US-China Tech Battle Forces Alibaba To Scrap Cloud Spinoff

(Bloomberg) — The escalating battle between the U.S. and China for tech dominance has led to one of the most surprising reversals of corporate strategy ever: On Thursday, Alibaba Group Holding Ltd. planned to spin off its $11 billion cloud business. And withdrew the listing plan. ,

Chairman Joseph Tsai and Chief Executive Officer Eddie Wu, two of Alibaba founder Jack Ma’s longtime lieutenants, said China’s e-commerce and Internet computing leader needs a strategy “reset.” Wu, in his first public comments since taking power, explained that ever-increasing US restrictions on chip sales to China have forced the company to reconsider its plan to break up the empire that Ma has assembled into six parts. Had spent decades doing. Alibaba also said it was suspending the listing of popular grocery business Freshippo.

Wall Street’s reaction to Alibaba’s reversal was swift: Shares fell 9.1% in New York trading, shedding more than $20 billion in market value, their biggest decline in a year.

This decision has come at a difficult time for Alibaba. The company is trying to bounce back from the Covid-19 pandemic. This is also just emerging from the massive action of the tech industry in China. And it is working to win back traders and buyers who have been attracted to PDD Holdings Inc. and new entrants like ByteDance Ltd.’s Douyin, as well as corporate customers who have turned to state-backed cloud services. Are.

The Biden administration’s restrictions on exports of some chips — particularly those designed for artificial intelligence use and critical to the high-end computing operations that run data centers and Alibaba’s cloud services — aren’t helping.

“Circumstances have changed,” Tsai told analysts on a post-earnings call. The company must now focus on providing cash to invest – because in an AI-driven world, to develop a full-fledged business based on a highly networked and high-scale infrastructure, investment is required. Is.”

The Chinese e-commerce leader is joining social-media giant Tencent Holdings Ltd. in publicly raising the challenges posed by U.S. trade sanctions. The Biden administration’s efforts to prevent the Chinese government from obtaining cutting-edge chips for military applications has begun to impact the country’s private sector in unexpected ways.

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Analysts said other factors may also have played a role in Alibaba’s reversal. Its cloud business has been slowing and losing market share for years — and has attracted government scrutiny over alleged security breaches.

The best time for Alibaba to seek a public listing for its cloud division “has already passed,” said Li Chengdong, head of Haitun, a Beijing-based technology think tank. “The strength of the business is the issue.”

Even before Thursday’s announcement, Alibaba’s effort had faced headwinds. Freshippo’s potential Hong Kong IPO was on hold amid weak sentiment for consumer stocks. Former Chief Executive Officer Daniel Zhang stepped down just months after agreeing to lead its cloud division. Logistics arm Cainyao filed for a Hong Kong IPO in late September, but it is unclear what its valuation will be.

Still, Thursday’s news came as a shock to most on Wall Street.

“I was quite surprised,” said Kevin Nett, head of Asian equities at Tocqueville Finance. “My initial view is that the entire corporate restructuring announced in May may be at risk.”

Osamu Yamagata at Aberdeen said the cloud spinoff was seen as “one of the marquee corporate actions” that would serve to reduce the holding company’s discount. The planned restructuring boosted Alibaba’s share price, he said, “so I would expect a reversal.”

The cloud spinoff was part of the most radical corporate overhaul in Alibaba’s history — designed to spread greater autonomy across its various businesses, reinvigorating them and creating greater market value. However, such a split would also risk diminishing Alibaba’s stature and impairing its position as one of the leaders of China’s digital economy.

Many observers saw the split as potentially encouraged by the government, which at the time was trying to break up powerful, private sector interests and curb the growing influence of technology companies.

Alibaba executives said that instead of the split, the company would focus on growing the cloud unit organically and issuing its first annual dividend of $2.5 billion, a bid to reassure shareholders who wanted a larger stake from the unit’s inception. Were expecting payment.

“The market is scratching its head,” said Willer Chen, research analyst at Forsyth Barr Asia. “The first annual dividend looks like compensation to shareholders. However, this may not fully compensate for the shock given the high value of the cloud unit.

Alibaba announced its decisions with solid but not spectacular quarterly earnings. Its sales rose 8.5% to 224.79 billion yuan ($31 billion), slightly above average estimates, and swung to a profit of 27.7 billion yuan from a loss a year earlier.

With Zhang’s exit, Tsai and Wu now face the challenge of reviving the cloud arm and the company as a whole.

Their biggest bet is AI. The company has released its own big language model, Tongyi Qianwen, and is also investing in high-flying startups like Zipu AI and Baichuan. Tsai said last month that the cloud unit now hosts half of China’s generic AI firms and serves about 80% of the country’s technology companies.

It’s unclear how U.S. sanctions will affect that effort. The cloud division is at the heart of Alibaba’s AI initiative and requires the kind of powerful chips that Santa Clara, California-based Nvidia Corp. supplies — which are now banned from most Chinese companies.

Except for its cloud business, Alibaba is struggling with a slowing consumer economy.

Read More: Alibaba, JD fail to inspire in China discount shopping festival

Alibaba and traditional rival JD.com Inc. Coming off a disappointing Singles Day campaign. China’s twin e-commerce leaders probably only managed single-digit percentage growth during their signature annual shopping festival, outpacing smaller but more innovative social media rivals like Douyin and Kuaishou Technology. And yet Tencent, which is investing heavily in video, and JD both reported better-than-expected results on Wednesday.

For its part, Alibaba has taken aggressive steps to boost its e-commerce business. Its Taobao and Tmall divisions are focusing on content creation to fend off competition from social media platforms and have launched AI-powered tools for merchants. The company has also cut thousands of employees in past quarters to reduce expenses.

–With assistance from Zeping Huang, Sarah Zheng, Vlad Savov and Debbie Wu.