Alibaba has scrapped plans to spin off its cloud business into a separate company, blaming uncertainty caused by the US tech trade war with China.
The company said that the plan, first announced in March, may now “not achieve the intended effect of shareholder value enhancement” because of new uncertainties arising from US restrictions, which have stopped Chinese companies from buying chips and other components needed for cloud servers. The news, revealed as Alibaba published its quarterly earnings today, saw its market capitalisation sink by $21.1 billion as of 17 November, as calculated from its valuation on Hong Kong’s Hang Seng index.
Alibaba is keeping hold of its cloud division
Analysts had previously estimated that selling shares in a newly independent Alibaba cloud company could yield as much as $60bn for the Chinese tech giant but also cautioned that any such deal would face intense scrutiny from multiple international regulators.
Recent US restrictions on the sale of advanced semiconductors to China seem to have ended any hopes that any such sale can still take place, though CEO Eddie Wu Yongming confirmed that the cloud division would continue to operate with the end goal of building the “most open cloud in the AI era”.
The plan to spin off the cloud division, known as the Alibaba Cloud Intelligence Unit, was part of a larger restructuring that would have seen the company broken into six separate businesses. The split would have effectively ended the conglomerate’s gradual expansion into multiple high-tech sectors that saw it experiment with providing instant messaging services, fintech and generative AI services.
But a spanner was thrown into the works in September, when Daniel Zhang, the former Alibaba group CEO who was due to lead the independent cloud business, left the company, reportedly to set up a tech investment fund.
Technical constraints hitting Alibaba cloud ambitions?
The new and leaner version of Alibaba that will emerge from the changes is more likely to reflect the current priorities of the Chinese government for the economy, namely to boost domestic security, defend against future US sanctions and boost high-tech manufacturing, explains John Lee, the director of East-West Futures Consulting.
Concern about the latest round of US chip restrictions is not uniform across China’s tech sector. Earlier today, for example, Tencent revealed that it has amassed “one of the largest inventories of AI chips in China” in anticipation of the new curbs. Even so, says Lee, it’s hardly a vote of confidence in China’s own ability to manufacture enough advanced semiconductors in the short-to-medium term to replace imports from the US and Taiwan. For Lee, Alibaba’s decision is suggestive of “a hard technical constraint” on its cloud business, one that may not have been properly anticipated by the company earlier in the year.
“It’s not just that they can’t buy Nvidia chips, it’s that they can’t get their own designs made,” adds Lee. Even if Alibaba Cloud were to be prioritised as a customer for domestically manufactured AI chips – a privilege more likely to be afforded to advanced manufacturing companies – it is not guaranteed that the semiconductors being provided will necessarily meet its design or volume needs.
Alibaba’s earnings report was not all bad news, revealing that its second-quarter revenues of $31bn were in line with previous forecasts. The company also announced that it will pay its first annual dividends to shareholders, worth $2.5bn.