Alibaba’s shocking reversal: Abandons $11 billion cloud spinoff amid escalating US-China tech battle

Alibaba’s stunning about-face on plans to spin off its $11 billion cloud business reveals the escalating US-China tech dominance battle. Amid increasing US restrictions on chip sales to China, Alibaba’s Chairman and CEO cited the need for a strategic “reset.” The reversal, along with the suspension of a Freshippo listing, triggered a 10% stock plunge, wiping out $22 billion in market value. Facing a post-pandemic comeback, industry crackdown, and competition, Alibaba focuses on organic cloud growth and issues its first-ever $2.5 billion annual dividend. The move raises questions about the viability of the earlier corporate restructuring plan.

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Alibaba Plunges $20 Billion as Chip War Prompts Breakup Rethink

By Jane Zhang, Henry Ren and Sarah Zheng

An escalating fight between the US and China for technological dominance has triggered one of the most stunning reversals of corporate strategy yet: On Thursday, Alibaba Group Holding Ltd. walked back plans to spin off and list its $11 billion cloud business.

Chairman Joseph Tsai and Chief Executive Officer Eddie Wu, two of Alibaba-founder Jack Ma’s longest-standing lieutenants, said China’s e-commerce and internet computing leader needed a strategy “reset.” Wu explained in his first public remarks since taking the helm that the US’s ever-increasing restrictions on chip sales to China has forced the company to rethink its plan to break up the empire Ma spent decades amassing into six parts. Alibaba also said it’s suspending a listing for the popular grocery business Freshippo.

Wall Street’s response to Alibaba’s reversal was swift: Shares slid 10% in Hong Kong, wiping out more than $22 billion of market value in their biggest drop in over a year.

The decision comes at difficult time for Alibaba. The company is trying to stage a comeback from the Covid-19 pandemic. It’s also only just emerging from a tech industrywide crackdown in China. And it’s working to win back merchants and shoppers who’ve flocked to PDD Holdings Inc. and newer entrants such as ByteDance Ltd.’s Douyin, as well as corporate customers that have turned to state-backed cloud services.

The Biden administration’s curbs on exports of certain chips — specifically designed for artificial intelligence use and critical for the data centers and high-end computing operations that drive 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 make investments — because in the AI-driven world, to develop a full-blown business based on a very networked and highly scaled infrastructure, it requires investment.”

The Chinese e-commerce leader is joining social-media giant Tencent Holdings Ltd. in publicly raising the challenges that the US’s trade restrictions have brought about. The Biden administration’s efforts to prevent the Chinese government from obtaining cutting-edge chips for military applications have begun affecting the country’s private sector in unexpected ways.

Analysts said other factors might’ve played into Alibaba’s reversal. Its cloud business has been slowing and losing market share for years — and has attracted government scrutiny over alleged security violations.

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

Even before Thursday’s announcement, Alibaba’s endeavor had faced headwinds. Its potential Hong Kong IPO of Freshippo was on the backburner amid weak sentiment for consumer stocks. Former Chief Executive Officer Daniel Zhang quit just months after agreeing to lead its cloud division. Logistics arm Cainiao filed for a Hong Kong IPO in late September, but the valuation it will command remains unclear.

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

“I was quite taken aback,” said Kevin Net, head of Asian equities at Tocqueville Finance. “My initial thoughts are that the whole corporate restructuring announced in May could be at risk.”

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

The cloud spinoff was one part of the most radical corporate overhaul in Alibaba history — one that was designed to spread more autonomy throughout its various businesses, rejuvenate them and create more market value. Such a split, however, also threatened to reduce Alibaba’s heft and erode its position as one of the leaders of the Chinese digital economy.

Many observers saw the split-up as potentially encouraged by a government that, at the time, was seeking to break up powerful, private-sector interests and curb the growing influence of tech firms.

Instead of a split-up, Alibaba executives said, the company will focus on growing the cloud unit organically and issuing its first-ever annual dividend totaling $2.5 billion, a bid to assuage shareholders who were hoping for a big payout from the unit’s debut.

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

Alibaba announced its decisions along with solid but unspectacular quarterly earnings. It posted an 8.5% rise in sales to 224.79 billion yuan ($31 billion), barely exceeding average projections, and swung to a profit of 27.7 billion yuan from a year-ago loss.

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

One of their biggest bets is AI. The company has released its own large language model, Tongyi Qianwen, and is also investing in high-flying startups like Zhipu AI and Baichuan. Tsai said last month the cloud unit now hosts half of China’s generative AI firms and serves about 80% of the country’s technology companies.

It’s unclear how the US sanctions will affect that effort. The cloud division is at the heart of Alibaba’s AI initiatives and requires the sort of powerful chips that Santa Clara, California-based Nvidia Corp. supplies — ones that are now mostly barred from Chinese firms.

Cloud business aside, Alibaba is grappling with a tepid consumer economy.

Alibaba and traditional rival JD.com Inc. are coming off a disappointing Singles’ Day campaign. China’s twin e-commerce leaders likely managed only single-digit percentage growth during their signature annual shopping festival, outpaced by smaller but more innovative social media rivals such as Douyin and Kuaishou Technology. And yet both Tencent, which has been investing heavily in video, and JD both reported better-than-projected results on Wednesday.

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