Alibaba exits Cloud Business after Beijing undercuts its potential

(Bloomberg) — Alibaba Group Holding Ltd.’s surprise move to completely spin off a potentially transformative $12 billion cloud business is fueling speculation about whether the Chinese e-commerce leader bowed to market realities or political realities.

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CEO Daniel Zhang dropped a bombshell Thursday when he unveiled the outlines of Alibaba’s historic six-way shakeup for the first time. Included among the IPO and financing of a slew of businesses was a plan to completely relinquish control of the business known as Alibaba Cloud, a once-thriving operation that had the potential to supercharge the company as Amazon Web Services grew to denote Inc .

At the heart of the issue is why Alibaba chose to split a business that some analysts value at more than $30 billion, a major beneficiary of a post-ChatGPT boom that relies on cloud resources to train next-generation AI models. In doing so, it sets apart an entity that comes with historical baggage and its own share of business uncertainty. Alibaba plunged as much as 5.9% in Hong Kong on Friday, after also reporting disappointing Chinese trade figures.

China̵[ads1]7;s most valuable e-commerce company invested tens of billions over more than a decade in operating data processing for companies over the internet. For years, it was among Alibaba’s proudest and most talked-about achievements, a business that outperformed rival offerings from Tencent Holdings Ltd. and Baidu Inc., grew more global in flavor than any other division, leading key internal initiatives.

But government scrutiny of cloud services run by private firms intensified around 2020, when Beijing became suspicious of privately owned repositories of sensitive and valuable data, triggering a now-infamous sweeping crackdown on the internet sphere. AliCloud itself drew regulatory ire in 2021 for discovering and then sharing a major software flaw before informing authorities, and was subsequently investigated in 2022 for its role in China’s largest known cybersecurity data leak. The cloud division in recent years began giving market share to rivals, including Huawei Technologies Co. and the state-owned China Mobile Ltd.

“It is positive for shareholders as it represents a significant return on capital, but once the cloud business is fully deployed will no longer add to Alibaba Holdco’s valuation,” said Vey Sern Ling, CEO of Union Bancaire Privee. “The company says its cloud business is relatively independent and unrelated to its core e-commerce business. But investors may wonder if the government told them to break up.”

Read more: Alibaba breakup begins with $12 billion Cloud Arm spinoff

Key points in the breakdown plan

  • Alibaba plans to spin off its cloud services division as an independent entity by distributing shares to shareholders over the next year

  • That means Alibaba may ultimately end up not owning any shares in China’s largest cloud services platform

  • It will aim to float the Cainiao logistics arm within 12 to 18 months

  • Most likely, the company aims to complete an IPO for the grocery chain Freshippo during the coming year

  • And it plans to secure external funding for its international trade division, which includes overseas operations such as Singapore-based Lazada

Like Amazon’s, Alibaba’s cloud service arose from the computing power needed to handle millions of simultaneous online shopping transactions. But unlike its American counterpart, it enjoyed home-court advantage in a huge Chinese market where online computing was (and still is) new to many businesses. Its push into the cloud, where software and services are delivered to customers via server farms the size of football fields, was once seen as helping cushion Alibaba against domestic shocks to its core business.

Zhang said Thursday that the cloud arm largely runs itself as an independent operation. But it is also inextricably intertwined with some of the company’s most central businesses.

Cloud runs its signature Singles’ Day gala, an annual event that showcases the company’s massive global reach in e-commerce. It helped power hundreds of thousands of transactions per second—a phenomenal endeavor Alibaba has unfailingly credited its cloud division with making possible. The unit turned a profit for the first time around the end of 2020, helping to prop up the bottom line just as the shocks of the Covid era hit shopping. And it houses the DAMO academy, which works on potentially ground-breaking, moonshot projects from chip design to quantum computing.

Read more: Scrutiny of record-breaking Alibaba could catch all of China tech

In fiscal 2022, it generated nearly $12 billion in revenue for the company — 8% of revenue. It was so important that in March, when Alibaba first revealed its six-way breakup, Zhang personally took the helm of what he called the Cloud Intelligence division—apparently signaling that it was destined for bigger things.

“This full spinoff plan involving AliCloud is both bold and confusing,” Nomura Holdings Inc analysts Jialong Shi and Thomas Shen wrote in a note. Their current valuation for the entity is around $31 billion. “AliCloud is BABA’s organic business and is still considered one of the long-term drivers for the group even though growth has temporarily slowed in recent quarters due to macro headwinds. That is why we find it puzzling that BABA has decided to spin off this the business instead of retaining at least a minority stake.”

The tide had turned against the business several years earlier. Beijing’s relentless and widespread crackdown on its former high-flying tech giants since the end of 2020 had pushed risk-averse institutions against state-owned suppliers.

Large-scale enterprises such as China Construction Bank and local municipalities in cities such as Nantong were already moving closer to state-backed cloud platforms, Bloomberg News has reported.

Ultimately, Alibaba may have joined for business reasons. Zhang said the cloud spinoff was intended to simplify its structure and respond to market needs. A stand-alone platform could grow to one day even surpass Alibaba in size if it attracts the right external funding, he told analysts on Thursday, without elaborating.

“The planned spin-out comes at a challenging time for the Cloud business, which appears to have lost its growth drive,” Bloomberg Intelligence analyst Robert Lea said.

Read more: Alibaba’s $32 billion day signals break for China Tech

–With the assistance of Vlad Savov.

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