Alibaba's cloud growth highlights China's two-speed economy, tech ambitions

Don't want to miss the best from Business Standard?

By Juliana Liu

 

No other company embodies the promises and perils of China’s current growth model quite like Alibaba Group Holding Ltd. The technology giant’s most recent quarterly earnings are a textbook illustration of the contradictions of Beijing’s two-speed economy — both strong and shaky at the same time. 

First the good news: Revenue at its flagship cloud division grew at a better-than-expected 34 per cent compared to the year before.  The unit’s contribution to total sales was only 16 per cent in the three months to September, but the proportion has been steadily expanding all year. Home of the popular Qwen AI model, downloaded more than 10 million times since its relaunch last week, brisk growth in this business is a sign that  Alibaba’s data-center bet may be starting to pay off. 

  Under the spiritual guidance of Jack Ma, now comfortably ensconced at the company he co-founded following a political rehabilitation, Alibaba has pledged to invest 380 billion yuan ($53.8 billion) over three years on AI infrastructure and technology to establish leadership in the sector. That’s a lot more aggressive than rival Tencent Holdings Ltd., with a relatively paltry $1.8 billion in capital investment committed in its latest quarter. 

 

Investors like this strategy. It is firmly in line with President Xi Jinping’s goal of going all in on self-reliance in a range of industries, especially cutting-edge technology. It’s not just a matter of economic development but also national security. Beijing’s rivalry with Washington hasn’t ended with a trade truce agreed last month. Beijing’s techno-nationalist goals, and Washington’s response, will be one of the main causes of this tense relationship. 

 

There are valid questions about the risks associated with Alibaba’s AI ambition. A measure of operating profit called adjusted EBITA in the cloud division increased by just $132 million annually in the latest quarter, Bloomberg Intelligence pointed out. That’s a poor return on investment when you consider that quarterly capital expenditure has nearly doubled over the past year to $4.4 billion.

 

The concerns are well founded in the context of larger general questions about the lack of killer AI apps and solid ways to achieve profitability. Private companies and their shareholders seem to be subsidizing the national AI rollout. However, given Alibaba’s well-known past regulatory challenges, it’s a good idea to remain aligned with government priorities — and even better if it’s also what investors are rewarding.  

 

But like the Chinese economy itself, Alibaba isn’t firing on all cylinders. Its e-commerce unit, which contributes half of revenue, has been weighed down by involution, a phenomenon of intense competition marked by margin-killing price wars. Net income halved to $2.9 billion as a result. 

 

In February, online retailer JD.com Inc. made a surprise entry into food delivery, an area dominated by market-leader Meituan and Alibaba. The incumbents resorted to aggressive ways to defend their positions. Alibaba announced $7 billion worth of subsidies and accelerated the launch of its quick-commerce business — aiming to deliver daily essentials in less than an hour.

 

The competition has resulted in losses in that segment of the larger delivery business that one analyst has called “horrifying.” On this week’s investor call, Jiang Fan, chief executive of the e-commerce group, said the situation had improved. The per-order loss halved in November compared to the summer months, although he did not quantify the actual loss.

 

Felix Wang, a partner at US-based Hedgeye Risk Management, told me the quick delivery business was estimated to have bled 36 billion yuan, weighing down the larger online shopping unit. Because of its heavy investment in both AI and e-commerce, the firm posted two straight quarters of negative cash flow. That’s the first time this has happened in more than 10 years.  

 

The immediate strain on cash is concerning, but Alibaba is hardly alone in dealing with the consequences of involution. JD’s net profit in the most recent quarter dropped by a comparable 55 per cent to about $740 million. Meituan is set to report its first quarterly loss in more than three years this week. I’ve written before about how the trio should just shake hands and agree to end price-based competition. Given the Darwinian dynamics in this and other industries including electrical vehicles, that’s not likely to happen. 

 

Alibaba’s latest earnings are a perfect window on what’s happening in the country. China’s economy isn’t quite the juggernaut it appears.  (Disclaimer: This is a Bloomberg Opinion piece, and these are the personal opinions of the writer. They do not reflect the views of www.business-standard.com or the Business Standard newspaper)