
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a legal representative and key responsible persons who shall be a PRC national living permanently in the PRC who has full civil capacity
to act, and at least one of these legal representatives or key responsible persons must have a mid-level or higher professional qualification in the field of publication;
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at least eight full-time editing and publishing staff, other than the legal representative and key responsible persons, who have professional
qualifications in publishing or other relevant fields recognized by the GAPPRFT and meet the needs of the entity's scope of online publication services, among whom at least three must have mid-level
or higher professional qualification;
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a content review system meeting the needs of the provision of online publication services;
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fixed working premises; and
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other items as required by relevant laws, administrative regulations or the GAPPRFT.
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The State Food and Drug Administration, or the SFDA, promulgated the Administrative Measures on Internet Drug Information Service in
July 2004 and certain implementing rules and notices thereafter. These measures set out regulations governing the classification, application, approval, content, qualifications and requirements
for Internet drug information services. An ICP service operator that provides information regarding drugs or medical equipment must obtain an Internet Drug Information Service Qualification
Certificate from the applicable provincial level counterpart of the SFDA.
Publishing and disseminating news through the Internet are highly regulated in the PRC. On November 7, 2000, the State Council
Information Office, or SCIO, and the MIIT jointly promulgated the Provisional Measures for Administrating Internet Websites Carrying on the News Publication Business, or Internet News Measures. These
measures require an ICP operator (other than a government authorized news unit) to obtain the approval from SCIO to publish news on its website or disseminate news through the Internet. Furthermore,
any disseminated news is required to be obtained from government-approved sources based on contracts between the ICP operator and these sources. The copies of these contracts must be filed with
relevant government authorities.
On
September 25, 2005, the SCIO and the MIIT jointly issued the Provisions on the Administration of Internet News Information Services, requiring Internet news information service
organizations to provide services as approved by the SCIO, subject to annual inspection under the new provisions. These Provisions also provide that no foreign invested enterprise, whether jointly or
wholly owned by the foreign investment, may be an Internet news information service organization, and no cooperation between Internet news information service organizations and foreign invested
enterprises is allowed before the SCIO completes the security evaluation.
On
May 2, 2017, the Cyberspace Administration issued the Administrative Provisions on Internet News Information Services, or the 2017 Internet News Information Provisions, which
came into effect on June 1, 2017 and redefine news information as reports and commentary on political, economic, military, diplomatic and other social and
public affairs, as well as reports and commentary on emergency social events. Pursuant to the 2017 Internet News Information Provisions, the Cyberspace Administration and its local counterparts
replaced the SCIO as the government department in charge of supervision and administration of internet news information. Further, an ICP operator must obtain approval from the Cyberspace
Administration in order to provide Internet news information services, including through websites, applications, forums, blogs, microblogs, public accounts, instant messaging tools,
and webcasts.
On February 17, 2011, the Ministry of Culture promulgated the Internet Culture Administration Tentative Measures, or the Internet Culture
Measures. The Internet Culture Measures require ICP operators engaging in "Internet culture activities" to obtain a permit from the Ministry of Culture. The term "Internet culture activities"
includes, among other things, online dissemination of Internet cultural products (such as audio-video products, gaming products, performances of plays or programs, works of art and cartoons) and the
production, reproduction, importation, publication and broadcasting of Internet cultural products.
On
November 20, 2006, the Ministry of Culture issued Several Suggestions of the Ministry of Culture on the Development and Administration of the Internet Music, or the
Suggestions, which became effective on November 20, 2006. The Suggestions, among other things, reiterate the requirement for an Internet service provider to obtain an Internet culture business
permit to carry on any business relating to Internet music products. In addition, foreign investors are prohibited from operating Internet culture businesses. However, the laws and regulations on
Internet music products are still evolving, and there have not been any provisions stipulating whether or how music video will be regulated by the Suggestions.
On
August 2, 2013, the Ministry of Culture promulgated the Notice on Implementing the Administrative Measures for the Content Self-examination of Internet Culture Business
Entities. According to this notice, any
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cultural
product or service shall be reviewed by the provider before being released to the public and the review process shall be done by persons who have obtained the relevant content review
certificate.
On
October 23, 2015, the Ministry of Culture promulgated the Notice on Further Strengthening and Improving the Content Review of Online Music, which took effect on
January 1, 2016 and stipulated that ICPs shall carry out self-examination in respect of the content management of online music, which shall be regulated by the cultural
administration departments in process or afterwards. According to this notice, ICP operators are required to submit their content administrative system, review procedures, and work standards to the
provincial culture administrative department where they are located for filing within a prescribed period.
On July 19, 2004, the SARFT promulgated the Administrative Measures on the Production and Operation of Radio and Television Programs,
effective as of August 20, 2004 and amended on August 28, 2015. These Measures provide that anyone who wishes to produce or operate radio or television programs must first obtain an
operating permit for their business.
On
February 1, 2002, the State Council promulgated the Regulations for the Administration of Films, or the Film Regulations, which became effective on the same day. The Film
Regulations set forth the general regulatory guidelines for China's film industry and address practical issues with respect to production, censorship, distribution and screening. They also establish
the SARFT as the sector's regulatory authority, and serve as the foundation for all other legislation promulgated in this area. The Film Regulations provide the framework for an industry-wide
licensing system operated by the SARFT, under which separate permits (and permit application procedures) apply.
Regulation of Internet Security
The Decision in Relation to Protection of the Internet Security enacted by the Standing Committee of the National People's Congress of China on
December 28, 2000 provides that the following activities conducted through the Internet are subject to criminal punishment:
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gaining improper entry into a computer or system of strategic importance;
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disseminating politically disruptive information or obscenities;
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leaking State secrets;
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spreading false commercial information; or
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infringing intellectual property rights.
The
Administrative Measures on the Security Protection of Computer Information Network with International Connections, issued by the Ministry of Public Security on December 16,
1997 and amended on January 8, 2011, prohibit the use of the Internet in a manner that would result in the leakage of State secrets or the spread of socially destabilizing content. The
Provisions on Technological Measures for Internet Security Protection, or the Internet Security Protection Measures, promulgated on December 13, 2005 by Ministry of Public Security require all
ICPs to keep records of certain information about their users (including user registration information, log-in and log-out time, IP address, content and time of posts by users) for at least
60 days and submit the above information as required by laws and regulations. Under these measures, value-added telecommunications services license holders must regularly update information
security and content control systems for their websites and must also report any public dissemination of prohibited content to local public security authorities. If a value-added telecommunications
services license holder violates these measures, the Ministry of Public Security and the local security bureaus may revoke its operating license and shut down its websites.
The
Communication Network Security Protection Administrative Measures, which were promulgated by the MIIT on January 21, 2010, require that all communication network operators,
including telecommunications service providers and Internet domain name service providers, divide their own communication networks into units. These communication network units shall be rated in
accordance with degree of damage to national security, economic
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operation,
social order and public interest in the event a unit is damaged. Communication network operators must file the division and ratings of their communication network with MIIT or its local
counterparts. If a communication network operator violates these measures, the MIIT or its local counterparts may order rectification or impose a fine up to RMB30,000 in case a violation is not
duly rectified.
Internet
security in China is also regulated and restricted from a national security standpoint. On July 1, 2015, the National People's Congress Standing Committee promulgated the
New National Security Law, which took effect on the same date and replaced the former National Security Law promulgated in 1993. According to the New National Security Law, the state
shall ensure that the information system and data in important areas are secure and controllable. In addition, according to the New National Security Law, the state shall establish national
security review and supervision institutions and mechanisms, and conduct national security reviews of key technologies and IT products and services that affect or may affect national security. There
are uncertainties on how the New National Security Law will be implemented in practice.
On
November 7, 2016, the National People's Congress Standing Committee promulgated the Cybersecurity Law, which came into effect on June 1, 2017, and apply to the
construction, operation, maintenance and use of networks as well as the supervision and administration of cybersecurity in China. The Cybersecurity Law defines "networks" as systems that are composed
of computers or other information terminals and relevant facilities used for the purpose of collecting, storing, transmitting, exchanging and processing information in accordance with certain rules
and procedures. "Network operators," who are broadly defined as owners and administrator of networks and network service providers, are subject to various security protection related obligations
including:
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complying with security protection obligations in accordance with tiered cybersecurity system's protection requirements, which include
formulating internal security management rules and manual, appointing cybersecurity responsible personnel, adopting technical measures to prevent computer virus and cybersecurity endangering
activities, adopting technical measures to monitor and record network operation status, cybersecurity events, retaining user logs for at least six months and adopting measures such as data
classification, key data backup and encryption, for the purpose of securing networks from interference, vandalization, or unauthorized visit and preventing network data from leakage, theft
or tampering;
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verifying user's identities before signing agreements or providing services such as network access, domain name registration, landline
telephone or mobile phone access, information publishing or real-time communication services;
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formulating cybersecurity emergency response plans, timely handling security risks, initiating emergency response plans, taking appropriate
remedial measures and reporting to regulatory authorities; and
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providing technical assistance and support for public security and national security authorities for protection of national security and
criminal investigations.
According
to the Cybersecurity Law, network service providers must inform users about and report to the relevant authorities any known security defects and bugs, and must provide
constant security maintenance services for their products and services. Network products and service providers shall not contain or provide malware. Network service providers who do not comply with
the Cybersecurity Law may be subject to fines, suspension of their businesses, shutdown of their websites, and revocation of their business licenses.
On
April 11, 2017, the Cyberspace Administration released the draft Measures on Security Assessment of the Cross-Border Transfer of Personal Information and Important Data, or the
draft Cross-Border Transfer Measures, which requires personal information and important data collected by and produced by all network operators during the course of their operations within China to be
stored within China. According to the draft Cross-Border Transfer Measures, self-assessment by network operators or assessment by industrial regulatory authority or the national cyberspace authority
under certain circumstances must be completed before transferring personal information or important data overseas.
According
to the draft Cross-Border Transfer Measures, personal information or important data may not be transferred overseas without consent from the concerned individual(s), or if the
transfer endangers the interests of
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individuals,
the public or national security. The export of the following data shall be pre-assessed by industrial regulatory authority or the national cyberspace
authority:
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personal information of 500,000 individuals or more;
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data with volume of 1,000 gigabytes or more;
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data in relation to nuclear facilities, chemistry and biology, national defense and military, health of the population, mega project
activities, ocean environment, and sensitive geographical information;
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network security information involving system bugs and security protection of key information infrastructure;
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personal information and important data provided by key information infrastructure operators; and
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other data that may affect national security and societal public interests, and considered by the industrial administration authority or
regulatory authority necessary to be subject to their assessment.
The
Cyberspace Administration will complete the solicitation of comments on the draft Cross-Border Transfer Measures in May 2017, and there are still substantial uncertainties
with respect to its final content and enactment timetable.
On
May 2, 2017, the Cyberspace Administration issued the Measures for Security Review of Cyber Products and Services, or the Cybersecurity Review Measures, which came into effect
on June 1, 2017. According to the Cybersecurity Review Measures, the following cyber products and services will be subject to cybersecurity review:
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important cyber products and services purchased by networks and information systems related to national security; and
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the purchase of cyber products and services by operators of critical information infrastructure in important industries and fields such as
public communications and information services, energy, transportation, water resources, finance, public service and electronic administration, and other critical information infrastructure, which may
affect national security.
The
Cyberspace Administration is responsible for organizing and implementing cybersecurity review, while the competent departments in key industries such as finance, telecommunications,
energy and transport shall be responsible for organizing and implementing security review of cyber products and services in their respective industries or fields. There are still substantial
uncertainties with respect to the interpretation and implementation of the Cybersecurity Review Measures.
Regulation of Privacy Protection
Under the ICP Measures, ICPs are prohibited from producing, copying, publishing or distributing information that is humiliating or defamatory to
others or that infringes upon the lawful rights and interests of others. Depending on the nature of the violation, ICPs may face criminal charges or sanctions by PRC security authorities for these
acts, and may be ordered to suspend temporarily their services or have their licenses revoked.
Under
the Several Provisions on Regulating the Market Order of Internet Information Services, issued by the MIIT on December 29, 2011, ICPs are also prohibited from collecting any
personal user information or providing any information to third parties without the consent of the user. The Cybersecurity Law provides an exception to the consent requirement where the information is
anonymous, not personally identifiable and unrecoverable. ICPs must expressly inform the users of the method, content and purpose of the collection and processing of user personal information and may
only collect information necessary for its services. ICPs are also required to properly maintain the user personal information, and in case of any leak or likely leak of the user personal information,
ICPs must take remedial measures immediately and report any material leak to the telecommunications regulatory authority.
In
addition, the Decision on Strengthening Network Information Protection promulgated by the Standing Committee of the National People's Congress on December 28, 2012 emphasizes
the need to protect electronic
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information
that contains individual identification information and other private data. The decision requires ICPs to establish and publish policies regarding the collection and use of personal
electronic information and to take necessary measures to ensure the security of the information and to prevent leakage, damage or loss. Furthermore, MIIT's Rules on Protection of Personal Information
of Telecommunications and Internet Users promulgated on July 16, 2013 contain detailed requirements on the use and collection of personal information as well as the security measures to be
taken by ICPs.
The
PRC government retains the power and authority to order ICPs to provide an Internet user's personal information if a user posts any prohibited content or engages in any illegal
activities through the Internet.
According
to the Cybersecurity Law, individuals may request that network operators make corrections to or delete their personal information in case the information is wrong or was
collected or used beyond an individuals' agreement with network operators.
Regulation of Consumer Protection
Our online and mobile commerce business is subject to a variety of consumer protection laws, including the PRC Consumer Rights and Interests
Protection Law, as amended and effective as of March 15, 2014, and the Administrative Measures for Online Trading, both of which have provided stringent requirements and obligations on business
operators, including Internet business operators and platform service providers like us. For example, consumers are entitled to return goods purchased online, subject to certain exceptions, within
seven days upon receipt of goods for no reason. On January 6, 2017, the SAIC issued the Interim Measures for No Reason Return of Online Purchased Commodities within Seven Days, which came into
effect on March 15, 2017, further clarifying the scope of consumers' rights to make returns without a reason, including exceptions, return procedures and online marketplace platform providers'
responsibility to formulate seven-day no-reason return rules and related consumer protection systems, and supervise the merchants for compliance with these rules. To ensure that merchants and service
providers comply with these laws and regulations, we, as platform operators, are required to implement rules governing transactions on our platform, monitor the information posted by merchants and
service providers, and report any violations by merchants or service providers to the relevant authorities. In addition, online marketplace platform providers may, pursuant to PRC consumer protection
laws, be exposed to liabilities if the lawful rights and interests of consumers are infringed in connection with consumers' purchase of goods or acceptance of services on online marketplace platforms
and the platform service providers fail to provide consumers with the contact information of the merchant or manufacturer. In addition, platform service providers may be jointly and severally liable
with merchants and manufacturers if they are aware or should be aware that the merchant or manufacturer is using the online platform to infringe upon the lawful rights and interests of consumers and
fail to take measures necessary to prevent or stop this activity.
Failure
to comply with these consumer protection laws could subject us to administrative sanctions, such as the issuance of a warning, confiscation of illegal income, imposition of a
fine, an order to cease business operations, revocation of business licenses, as well as potential civil or criminal liabilities.
Regulation of Pricing
In China, the prices of a very small number of products and services are guided or fixed by the government. According to the Pricing Law,
business operators must, as required by the government departments in charge of pricing, mark the prices explicitly and indicate the name, production origin, specifications, and other related
particulars clearly. Business operators may not sell products at a premium or charge any fees that are not explicitly indicated. Business operators must not commit the specified unlawful pricing
activities, such as colluding with others to manipulate the market price, providing fraudulent discounted price information, using false or misleading prices to deceive consumers to transact, or
conducting price discrimination against other business operators. Failure to comply with the Pricing Law or other rules or regulations on pricing may subject business operators to administrative
sanctions such as warning, orders to cease unlawful activities, payment of compensation to consumers, confiscation of illegal gains, and/or fines. The business operators may be ordered to suspend
business for rectification, or have their business licenses revoked if the circumstances are severe. Merchants on Tmall and
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Taobao
Marketplace undertake the primary obligation under the Pricing Law. However, in some cases, we have been and may in the future be held liable and be subject to fines or other penalties if the
authorities determine that, as the platform operator, our guidance for platform-wide promotional activities resulted in unlawful pricing activities by the merchants on our platforms or if the pricing
information we provided for platform-wide promotional activities was determined to be untrue or misleading.
Regulation of Intellectual Property Rights
Patent.
Patents in the PRC are principally protected under the Patent Law of the PRC. The duration of a patent right is either 10 years
or
20 years from the date of application, depending on the type of patent right.
Copyright.
Copyright in the PRC, including copyrighted software, is principally protected under the Copyright Law of the PRC and related
rules and
regulations. Under the Copyright Law, the term of protection for copyrighted software is 50 years.
Trademark.
Registered trademarks are protected under the Trademark Law of the PRC and related rules and regulations. Trademarks are
registered with
the Trademark Office of the SAIC. Where registration is sought for a trademark that is identical or similar to another trademark which has already been registered or given preliminary examination and
approval for use in the same or similar category of commodities or services, the application for registration of this trademark may be rejected. Trademark registrations are effective for a renewable
ten-year period, unless otherwise revoked.
Domain Name.
Domain name registrations are handled through domain name service agencies established under the relevant regulations, and
applicants
become domain name holders upon successful registration.
Regulation of Anti-counterfeiting
According to the Trademark Law of the PRC, counterfeit or unauthorized production of the label of another person's registered trademark, or sale
of any label that is counterfeited or produced without authorization will be deemed as an infringement of the exclusive right to use a registered trademark. The infringing party will be ordered to
cease infringement immediately, a fine may be imposed and the counterfeit goods will be confiscated. The infringing party may also be held liable for damages suffered by the owner of the intellectual
property rights, which will be equal to the gains obtained by the infringing party or the losses suffered by the owner as a result of the infringement, including reasonable expenses incurred by the
owner in connection with enforcing its rights.
Under
the Tort Liability Law of the PRC, an Internet service provider may be subject to joint liability if it is aware that an Internet user is infringing upon the intellectual property
rights of others through its Internet services, such as selling counterfeit products, and fails to take necessary measures to stop that activity. If an Internet service
provider receives a notice from an infringed party regarding an infringement, the Internet service provider is required to take certain measures, including deleting, blocking and unlinking the
infringing content, in a timely manner.
In
addition, under the Administrative Measures for Online Trading issued by the SAIC on January 26, 2014, as an operator of an online trading platform, we must adopt measures to
ensure safe online transactions, protect consumers' rights and prevent trademark infringement.
Tax Regulations
The PRC enterprise income tax, or EIT, is calculated based on the taxable income determined under the applicable EIT Law and its implementation
rules, which became effective on January 1, 2008 and were most recently amended on February 24, 2017. The EIT Law generally imposes a uniform enterprise income tax rate of 25% on all
resident enterprises in China, including foreign-invested enterprises.
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The
EIT Law and its implementation rules permit certain High and New Technologies Enterprises, or HNTEs, to enjoy a reduced 15% enterprise income tax rate subject to these HNTEs
meeting certain qualification criteria. In addition, the relevant EIT laws and regulations also provide that entities recognized as Software Enterprises are able to enjoy a tax holiday consisting of a
2-year-exemption commencing from their first profitable calendar year and a 50% reduction in ordinary tax rate for the following three calendar years, while entities qualified as Key Software
Enterprises can enjoy a preferential EIT rate of 10%. A number of our PRC subsidiaries and operating entities enjoy these types of preferential tax treatment. See "Item 10. Additional
Information E. Taxation People's Republic of China Taxation."
Uncertainties
exist with respect to how the EIT Law applies to the tax residence status of Alibaba Group and our offshore subsidiaries. Under the EIT Law, an enterprise established
outside of China with a "de facto management body" within China is considered a "resident enterprise," which means that it is treated in the same manner as a Chinese enterprise for enterprise income
tax purposes. Although the implementation rules of the EIT Law define "de facto management body" as a managing body that exercises substantive and overall management and control over the production
and business, personnel, accounting books and assets of an enterprise, the only official guidance for this definition currently available is set forth in Circular 82 issued by the State
Administration of Taxation, which provides guidance on the determination of the tax residence status of a Chinese-controlled offshore incorporated enterprise, defined as an enterprise that is
incorporated under the laws of a foreign country or territory and that has a PRC enterprise or enterprise group as its primary controlling shareholder. Although Alibaba Group Holding Limited does not
have a PRC enterprise or enterprise group as our primary controlling shareholder and is therefore not a Chinese-controlled offshore incorporated enterprise within the meaning of Circular 82, in
the absence of guidance specifically applicable to us, we have applied the guidance set forth in Circular 82 to evaluate the tax residence status of Alibaba Group and our subsidiaries
organized outside the PRC.
According
to Circular 82, a Chinese-controlled offshore incorporated enterprise will be regarded as a PRC tax resident by virtue of having a "de facto management body" in China
and will be subject to PRC enterprise income tax on its worldwide income only if all of the following criteria are met:
-
-
the primary location of the day-to-day operational management is in the PRC;
-
-
decisions relating to the enterprise's financial and human resource matters are made or are subject to approval by organizations or personnel
in the PRC;
-
-
the enterprise's primary assets, accounting books and records, company seals, and board and shareholders meeting minutes are located or
maintained in the PRC; and
-
-
50% or more of voting board members or senior executives habitually reside in the PRC.
We
do not believe that we meet any of the conditions outlined in the immediately preceding paragraph. Alibaba Group Holding Limited and our offshore subsidiaries are incorporated outside
the PRC. As a holding company, our key assets and records, including the resolutions and meeting minutes of our board of directors and the resolutions and meeting minutes of our shareholders, are
located and maintained outside the PRC. In addition, we are not aware of any offshore holding companies with a corporate structure similar to ours that have been deemed a PRC "resident enterprise" by
the PRC tax authorities. Accordingly, we believe that Alibaba Group Holding Limited and our offshore subsidiaries should not be treated as a "resident enterprise" for PRC tax purposes if the criteria
for "de facto management body" as set forth in Circular 82 were deemed applicable to us. However, as the tax residency status of an enterprise is subject to determination by the PRC tax
authorities and uncertainties remain with respect to the interpretation of the term "de facto management body" as applicable to our offshore entities, we will continue to monitor our tax status. See
"Item 3. Key Information D. Risk Factors Risks Related to Doing Business in the People's Republic of
China We may be treated as a resident enterprise for PRC tax purposes under the PRC Enterprise Income Tax Law, and we may therefore be subject to PRC income tax
on our global income."
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In
the event that Alibaba Group Holding Limited or any of our offshore subsidiaries is considered to be a PRC resident enterprise:
-
-
Alibaba Group Holding Limited or our offshore subsidiaries, as the case may be, may be subject to the PRC enterprise income tax at the rate of
25% on our worldwide taxable income;
-
-
dividend income that Alibaba Group Holding Limited or our offshore subsidiaries, as the case may be, received from our PRC subsidiaries may be
exempt from the PRC withholding tax; and
-
-
dividends paid to our overseas shareholders or ADS holders who are non-PRC resident enterprises as well as gains realized by these shareholders
or ADS holders from the transfer of our shares or ADSs may be regarded as PRC-sourced income and as a result be subject to PRC withholding tax at a rate of up to 10%, subject to any reduction or
exemption set forth in relevant tax treaties, and similarly, dividends paid to our overseas shareholders or ADS holders who are non-PRC resident individuals, as well as gains realized by these
shareholders or ADS holders from the transfer of our shares or ADSs, may be regarded as PRC-sourced income and as a result be subject to PRC withholding tax at a rate of 20%, subject to any reduction
or exemption set forth in relevant tax treaties.
Under
Bulletin 7 issued by the State Administration of Taxation on February 3, 2015, which replaced or supplemented certain previous rules under Circular 698, an
"indirect transfer" of assets, including equity interests in a PRC resident enterprise, by non-PRC resident enterprises may be re-characterized and treated as a direct transfer of PRC taxable assets,
if the arrangement does not have a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from an indirect
transfer may be subject to PRC enterprise income tax. According to Bulletin 7, "PRC taxable assets" include assets attributed to an establishment or a place of business in China, immoveable properties
in China, and equity investments in PRC resident enterprises. In respect of an indirect offshore transfer of assets of a PRC establishment, the relevant gain is to be regarded as effectively connected
with the PRC establishment or a place of business and therefore included in its enterprise income tax filing, and would consequently be subject to PRC enterprise income tax at a rate of 25%. Where the
underlying transfer relates to the immoveable properties in China or to equity investments in a PRC resident enterprise, which is not effectively connected to a PRC establishment or a place of
business of a non-resident enterprise, a PRC enterprise income tax at 10% would apply, subject to available preferential tax treatment under applicable tax treaties or similar arrangements, and the
party who is obligated to make the transfer payments has the withholding obligation. There is uncertainty as to the implementation details of Bulletin 7. If Bulletin 7 was determined by the tax
authorities to be applicable to some of our transactions involving PRC taxable assets, our offshore subsidiaries conducting the relevant transactions might be required to spend valuable resources to
comply with Bulletin 7 or to establish that the relevant transactions should not be taxed under Bulletin 7, which may materially and adversely affect us. See "Item 3. Key
Information D. Risk Factors Risks Related to Doing Business in the People's Republic of
China We and our shareholders face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises or other assets attributed
to a PRC establishment of a non-PRC company."
Where
the payers fail to withhold any or sufficient tax, the non-PRC residents, as the transferors, are required to declare and pay the taxes to the tax authorities on their own within
the statutory time limit. Failure to comply with the tax payment obligations by the non-PRC residents will result in penalties, including full payment of taxes owed, and interest on
those taxes.
Before August 2013 and pursuant to applicable PRC tax regulations, any entity or individual conducting business in the service industry
is generally required to pay a business tax at the rate of 5% on the
revenues generated from providing services. However, if the services provided are related to technology development and transfer, the business tax may be exempted subject to approval by the relevant
tax authorities.
In
November 2011, the Ministry of Finance and the State Administration of Taxation promulgated the Pilot Plan for Imposition of Value-Added Tax to Replace Business Tax. In May and
December 2013, April 2014 and
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March 2016,
the Ministry of Finance and the State Administration of Taxation promulgated Circular 37, Circular 106, Circular 43 and Circular 36 to further
expand the scope of services which are to be subject to Value-Added Tax, or VAT, instead of business tax. Pursuant to these tax rules, from August 1, 2013, a VAT was imposed to replace the
business tax in certain service industries, including technology services and advertising services, and from May 1, 2016, VAT replaced business tax in all industries, on a nationwide basis. A
VAT rate of 6% applies to revenue derived from the provision of certain services. Unlike business tax, a taxpayer is allowed to offset the qualified input VAT paid on taxable purchases against the
output VAT chargeable on the revenue from services provided. Accordingly, although the 6% VAT rate is higher than the previously applicable 5% business tax rate, no materially different tax cost to us
has resulted nor do we expect one to result from the replacement of the business tax with a VAT on our services.
Consumer goods imported through cross-border e-commerce platforms were originally classified as "personal baggage or postal articles" under the
Notice on Pilot Bonded Area Import Pattern of Cross-Border Trade E-Commerce Services issued by PRC General Administration of Customs on March 4, 2014. A personal baggage or postal articles tax
was levied on these goods before the online retailors could deliver the same to buyers. The personal baggage or postal articles tax were exempted if the payable amount was lower than RMB50. The rate
of personal baggage or postal articles tax was respectively 10%, 20%, 30% and 50% for different categories of products imported. Under this tax pattern, a quota of RMB1,000 for each purchase
order was imposed on online buyers, otherwise the imported goods were classified as normal goods, which are subject to value-added tax, consumption tax and tariff.
The
above-mentioned pilot bonded area import pattern of cross-border e-commerce was abolished pursuant to the New Cross-Border E-commerce Tax Notice. The goods imported through
cross-border e-commerce platforms are now treated as normal goods rather than "personal baggage or postal articles" and subject to the usual value-added tax, consumption tax and tariff. Normally, a
17% value-added tax will be levied on most products sold on the cross-border e-commerce platform and a 15% consumption tax will be levied on high-end cosmetics, while no consumption tax will be levied
on skin care products, maternity and baby care products. However, the
New Cross-Border E-commerce Tax Notice provides that, if the goods imported through cross-border e-commerce platforms are within the quota of RMB2,000 for each purchase order or
RMB20,000 per year for each buyer, the payable amount for the value-added tax and the consumption tax will be reduced to 70% of the payable tax, and the tariff will be waived.
According to the Notice on the Taxation Policies for Cross-border E-Commerce Retail Export, or the E-Commerce Export Taxation Notice, which was
jointly issued by the Ministry of Finance and the State Administration of Taxation and took effect as of January 1, 2014, an e-commerce export enterprise may be exempt or refunded from
consumption tax and VAT upon satisfaction of the following conditions:
-
-
it is a general VAT taxpayer, and has been granted the export tax refund/exemption eligibility;
-
-
the customs export declarations (specifically for export tax refund) for exported goods have been obtained and information thereon is
consistent with the electronic information of the customs export declarations;
-
-
the foreign exchange for the exported goods is received prior to the deadline of tax refund or tax exemption; and
-
-
where the e-commerce export enterprise is a foreign trade enterprise, it must have obtained corresponding special VAT invoices, special payment
statements for consumption tax (split pages) or special customs statements for payment of import VAT or consumption tax for purchase of the goods for export, and relevant information on the foregoing
documents shall be consistent with that contained in the customs export declarations (specifically for export tax refunds).
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Even
if an e-commerce export enterprise does not satisfy the foregoing conditions, it may also be exempt from consumption tax and VAT if it meets the following
requirements:
-
-
it has completed tax registration;
-
-
it has obtained customs export declarations for the exported goods; and
-
-
it has obtained legal and valid proof for purchase of the exported goods.
Third-party
e-commerce platforms providing transaction services for e-commerce export enterprises are not eligible for a tax refund or exemption under the E-Commerce Export Taxation
Notice.
Regulation of Foreign Exchange and Dividend Distribution
The principal regulations governing foreign currency exchange in China are the Regulations on Foreign Exchange Administration of the PRC. Under
the PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions, may be made in foreign currencies
without prior approval from SAFE by complying with certain procedural requirements. By contrast, approval from or registration with appropriate government authorities is required where RMB is to be
converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of foreign currency-denominated loans or foreign currency is to be remitted into China under the
capital account, such as a capital increase or foreign currency loans to our PRC subsidiaries.
In
August 2008, SAFE issued the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency
Capital of Foreign-Invested Enterprises, or SAFE Circular 142, regulating the conversion by a foreign-invested enterprise of foreign currency-registered capital into RMB by restricting how the
converted RMB may be used. In addition, SAFE promulgated Circular 45 on November 9, 2011 in order to clarify the application of SAFE Circular 142. Under SAFE Circular 142
and Circular 45, the RMB capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the
applicable government authority and may not be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of RMB capital converted from foreign
currency registered capital of foreign-invested enterprises. The use of RMB capital may not be changed without SAFE's approval, and RMB capital may not in any case be used to repay RMB loans if the
proceeds of such loans have not been used.
Since
SAFE Circular 142 has been in place for more than five years, SAFE decided to further reform the foreign exchange administration system in order to satisfy and facilitate
the business and capital operations of foreign invested enterprises, and issued the Circular on the Relevant Issues Concerning the Launch of Reforming Trial of the Administration Model of the
Settlement of Foreign Currency Capital of Foreign-Invested Enterprises in Certain Areas on August 4, 2014. This circular suspends the application of SAFE Circular 142 in certain areas
and allows a foreign-invested enterprise registered in these areas with a business scope including "investment" to use the RMB capital converted from foreign currency registered capital for equity
investments within the PRC. On April 9, 2015, SAFE released the Notice on the Reform of the Administration Method for the Settlement of Foreign Exchange Capital of Foreign-invested Enterprises,
or SAFE Circular 19, which came into force and superseded SAFE Circular 142 on June 1, 2015. Circular 19 allows foreign invested enterprises to settle their foreign
exchange capital on a discretionary basis according to the actual needs of their business operation and provides the procedures for foreign invested companies to use Renminbi converted from foreign
currency-denominated capital for equity investment. Nevertheless, Circular 19 also reiterates the principle that Renminbi converted from foreign currency-denominated capital of a
foreign-invested company may not be directly or indirectly used for purposes beyond its business scope.
In
November 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment, which substantially
amends and simplifies the current foreign exchange procedure. Pursuant to this circular, the opening of various special purpose foreign exchange
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accounts,
such as pre-establishment expenses accounts, foreign exchange capital accounts and guarantee accounts, the reinvestment of RMB proceeds by foreign investors in the PRC, and remittance of
foreign exchange profits and dividends by a foreign-invested enterprise to its foreign shareholders no longer require the approval or verification of SAFE, and multiple capital accounts for the same
entity may be opened in different provinces, which was not possible previously. In addition, SAFE promulgated the Circular on Printing and Distributing the Provisions on Foreign Exchange
Administration over Domestic Direct Investment by Foreign Investors and the Supporting Documents in May 2013, which specifies that the administration by SAFE or its local branches over direct
investment by foreign investors in the PRC shall be conducted by way of registration and banks shall process foreign exchange business relating to the direct investment in the PRC based on the
registration information provided by SAFE and its branches. In February 2015, SAFE promulgated the Circular of Further Simplifying and Improving the Policies of Foreign Exchange Administration
Applicable to Direct Investment, or SAFE Circular 13, which became effective on June 1, 2015. Under SAFE Circular 13, the current foreign exchange procedures will be further
simplified, and foreign exchange registrations of direct investment will be handled by the banks designated by the foreign exchange authority instead of SAFE and its branches. However, the foreign
invested enterprises were still prohibited by SAFE Circular 13 to use the RMB converted from foreign currency-registered capital to extend entrustment loans, repay bank loans or
inter-company loans.
On
June 19, 2016, SAFE issued the Circular on Reforming and Regulating Policies on the Control over Foreign Exchange Settlement of Capital Accounts, or Circular 16, which
took effect on the same day. Compared to Circular 19, Circular 16 provides that discretionary foreign exchange settlement applies to foreign exchange capital, foreign debt offering
proceeds and remitted foreign listing proceeds, and the corresponding Renminbi obtained from foreign exchange settlement are not restricted from extending loans to related parties or repaying the
inter-company loans (including advances by third parties). However, since Circular 16 came into effect recently, there exist substantial uncertainties with respect to its interpretation and
implementation in practice.
On
January 26, 2017, SAFE promulgated the Circular on Further Improving Reform of Foreign Exchange Administration and Optimizing Genuineness and Compliance Verification, or
Circular 3, which took effect on the same day. Circular 3 sets out various measures, including the following:
-
-
relaxing the policy restriction on foreign exchange inflow to further enhance trade and investment facilitation, including:
-
o
-
expanding the scope of foreign exchange settlement for domestic foreign
exchange loans,
-
o
-
allowing the capital repatriation for offshore financing against domestic
guarantee,
-
o
-
facilitating the centralized management of foreign exchange funds of
multinational companies, and
-
o
-
allowing offshore institutions within pilot free trade zones to settle
foreign exchange in domestic foreign exchange accounts; and
-
-
tightening genuineness and compliance verification of cross-border transactions and cross-border capital flow, including:
-
o
-
improving the statistics of current account foreign currency earnings
deposited offshore,
-
o
-
requiring banks to verify board resolutions, tax filing form, and audited
financial statements before wiring foreign invested enterprises' foreign exchange distribution above US$50,000,
-
o
-
strengthening genuineness and compliance verification of foreign direct
investments, and
-
o
-
implementing full scale management of offshore loans in Renminbi and
foreign currencies by requiring the total amount of offshore loans be no higher than 30% of the onshore lender's equity shown on its audited financial statements of the last year.
We
typically do not need to use our offshore foreign currency to fund our PRC operations. In the event we need to do so, we will apply to obtain the relevant approvals of SAFE and other
PRC government authorities as
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necessary.
Our PRC subsidiaries' distributions to their offshore parents and our cross-border foreign exchange activities are required to comply with the various requirements as described above.
SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents' Offshore Investment and Financing
and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014, which replaced the former circular commonly known as "SAFE Circular 75"
promulgated by SAFE on October 21, 2005. SAFE Circular 37 requires PRC residents to register with local branches of SAFE in connection with their direct establishment or indirect control
of an offshore entity, for the purpose of overseas investment and financing, with their legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in
SAFE Circular 37 as a "special purpose vehicle." SAFE Circular 37 further requires amendment to the registration in the event of any significant changes with respect to the special
purpose vehicle, such as increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material event. In the event that a PRC shareholder
holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions
to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into
its PRC subsidiary. Furthermore, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign exchange controls. On
February 13, 2015, SAFE released SAFE Circular 13, under which local banks will examine and handle foreign exchange registration for overseas direct investment, including the initial
foreign exchange registration and amendment registration, from June 1, 2015. There exist substantial uncertainties with respect to its interpretation and implementation by governmental
authorities and banks.
We
have notified substantial beneficial owners of ordinary shares who we know are PRC residents of their filing obligation, and we have periodically filed SAFE Circular 75 reports
prior to the promulgation of SAFE Circular 37, on behalf of certain employee shareholders whom we know are PRC residents. However, we may not be aware of the identities of all our beneficial
owners who are PRC residents. In addition, we do not have control over our beneficial owners and cannot assure you that all of our PRC resident beneficial owners will comply with SAFE
Circular 37. The failure of our beneficial owners who are PRC residents to register or amend their SAFE registrations in a timely manner pursuant to SAFE Circular 37 or the
failure of future beneficial owners of our company who are PRC residents to comply with the registration procedures set forth in SAFE Circular 37 may
subject these beneficial owners or our PRC subsidiaries to fines and legal sanctions. Failure to register or amend the registration may also limit our ability to contribute additional capital to our
PRC subsidiaries or receive dividends or other distributions from our PRC subsidiaries or other proceeds from disposal of our PRC subsidiaries, or we may be penalized by SAFE.
Under the Administration Measures on Individual Foreign Exchange Control issued by the PBOC on December 25, 2006, all foreign exchange
matters involved in employee share ownership plans and share option plans in which PRC citizens participate require approval from SAFE or its authorized branch. Pursuant to SAFE Circular 37,
PRC residents who participate in share incentive plans in overseas non-publicly-listed companies may submit applications to SAFE or its local branches for the foreign exchange registration with
respect to offshore special purpose companies. In addition, under the Notices on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating in Share Incentive Plans
of Overseas Publicly-Listed Companies, or the Share Option Rules, issued by SAFE on February 15, 2012, PRC residents who are granted shares or share options by companies listed on overseas
stock exchanges under share incentive plans are required to (i) register with SAFE or its local branches, (ii) retain a qualified PRC agent, which may be a PRC subsidiary of the overseas
listed company or another qualified institution selected by the PRC subsidiary, to conduct the SAFE registration and other procedures with respect to the share incentive plans on behalf of the
participants, and (iii) retain an overseas institution to handle matters in connection with their exercise of share options, purchase and sale of shares or interests and funds transfers.
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The principal laws, rules and regulations governing dividend distribution by foreign-invested enterprises in the PRC are the Company Law of the
PRC, as amended, the Wholly Foreign-owned Enterprise Law and its implementation regulations and the Chinese-foreign Equity Joint Venture Law and its implementation regulations. Under these laws, rules
and regulations, foreign-invested enterprises may pay dividends only out of their accumulated profit, if any, as determined in accordance with PRC accounting standards and regulations. Both PRC
domestic companies and wholly-foreign owned PRC enterprises are required to set aside as general reserves at least 10% of their after-tax profit, until the cumulative amount of their reserves reaches
50% of their registered capital. A PRC company is not permitted to distribute any profits until any losses from prior fiscal years have been offset. Profits retained from prior fiscal years may be
distributed together with distributable profits from the current fiscal year.
Labor Laws and Social Insurance
Pursuant to the PRC Labor Law and the PRC Labor Contract Law, employers must execute written labor contracts with full-time employees. All
employers must comply with local minimum wage standards. Violations of the PRC Labor Contract Law and the PRC Labor Law may result in the imposition of fines and other administrative and criminal
liability in the case of serious violations.
In
addition, according to the PRC Social Insurance Law and the Regulations on the Administration of Housing Funds, employers in China must provide employees with welfare schemes covering
pension insurance, unemployment insurance, maternity insurance, work-related injury insurance, medical insurance and housing funds.
Anti-monopoly Law
The PRC Anti-monopoly Law, which took effect on August 1, 2008, prohibits monopolistic conduct, such as entering into monopoly
agreements, abuse of dominant market position and concentration of undertakings that have the effect of eliminating or restricting competition.
Competing business operators may not enter into monopoly agreements that eliminate or restrict competition, such as by boycotting transactions,
fixing or changing the price of commodities, limiting the output of commodities, fixing the price of commodities for resale to third parties, among others, unless the agreement will satisfy the
exemptions under the Anti-monopoly Law, such as improving technologies, increasing the efficiency and competitiveness of small and medium-sized undertakings, or safeguarding legitimate interests in
cross-border trade and economic cooperation with foreign counterparts. Sanctions for violations include an order to cease the relevant activities, and confiscation of illegal gains and fines (from 1%
to 10% of sales revenue from the previous year, or RMB500,000 if the intended monopoly agreement has not been performed).
A business operator with a dominant market position may not abuse its dominant market position to conduct acts, such as selling commodities at
unfairly high prices or buying commodities at unfairly low prices, selling products at prices below cost without any justifiable cause, and refusing to trade with a trading party without any
justifiable cause. Sanctions for violation of the prohibition on the abuse of dominant market position include an order to cease the relevant activities, confiscation of the illegal gains and fines
(from 1% to 10% of sales revenue from the previous year).
Where a concentration of undertakings reaches the declaration threshold stipulated by the State Council, a declaration must be approved by the
anti-monopoly authority before the parties implement the concentration.
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Concentration
refers to (1) a merger of undertakings; (2) acquiring control over other undertakings by acquiring equities or assets; or (3) acquisition of control over, or the
possibility of exercising decisive influence on, an undertaking by contract or by any other means. If business operators fail to comply with the mandatory declaration requirement, the anti-monopoly
authority is empowered to terminate and/or unwind the transaction, dispose of relevant assets, shares or businesses within certain periods and impose fines of up to RMB500,000.
See
"Item 3. Key Information D. Risk Factors Risks Related to Our Business and
Industry We may become the target of anti-monopoly and unfair competition claims, which may result in our being subject to fines as well as constraints on
our business."
Anti-Terrorism Law
The PRC Anti-Terrorism Law, which was promulgated on December 27, 2015 and came into effect on January 1, 2016, imposes
obligations on telecommunication business operators and Internet service providers to provide technical interfaces and technical assistance in decryption and other efforts to public and national
security authorities in terrorism prevention and investigation. Also, the Anti-Terrorism Law requires Internet service providers to implement network security and information and content monitoring
systems and adopt technical security measures to prevent the dissemination of information containing terrorist or extremist content. Once content of this type is detected, Internet service providers
shall cease the transmission of the information, keep the relevant records, delete the information and report to public and national security bodies. In addition, the Anti-Terrorism Law requires
telecommunication business operators and Internet service providers to verify the identity of their clients, and to not provide services to anyone whose identity is unclear or who declines to verify
his/her identity. However, the Anti-Terrorism Law does not further specify the required verification measures. Since the Anti-Terrorism Law was promulgated recently, there exist substantial
uncertainties with respect to its interpretation and implementation by governmental authorities.
Regulation Applicable to Alipay
According to the Administrative Measures for the Payment Services Provided by Non-financial Institutions, or the Payment Services Measures,
promulgated by the PBOC on June 14, 2010 and effective as of September 1, 2010, a payment institution, a non-financial institution providing monetary transfer services as an intermediary
between payees and payers, including online payment, issuance and acceptance of prepaid cards or bank cards, and other payment services specified by the PBOC, is required to obtain a payment business
license. Any non-financial institution or individual engaged in the payment business without this license may be ordered to cease its payment services and be subject to administrative sanctions and
even criminal liabilities. Applications for payment business licenses are examined by the local branches of the PBOC and then submitted to the PBOC for approval. The registered capital of an applicant
that engages in a nationwide payment business must be at least RMB100 million, while that of an applicant engaging in a payment business within a province must be at least RMB30 million.
A
payment institution is required to conduct its business within the scope of business indicated in its payment business license, and may not undertake any business beyond that scope or
outsource its payment business. No payment institution may transfer, lease or lend its payment business license.
On
January 20, 2015, the SAFE promulgated the Guiding Opinions on the Pilot Services of Cross-Border Foreign Exchange Payment by Payment Institutions, or the Guiding Opinions,
which replaced the previous guiding opinion issued by SAFE on February 1, 2013. Pursuant to the Guiding Opinions, a payment institution is required to obtain approval from the SAFE in order to
engage in pilot cross-border foreign exchange payment services and may only provide cross-border foreign exchange payment services for trade in goods or trade in services with real and legitimate
transaction background. The payment institution must also verify the real names and identity information of the customers involved in the cross-border transactions, maintain records of the relevant
transactions and make monthly reports to the local branch of the SAFE.
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In
addition, on December 28, 2015, the PBOC promulgated the Administrative Measures for the Online Payment Business of Non-bank Payment Institutions, or the Online Payment
Measures, which came into effect on July 1, 2016. The Online Payment Measures require online payment institutions to conduct "know your client" checks and implement the real name system for
payment accounts. The Online Payment Measures classify online payment accounts into three categories and require online payment institutions to impose real-name based, classified management, including
imposing limits on annual payment volume with respect to different categories of online payment accounts. In addition, a payment account can only be opened by a payment institution with Internet
payment business license at the request of customers.
On
January 13, 2017, the PBOC issued the Notice on Matters Related to Implementation of Centralized Custody of Clients' Reserve Funds of Payment Institutions, which requires that
from April 17, 2017, payment institutions transfer a portion of customer reserve funds to a specifically designated bank account upon the request of the PBOC and that no interest shall accrue
upon the transferred customer reserve funds.
We
rely on Alipay to provide payment services on our marketplaces and Alipay has obtained a payment business license from the PBOC as well as approval for cross-border foreign exchange
payment services from the SAFE.
The PRC Anti-money Laundering Law, which became effective on January 1, 2007, sets forth the principal anti-money laundering requirements
applicable to both financial and non-financial institutions with anti-money laundering obligations, such as Alipay, including the adoption of precautionary and supervisory measures, establishment of
various systems for client identification, preservation of clients' identification information and transactions records, and reports on block transactions and suspicious transactions. The Payment
Services Measures also require that the payment institution follow the rules associated with anti-money laundering and comply with their anti-money laundering obligations.
In
addition, the PBOC promulgated the Administrative Measures for Payment Institutions Regarding Anti-money Laundering and Counter Terrorism Financing on March 5, 2012, or the
Anti-money Laundering Measures, according to which the payment institution must establish and improve unified anti-money laundering internal control systems and file their systems with the local
branch of the PBOC. The Anti-money Laundering Measures also require the payment institution to set up an anti-money laundering department or designate an internal department to be responsible for
anti-money laundering and counter terrorism financing work.
Alipay
is in the process of expanding its business internationally, and it may become subject to additional laws, rules and regulations of the jurisdictions in which it chooses to
operate. These regulatory regimes may be complex and require extensive time and resources to ensure compliance.
Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 added Section 13(r) to the Exchange Act.
Section 13(r) requires an issuer to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities, including, among
other matters, transactions or dealings relating to the government of Iran. Disclosure is required even where the activities, transactions or dealings are conducted outside the U.S. by
non-U.S. affiliates in compliance with applicable law, and whether or not the activities are sanctionable under U.S. law.
During
the fiscal year ended March 31, 2017, SoftBank Group Corp., one of our major shareholders, through one of its non-U.S. subsidiaries, provided roaming services in
Iran through Telecommunications Services Company (MTN Irancell), which is or may be a government-controlled entity. During the fiscal year ended March 31, 2017, SoftBank Group Corp. had
no gross revenues from these services and no net profit was generated. This subsidiary also provided telecommunications services in the ordinary course of business to accounts affiliated with the
Embassy of Iran in Japan. During the fiscal year ended March 31, 2017, SoftBank Group Corp. estimates that
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gross
revenues and net profit generated by these services were both under US$9,400. In addition, during the year end of March 31, 2017, SoftBank Group Corp., through one of its
non-U.S. indirect subsidiaries, provided office supplies to the Embassy of Iran in Japan. SoftBank Group Corp. estimates that gross revenue and net profit generated by these services were under
US$5,300 and US$1,030, respectively. These activities have been conducted in accordance with applicable laws and regulations, and they are not sanctionable under U.S. or Japanese law. Accordingly,
with respect to Telecommunications Services Company (MTN Irancell), the relevant subsidiary of SoftBank Group Corp. intends to continue these activities. With respect to services provided to
accounts affiliated with the Embassy of Iran in Japan, the relevant subsidiary of SoftBank Group Corp. is obligated under contract to continue these services. With respect to the provision of office
supplies to the Embassy of Iran in Japan, the relevant subsidiary of SoftBank Group Corp. intends to continue these activities. We were not involved in, and did not receive any revenue from, any of
these activities by SoftBank.
C. Organizational Structure
We conduct our business operations across approximately 630 subsidiaries and other consolidated entities. The chart below summarizes our corporate legal structure
and identifies the significant subsidiaries described in " A. History and Development of the Company," as well as our other subsidiaries and variable interest entities that
are material to our business and the number of their respective subsidiaries, as of March 31, 2017:
-
(1)
-
Includes approximately 130 subsidiaries and consolidated entities incorporated in China and approximately 230 subsidiaries
incorporated in other jurisdictions. In addition, the entities pictured in this chart hold, directly and indirectly, an aggregate of approximately 160 additional subsidiaries and consolidated entities
incorporated in China and approximately 100 additional subsidiaries incorporated outside of China not pictured in the chart.
-
(2)
-
The principal holding company for our strategic
investments, including Youku Tudou.
-
(3)
-
Primarily involved in the operation of Taobao Marketplace.
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(4)
-
Primarily involved in the
operation of Tmall and Juhuasuan.
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(5)
-
Primarily involved in the operation of Alimama.
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(6)
-
Primarily involved in the operation of
Alibaba.com, 1688.com and AliExpress.
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(7)
-
Primarily involved in the operation of cloud computing services.
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-
(8)
-
Each of these variable interest entities is 80%-owned by Jack Ma and 20%-owned by Simon Xie, other than Zhejiang Taobao
Network Co., Ltd., which is 90%-owned by Jack Ma and 10%-owned by Simon Xie.
Contractual Arrangements among Our Wholly-foreign Owned Enterprises, Variable Interest Entities and the Variable Interest Entity Equity Holders
Due to PRC legal restrictions on foreign ownership and investment in, among other areas, value-added telecommunications services, which include
the operations of Internet content providers, or ICPs, we, similar to all other entities with foreign-incorporated holding company structures operating in our industry in China, operate our Internet
businesses and other businesses in which foreign investment is restricted or prohibited in the PRC through wholly-foreign owned enterprises, majority-owned entities and variable interest entities. The
relevant variable interest entities, which are incorporated in the PRC and 100% owned by PRC citizens or by PRC entities owned by PRC citizens, where applicable, hold the ICP licenses and other
regulated licenses and operate our Internet businesses and other businesses in which foreign investment is restricted or prohibited. Specifically, our variable interest entities that are material to
our business are Zhejiang Taobao Network Co., Ltd., Zhejiang Tmall Network Co., Ltd., Hangzhou Alibaba Advertising Co., Ltd., Hangzhou Ali
Technology Co., Ltd. and Alibaba Cloud Computing Ltd. Each of these variable interest entities other than Zhejiang Taobao Network Co., Ltd. is 80%-owned by Jack Ma,
our lead founder, executive chairman and one of our principal shareholders, and 20%-owned by Simon Xie, one of our founders. Zhejiang Taobao Network Co., Ltd. is 90%-owned by Jack Ma and
10%-owned by Simon Xie. We have entered into certain contractual arrangements, as described in more detail below, which collectively enable us to exercise effective control over the variable interest
entities and realize substantially all of the economic risks and benefits arising from, the variable interest entities. As a result, we include the financial results of each of the variable interest
entities in our consolidated financial statements in accordance with U.S. GAAP as if they were our wholly-owned subsidiaries.
Other
than the ICP licenses and other licenses and approvals for businesses in which foreign ownership is restricted or prohibited held by our variable interest entities, we hold our
material assets in, and conduct our material operations through, our wholly-foreign owned and majority-owned enterprises, which primarily provide technology and other services to our customers. We
generate the significant majority of our revenue directly through our wholly-foreign owned enterprises, which directly capture the profits and associated cash flow from operations without having to
rely on contractual arrangements to transfer cash flow from the variable interest entities to the wholly-foreign owned enterprises.
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The
following diagram is a simplified illustration of the ownership structure and contractual arrangements that we typically have in place for our variable interest entities:
The
following is a summary of the common contractual arrangements that provide us with effective control of our material variable interest entities and that enable us to receive
substantially all of the economic benefits from their operations.
Contracts that Give Us Effective Control of the Variable Interest Entities
Loan agreements.
Pursuant to the relevant loan agreement, the respective wholly-foreign owned enterprise has granted an interest-free loan to
the
relevant variable interest entity equity holders, which may only be used for the purpose of a capital contribution to the relevant variable interest entity or as may be otherwise agreed by the
wholly-foreign owned enterprise. The wholly-foreign owned enterprise may require acceleration of repayment at its absolute discretion. When the variable interest entity equity holders make early
repayment of the outstanding amount, the wholly-foreign owned enterprise or a third-party designated by it may purchase the equity interests in the variable interest entity at a price equal to the
outstanding amount of the loan, subject to any applicable PRC laws, rules and regulations. The variable interest entity equity holders undertake not to enter into any prohibited transactions in
relation to the variable interest entity, including the transfer of any business, material assets, intellectual property rights or equity interests in the variable interest entity to any third-party.
The parties to the loan agreement for each of our material variable interest entities are Jack Ma and Simon Xie on the one hand, and Taobao (China) Software Co., Ltd., Zhejiang Tmall
Technology Co., Ltd., Alibaba (China) Technology Co., Ltd., Hangzhou Alimama Technology Co., Ltd. and Zhejiang Alibaba Cloud Computing Ltd., the respective
wholly-foreign owned enterprise on the other hand.
Exclusive call option agreements.
The variable interest entity equity holders have granted the wholly-foreign owned enterprise an exclusive
call
option to purchase their equity interest in the variable interest entity at an exercise price equal to the higher of (i) the registered capital in the variable interest entity; and
(ii) the minimum price as permitted by applicable PRC laws. Each relevant variable interest entity has further granted the relevant wholly-foreign owned enterprise an exclusive call option to
purchase its assets at an exercise price equal to the book value of the assets or the minimum price as permitted by applicable PRC law, whichever is higher. The wholly-foreign owned enterprise may
nominate another entity or individual to purchase the equity interest or assets, if applicable, under the call options. Each call option is exercisable subject to the condition that applicable
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PRC
laws, rules and regulations do not prohibit completion of the transfer of the equity interest or assets pursuant to the call option. Each wholly-foreign owned enterprise is entitled to all
dividends and other distributions declared by the variable interest entity, and the variable interest entity equity holders have agreed to give up their rights to receive any distributions or proceeds
from the disposal of their equity interests in the variable interest entity which are in excess of the original registered capital that they contributed to the variable interest entity, and to pay any
distributions or premium to the wholly-foreign owned enterprise. The exclusive call option agreements remain in effect until the equity interest or assets that are the subject of these agreements are
transferred to the wholly foreign owned enterprise. The parties to the exclusive call option agreement for each of our material variable interest entities are Jack Ma and Simon Xie as the variable
interest entity equity holders, the relevant variable interest entity and its corresponding wholly-foreign owned enterprise.
Proxy agreements.
Pursuant to the relevant proxy agreement, each of the variable interest entity equity holders irrevocably authorizes any
person
designated by the wholly-foreign owned enterprise to exercise his rights as an equity holder of the variable interest entity, including the right to attend and vote at equity holders' meetings and
appoint directors. The parties to the proxy agreement for each of our material variable interest entities are Jack Ma and Simon Xie as the variable interest entity equity holders, the relevant
variable interest entity and its corresponding wholly-foreign owned enterprise.
Equity pledge agreements.
Pursuant to the relevant equity pledge agreement, the relevant variable interest entity equity holders have pledged
all of
their interests in the equity of the variable interest entity as a continuing first priority security interest in favor of the corresponding wholly-foreign owned enterprise to secure the outstanding
amounts advanced under the relevant loan agreements described above and to secure the performance of obligations by the variable interest entity and/or its equity holders under the other structure
contracts. Each wholly-foreign owned enterprise is entitled to exercise its right to dispose of the variable interest entity equity holders' pledged interests in the equity of the variable interest
entity and has priority in receiving payment by the application of proceeds from the auction or sale of the pledged interests, in the event of any breach or default under the loan agreement or other
structure contracts, if applicable. These equity pledge agreements remain in force for the duration of the relevant loan agreement and other structure contracts. The parties to the equity pledge
agreement for each of our material variable interest entities are Jack Ma and Simon Xie as the variable interest entity equity holders, the relevant variable interest entity and its corresponding
wholly-foreign owned enterprise. All of the equity pledges relating to our material variable interest entities have been registered with the relevant office of the Administration for Industry and
Commerce in China.
Contracts that Enable Us to Receive Substantially All of the Economic Benefits from the Variable Interest Entities
Exclusive technical services agreements.
Each relevant variable interest entity has entered into an exclusive technical services agreement
with the
respective wholly-foreign owned enterprise, pursuant to which the relevant wholly-foreign owned enterprise provides exclusive technical services to the variable interest entity. In exchange, the
variable interest entity pays a service fee to the wholly-foreign owned enterprise which typically amount to what would be substantially all of the variable interest entity's pre-tax profit (absent
the service fee), resulting in a transfer of substantially all of the profits from the variable interest entity to the wholly-foreign owned enterprise.
The
exclusive call option agreements described above also entitle the wholly-foreign owned enterprise to all dividends and other distributions declared by the variable interest entity
and to any distributions or proceeds from the disposal by the variable interest entity equity holders of their equity interests in the variable interest entity that are in excess of the original
registered capital that they contributed to the variable interest entity.
In
the opinion of Fangda Partners, our PRC legal counsel:
-
-
the ownership structures of our material wholly-foreign owned enterprises and our material variable interest entities in China do not and will
not violate any applicable PRC law, regulation, or rule currently in effect; and
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-
-
the contractual arrangements between our material wholly-foreign owned enterprises, our material variable interest entities and the variable
interest entity equity holders governed by PRC laws are valid, binding and enforceable in accordance with their terms and applicable PRC laws, rules, and regulations currently in effect, and will not
violate any applicable PRC law, regulation, or rule currently in effect.
However,
we have been further advised by our PRC legal counsel, Fangda Partners, that there are substantial uncertainties regarding the interpretation and application of current and
future PRC laws, rules and regulations. Accordingly, the PRC regulatory authorities may in the future take a view that is contrary to the opinion of our PRC legal counsel. We have been further advised
by our PRC legal counsel that if the PRC government finds that the agreements that establish the structure for operating our Internet-based business do not comply with PRC government restrictions on
foreign investment in the aforesaid business we engage in, we could be subject to severe penalties including being prohibited from continuing operations. See "Item 3. Key
Information D. Risk Factors Risks Related to Our Corporate Structure."
D. Property, Plant and Equipment
As of March 31, 2017, we occupied facilities around the world with an aggregate gross floor area of office buildings owned by us totaling
558,080 square meters. We maintain offices in Australia, China, France, Germany, Hong Kong, India, Indonesia, Italy, Japan, Malaysia, the Netherlands, the Philippines, Russia, Singapore, South
Korea, Taiwan, Thailand, Turkey, the United Arab Emirates, the United Kingdom, the United States and Vietnam. In addition, we maintain data centers in Australia, China, Germany, Hong
Kong, Singapore, the United Kingdom and the United States.