Alibaba reverses its decision for cloud division spin-off

Reading time: 7m 42s

What happened?

Alibaba has called off its plans to split its business into six separate units and list Alibaba Cloud, its lucrative cloud arm. They’ve also paused plans to list its supermarket unit, Freshippo.

Why? Well, the US is tightening its grip on chip exports to China. The Chinese technology group’s reversal signals the impact that the curb is having, especially because Alibaba’s cloud division relies on the chips needed for AI.

They lost $21 billion in market capitalisation due to the decision.

More on the story

March 2023 marked the announcement of the company’s plan to restructure itself, the biggest planned restructuring in its 24- year history. They announced that they would split the business into 6 units during the same period.

The new leadership team signalled another period of funding to boost its cloud infrastructure. However, the move comes amid a time when the US has tightened its chip controls. They have acknowledged this could “materially and adversely” affect its ability to offer “products and services and to perform under existing contracts.”

Eddie Yongming Wu, Alibaba’s new CEO stated, “The deep convergence of AI plus cloud computing will be an important impetus for our future development.”

In other words, it seems like Alibaba is making another huge gamble – believing that AI will increase its growth. The fact that the plan to restructure the company has been shelved, expectations have been shattered, and the US has curbed high-performance chip exports to China, I think it’s safe to say that this is another rickety gamble. One that can even cause more problems than solve.

Alibaba: A quick glance

What? A technology company specialising in retail, e-commerce, technology and the internet.

Industry: E-commerce, retail, technology and internet

Founded: 1999, Hangzhou, China

Founders: Jack Ma, Joseph C. Tsai, Eddie Wu, Zhang Ying and several others.

Current CEO: Daniel Zhang

Market Capitalisation: $199.79 billion

What does this mean?

The decision to restructure was a proposition by Daniel Zhang, Alibaba’s former CEO. It’s clear that this is not a vision held by the current CEO. What does the reversal mean? What impact could it have? Let’s look at some factors below.

*Image courtesy of* *Data Center Dynamics*

It’s a strategic move. The US’ curb in its chips doesn’t include the chips they have already sent to China. It means that Alibaba, although limited, has some stockpile left of Nvidia chips. It means Wu will be forced to carefully consider how to use the remaining chips to boost their cloud division. It’s even been cited that they have already stopped taking on new customers that rely on the chips.
The US is making things more difficult. Alibaba want to grow their cloud division. The curbs are a setback in enabling growth within this arm of the company. Alibaba Cloud is the largest Chinese cloud service provider – it could result in a significant slowdown in China’s cloud industry.
Waning investor confidence? The move shocked investors. Almost no-one saw this coming. It seemed like things were getting on steadily after announcing Alibaba’s new leadership. The new moves indicate that this may not have been the case. It was revealed that two private holding vehicles belonging to the family trust of Jack Ma, a cofounder of Alibaba, planned to sell almost $900 worth of Alibaba shares. However, it was later announced that he is “very positive” about the company and will continue to hold its shares.
It highlights geopolitical tensions. Relations between the US and China haven’t been good in recent months. From the shooting down of a supposed spy balloon over US waters, to China’s seeming support of Russia amid its invasion of Ukraine, to threats that China could invade China with force - such events have furthered the little hope left for the two countries to get along. I believe that the US curbs on exports to China is also more of a political move than a business one. The curbs could have a bigger impact on China’s AI growth and it’s a move that will not affect the US’ ambitions for growth in this field.

A US chip curb isn’t the only setback Alibaba is facing in growing its cloud division...

China’s economic slowdown. The expectations post lockdown, was that China would experience more than 5% growth. However, economists have now revised their economic growth forecasts to just 5%. One major reason for this, is due to China’s slowing property market, which accounts for around 25% of China’s overall GDP. Many people’s wealth and finances are tied to the real estate market, and with large property developers such as Evergrande and Country Garden facing a myriad of financial problems, it is likely that the crisis will not end any time soon. It means that creditors are more wary about lending to companies in general. There has also been a slowdown in corporate spending in information technology It could affect Alibaba and their plans to raise more funds to fuel its growth plans for their cloud division.
Increasing competition. Even though Alibaba currently stands as the largest cloud service provider in mainland China, rivals such as Tencent and Huwaei are heating up the competition. In 2022, Tencent launched new cloud computing products aimed at overseas markets. The curbs will not just affect Alibaba, but Chinese companies who need the AI related chips, which include both Huawei and Tencent. It does ignite the possibility that Alibaba may lose their top crown to rivals within the market.
A tougher regulatory environment. The Chinese government has been cracking down on Chinese technology companies that wield a lot of influence and power in the country. Chinese authorities began a regulatory crackdown in 2020 out of concern that the country’s biggest internet platforms were being monopolistic and becoming too powerful. Some of the measures they introduced were implementing changes to cross border data transfer, announcing new privacy laws and introducing new measures within the gaming industry. It wiped out trillions of dollars in market value from Chinese technology companies and have reduced in size, compared to their US counterparts. Alibaba was one of the technology giants that was affected. For example, they had to pay out $2.8 billion in fines and caused Alibaba’s shares to tank.

IPO’s in Hong Kong

“The Hong Kong market has not recovered as much as we would like”. These are words stated by Irene Chu, a partner at KPMG China.

Analysts expected a rebound in Hong Kong’s initial public listing market, however activity has remained low. According to KPMG, in the first three quarters of 2023, the Hong Kong IPO market had only concluded 44 listings and raised around $3.14 billion. It should even be noted that the stock market was one of the worst performing in 2022, with a 15% shed in valuation.

According to the London Stock Exchange group data, there have been less than $3 billion worth of IPO’s in Hong Kong in the first nine months of 2023, compared to $4 billion during the same time last year.

Analysts expected a rebound in Hong Kong’s initial public listing market; however it has remained low.

Even if Alibaba’s cloud division had spun off and gone public, the chances of it not going well were high.

Alibaba said, “We believe that a full spin-off of Cloud Intelligence Group may not achieve the intended effect of shareholder value enhancement.”

I think the Chinese IPO market will rebound. Given the last figure for youth unemployment was 21.3% for June 2023, a record high, the property crisis that is occurring and the grim economic outlook for China, the rebound will not occur any time soon. However, I do believe that it’s a matter of when not if.

*Image courtesy of* *China Global Daily*

So, what’s next?

For Alibaba: Wu could continue to make surprise moves and reverse decisions made by the former chief executive. Given the current economic and geopolitical circumstances, an IPO of their Cloud and grocery unit is still possible. The timing just has to be right.

Around 80% of Chinese businesses use Alibaba Cloud. Given that their rival, Tencent has, and I quote a “large stockpile of AI chips from U.S maker Nvidia”, we can take an educated guess and assume that Alibaba Cloud has a similar amount or less. However, there is no certainty. If the US curb in chips continues to occur, then it could mean that Chinese businesses will turn to rivals who have a larger supply of chips available, and their dominance could wane.

For the Chinese tech industry: Even though other technology companies have some stockpile of Nvidia chips, the curb in US chip exports occurs to all Chinese companies. Unless the curb is lifted, supply will eventually plummet and become critically low. This could cause a spike in chip prices in China and lead to a slowdown in growth for the Chinese chip industry.

For Nvidia: Chipmaker Nvidia recently announced record revenues of $18.1 billion in their latest Q3 earnings report. They also said they expect growth in other regions, but a “significant” drop in sales to China due to the curb in chip exports. The chip restrictions could hurt the chip making company more than expected, especially because China is an important market to the company.

For the US-China relations: If the curb continues, it could sour relations further.

Kamala Harris stated, “Let’s be clear: when it comes to AI, America is a global leader. It is American companies that lead the world in AI innovation. It is America that can catalyse global action and can build global consensus in a way no other country can.”

Chips have become a critical component for companies wanting to grow in the generative AI field and both countries want to become the leader in this. The recent meeting of President Biden and Xi has showed signs of some progress between the two, but tensions are still very high.

*Image courtesy of* *Cambridge Independent*

Closing thoughts:

I was a little surprised with the decision. The spin- off of all six units could’ve done some good for the company, but we won’t know for some time. I believe a spin -off is coming, but like I’ve stated above, the circumstances have to make sense. Going public right now could prove to be a massive disaster and have deep consequences.

Will the US remove their curb in chip exports to China? Maybe. But I don’t think they will for some time. The US is determined in becoming the leader in the field of generative AI and if they can get ahead of their biggest competition (China), then that is what they will do.

As we've seen in the past, China won’t stay silent. They are going to retaliate in some way. We have to wait for what this will be. But for now, the curbs will be a blow to Chinese technology companies in the short term and possibly even to the long-term.

What are your thoughts on the story? Do you think Alibaba will eventually split up its units? Do you see this as a more permanent move?

Comment below, message me on any of my social media platforms, or send me an email: hello@parahinsights.com. I look forward to hearing from you!

That’s it for this week!

Until next time, remember to stay curious!

DISCLAIMER:

This blog is for informational purposes only. Parah Insights is not associated with the news sources in this blog, and sharing does not equal endorsement. Parah Insights does not provide financial, tax, legal or accounting advice – always consult your financial and legal advisors to determine what’s right for you and your business.

Further resources:

‘Alibaba cancelling its cloud unit spin-off may actually be better for shareholders: Analyst’ - YouTube video by CNBC

‘Alibaba Nixes Cloud Spinoff’ - YouTube video by Bloomberg Intelligence

‘Alibaba’s Stock Earnings: Our Thoughts’ - YouTube video by Everything Money

‘Why Is Alibaba Stock own After Reporting Earnings?’ - YouTube video by Couch Investor