Alibaba scraps plans to hive off cloud business amid growing chip uncertainties

Alibaba Group Holding has abandoned its plans to spin off and list its cloud computing unit because of "uncertainties" related to the recent US controls on exporting chips to China.

"We believe that these new restrictions may materially and adversely affect Cloud Intelligence Group's ability to offer products and services and to perform under existing contracts, thereby negatively affecting our results of operations and financial condition," the company said in a statement. "These new restrictions may also affect our businesses more generally by limiting our ability to upgrade our technological capabilities."

The unexpected decision to abandon plans to hive off the cloud computing business led to a $20 billion decline in Alibaba Group's market value on Friday, as its shares fell 10% in Hong Kong. 

Earlier this year, the Chinese ecommerce giant announced a plan to hive off the cloud computing business and list it by May 2024. This was part of the restructuring plan that would have divided its business into six groups.

Other than the Cloud Intelligence Group or the cloud computing unit, the other businesses included Taobao Tmall Commerce Group, Global Digital Commerce Group, Local Services Group, Cainiao Smart Logistics Group, and Digital Media and Entertainment Group.

Alibaba Cloud is one of the biggest public cloud service providers in the region and competes with the US-based Amazon Web Services, Google Cloud, and Microsoft Azure. The chip restrictions by the US are expected to help the US cloud providers gain an upper hand over their Chinese rivals.

"Alibaba must have a plan to source 'good enough' AI chips domestically to at least keep the AI and cloud computing business competitive for at least the next two to three generations of training AI models," said Neil Shah, partner, and co-founder at Counterpoint Research. 

The impact of leadership change

The move to change the strategy could be the result of the change in leadership at Alibaba. The Alibaba Group's Chief Executive, Daniel Zhang, was initially supposed to head the cloud business but he stepped down in September and the company is yet to announce new management for the cloud business.

"I believe the new leadership team has a different view than its predecessor on remaining a more integrated company similar to Amazon Web Service or Tencent. This could be a good move to still have full control over the cloud and AI business despite the ban on access to powerful chips from Nvidia to shape the cloud and AI infrastructure prudently vs an independent company, which would face unprecedented investor pressure," Shah said.   

The changing geopolitical equation

Last month, the US unveiled fresh restrictions that reduced the types of chips that US companies can sell to China. The US and China have been engaged in an intense rivalry over advanced chips and the materials and equipment required to produce semiconductors. In response to the US restrictions announced last year, China limited the export of Gallium and Germanium, which are required in chip production.

"The escalating technological rivalry among global superpowers is intensifying in the realms of AI and advanced semiconductor technology," said Kanishk Gaur, CEO of Athenian Tech. "US firms currently have an edge, primarily due to their access to sophisticated chip technology, which could pose a challenge for Chinese companies like Alibaba. This disparity in technological capabilities could significantly influence Alibaba's operations, particularly in mature markets such as Malaysia, Indonesia, Singapore, and Japan, where advanced chip technology is crucial."