Months after announcing a radical restructuring, Chinese tech group Alibaba is reversing course and taking another gamble — betting artificial intelligence will power future growth despite its access to essential AI processors being threatened by Washington’s chip controls.
New chief executive Eddie Yongming Wu on Thursday abandoned a major company strategy shift set in March by his predecessor Daniel Zhang, saying the ecommerce-led group would not be breaking up its empire and splitting off its cloud business.
Wu told analysts on his first earnings call that, in the AI era, “IT investment will grow exponentially and demand for cloud computing will expand exponentially”.
He added: “The deep convergence of AI plus cloud computing will be an important impetus for our future development.”
But investors focused on the inherent risks of the about-face, dumping Alibaba shares in New York, where the company’s market value was cut by about $20bn by the end of the day on five times normal volumes and a 9 per cent fall in its share price.
“Alibaba was the symbol of China’s crackdown on internet companies. If it was hoping to be the symbol of China’s turnaround, then it’s not happening,” said Duncan Clark, founder of the Beijing-based BDA consulting firm.
Wu’s move to cancel the cloud spin-off, and a simultaneous delay of supermarket chain Freshippo’s public listing, reverses key prongs of the group’s restructuring into six separate business units, announced in March in an effort to combat a sinking share price.
Alibaba’s new leadership also signalled another period of investment to build up its AI cloud infrastructure. The strategy comes in the face of US chip controls, tightened in October, that the group warned could “materially and adversely affect” its ability “to offer products and services and to perform under existing contracts”.
Retaining the cloud business will allow Alibaba to hold on to its prized stockpile of Nvidia chips, which can no longer be brought into the country, letting Wu decide how to provision the crucial computing power needed for AI and its data centre services.
There is already evidence of it having to make hard choices about its limited resources. Two people close to Alibaba’s cloud unit said the company had stopped taking on most new customers for cloud services powered by Nvidia’s advanced processors. They added that the scarcity of Nvidia chips was creating tensions internally as various divisions vied for computing power.
For existing customers, “there are plans to increase GPU [graphics processing unit] rental prices by 30 to 50 per cent”, said one of the people.
Pressed by Wall Street analysts on Thursday on how Alibaba planned to build its cloud business around AI with a limited supply of high-end processors, Wu said it was an issue that affected the entire Chinese market and one where Alibaba was best positioned to solve it for customers, he claimed.
US export controls would leave Chinese groups relying on “multiple different chips” for AI computing power, Wu said.
“This will increase the importance of AI cloud computing,” he added. “Under such a situation, our clients have a much greater need for a cloud computing platform that provides a highly efficient and all-in-one solution, simplifying development and usage, and shielding them from the thorny issues surrounding AI chips.”
Charlie Chai, an analyst at 86Research, said having the cloud unit still attached to Alibaba’s cash-gushing ecommerce business would give the unit time to build out an AI cloud computing platform running on domestically produced chips.
“There will be no pressure from outside investors . . . though such a transition will take a considerable amount of time, and require significant investment and not yield much revenue in the near term.”
Alibaba’s warnings about the impact of US restrictions on its cloud computing business were similar to those of rival Tencent the previous day. President Martin Lau told an earnings call that China’s biggest company by market value had enough Nvidia chips to continue training its proprietary AI model for “at least a couple more generations”, but that it needed to “figure out ways to make usage of our AI chips more efficient”.
Wu’s move to bet on the high-growth potential of AI and cloud computing, in the face of rising obstacles, follows a tough stretch for the business unit. It has suffered tepid revenue growth and trouble signing up large state-owned customers, which favour private cloud installations that they have greater control over.
“Competition is fierce in cloud,” said the head of a Nasdaq-listed Chinese tech group that uses services from both Huawei and Alibaba. “Their sales teams are competing on price every day.”
Confused messaging around the unit and its place in the wider group have compounded investor fatigue with Alibaba. For years prior to the spin-off announcement, former chief Zhang trumpeted cloud as central to Alibaba’s future, but then struggled to deliver.
Zhang had been set to remain at the helm of the cloud unit, but in September was abruptly forced out when Wu took the reins as chief executive, according to two people close to the situation. “There was a power struggle,” said one person close to Zhang.
Robin Zhu, an analyst at Bernstein, said the disjointed messaging around Zhang’s departure had befuddled investors. “It adds to investors’ perception of Alibaba’s internal disorganisation.”
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