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Alibaba's Honeymoon Is Over

The feel-good story is over after the government blasted Alibaba for not doing enough to ban fake goods from its shopping sites.

Reuters / Brendan McDermid

At some point, Alibaba’s glow had to fade. That moment is now.

Jack Ma’s e-commerce giant reported lower-than-expected revenue on Thursday, sending shares tumbling 10 percent in early trading. But the more concerning storyline for Alibaba is the buzz around a Chinese government report published on Wednesday that blasted the company for not doing enough to keep counterfeit, fake and subpar goods off of its biggest shopping marketplace, Taobao.

The report, authored by China’s State Administration of Industry and Commerce, was based on a July 2014 meeting with the company, but was not released earlier because the agency said it did not want to affect the company’s historic IPO.

The uncommon report threatens the feel-good story of Alibaba’s entrepreneurial rise to prominence and casts a cloud over the company as it courts American brands to sell into China.

Executive Vice Chairman Joe Tsai said in an earnings call on Thursday that the company first learned of the report on Wednesday and did not ask the government to hold off on publishing it.

He claimed the report was “flawed” and reiterated a previous company statement that Alibaba will file a formal complaint with the SAIC.

In the earlier statement, Alibaba claimed that “director Liu Hongliang’s procedural misconduct during the supervision process; irrational enforcement of the law; and obtaining a biased conclusion using the wrong methodology has inflicted irreparable and serious damage to Taobao and Chinese online businesses.”

Only one analyst asked the company about the report, with a query about how it would impact the business. “Obviously anytime you have a situation like this, it doesn’t help,” Tsai said. He then switched gears and highlighted the company’s strong customer growth in the previous quarter as a sign that shoppers are happy with the goods they purchase.

The popularity of Alibaba’s sites wouldn’t be growing if shoppers “are getting bad quality stuff on our site,” he argued.

The counter-argument is obvious: Plenty of shoppers are willing to buy fakes for the right price.

This article originally appeared on Recode.net.