Analysis: Alibaba overhaul leaves fate of prized cloud unit up in the air

China Mobile

31/03/2023 10:18

By Josh Horwitz
       SHANGHAI, March 31 (Reuters) - Alibaba's  9988.HK 
six-way breakup plan has raised questions about the long-term
shape of its profitable cloud unit, given that it will have to
tackle heavy regulatory scrutiny at a time when competition is
intensifying both in China and abroad.
    While a split into a standalone unit will give investors a
chance to make focused bets on a business estimated by analysts
to be worth between $41 billion and $60 billion, the step could
put Alibaba's cloud unit even more in the cross-hairs of Chinese
and overseas regulators, likely slowing its growth.
    Some analysts said external investment and separation from
Alibaba's core ecommerce business could help it grow overseas,
where it is far behind rivals such as Amazon Web Services. But
others see the Chinese state investing in the cloud unit or it
even going private, given its dominance in the domestic cloud
computing industry.
    Alibaba's planned Cloud Intelligence Group, which will house
the cloud business AliCloud as well as the tech giant's
artificial intelligence and semiconductor research, has a 36%
market share in China's domestic cloud computing sector.
    Its servers host reams of data from companies ranging from
tech peers to retailers, the handling and sharing of which has
in recent years drawn increasing scrutiny from Beijing. 
    "Alibaba’s business lines have different levels and types of
regulatory sensitivity," said Gavekal Dragonomics analyst Thomas
Gatley in a note this week. 
    "For cloud computing, data security is paramount."
    Alibaba and China's commerce ministry did not immediately
respond to queries sent on Friday. 

    CHANGING MARKET DYNAMICS   
    Receiving state investment and drawing closer to the Chinese
government could satisfy regulators in Beijing, who have rolled
out new laws regulating the handling of data in China and set up
a data bureau to underline their focus on the area. 
    It could also help AliCloud to compete more effectively in
China, where overall demand for cloud computing from internet
companies is slowing and growth is mainly coming from
governments and state-owned enterprises which have not migrated
to the cloud as quickly.
    While government entities "will not completely reject"
companies like Alibaba, Baidu  BIDU.O , and Tencent Holdings
 0700.HK  for their projects, "they will have a tendency to
choose companies with a government funding and backgrounds,"
said Zhang Yi, who tracks China's cloud computing sector at
research firm Canalys.
    In the first half of last year, China's top three telcos -
China Mobile  0941.HK , China Unicom  0762.HK , and China
Telecom  0728.HK  - collectively surpassed Alibaba's share in
the domestic cloud market for the first time, according to
brokerage Jefferies, underscoring Beijing's growing reliance on
state-backed carriers for data management.
    But growing closer to Beijing has a downside, said Michael
Tan, a Shanghai-based partner of law firm Taylor Wessing. 
    "It could backfire at the international level, as it might
then face even more attention from the U.S.," he said.
    In January, Reuters reported that the Biden administration
is reviewing Alibaba's cloud business to determine whether it
poses a risk to U.S. national security. 
    
    OTHER PROBLEMS
    The cloud unit has its own domestic problems to fix. 
    In 2021, China's Ministry of Industry and Information
Technology suspended an information-sharing partnership with
AliCloud on the grounds that Alibaba did not report a security
vulnerability related to the open-source logging framework
Apache Log4j2.
    And in December 2022, Alibaba Cloud experienced what it
called its "longest major-scale failure" for more than a decade
after its Hong Kong and Macau servers suffered a serious outage
that affected many services in the region including ones
belonging to crypto exchange OKX.
    Weeks after the outage, Alibaba group Chairman and CEO
Daniel Zhang took over as head of the cloud unit, a role he will
continue to hold concurrently even after the split-up.
    Another risk from the planned split of the cloud unit, which
had sales of around $11.5 billion last year, is that previously
captive in-house Alibaba clients start courting rivals, hurting
its revenue.
    But splitting the cloud unit away could also be a positive
for the other Alibaba businesses, some analysts said.     
    "When all data was put in one basket at Alibaba, there could
always be concern about misuse of data within the company to
maximise profit," said Tan at Taylor Wessing.
    "The restructuring will help avoid this."
    ($1 = 6.8902 Chinese yuan renminbi)

 (Reporting by Josh Horwitz; Editing by Brenda Goh and
Muralikumar Anantharaman)
 ((Josh.Horwitz@thomsonreuters.com; +86 21 20830007;))