Alibaba Group, the Chinese e-commerce giant, has decided to cancel its plans to spin off its cloud business. This move comes as a response to the uncertainties created by the US export ban on chips used in artificial intelligence (AI) applications. The ban, which was implemented last month, has had a significant impact on China’s major tech companies, with Tencent Holdings already stating that its cloud services have been affected by the restrictions.

The announcement made by Alibaba on Thursday coincided with the release of its second-quarter revenue, which met expectations. Earlier this year, the company had unveiled its plans to separate its cloud business as part of a major restructuring effort, the largest in its history. However, the initial public offering (IPO) of its Freshippo groceries business has been delayed. Instead, Alibaba stated that it will seek external funding for its international digital commerce group arm. Additionally, the company’s logistics division, Cainiao, has applied to list in Hong Kong.

Investors have not reacted positively to Alibaba’s decision to abandon the spin-off of its cloud business, as the company’s US-listed shares dropped by 8.5% at market open. Investors were hoping to receive separate shares of the cloud business, as they believed it had significant growth potential and could achieve a higher value in the public markets. Analysts estimated that the cloud division could be valued between $41-60 billion. However, concerns were raised about the regulatory scrutiny the listing might attract due to the large amount of data it manages.

The unexpected departure of Alibaba’s former CEO, Daniel Zhang, in September has raised further questions about the company’s plans for its cloud division. Zhang initially focused on cloud computing but suddenly quit, leaving Eddie Wu, one of Alibaba Group’s co-founders, to take over as CEO of both Alibaba and the cloud business. Joseph Tsai, another co-founder, was appointed as the group chairman.

During a post-earnings call, Tsai explained that Alibaba would not pursue a full spin-off of the Cloud Intelligence Group due to the uncertainties created by the US export restrictions on advanced computing chips. Instead, the company will focus on growing the cloud business and investing in its AI capabilities. The cloud unit will continue to operate independently. Furthermore, regulatory filings revealed that Jack Ma’s family trust plans to sell 10 million American Depository Shares of Alibaba Group Holdings for approximately $871 million.

Alibaba’s future strategy involves giving each of its businesses more independence in the market. A strategic review will be conducted to determine which businesses are considered “core” and “non-core.” Core businesses will receive long-term focus and resources, with an emphasis on research and development and improving the user experience. Non-core businesses will be made profitable as soon as possible or capitalized through other means. Alibaba will also invest in and foster innovative businesses for the future.

In terms of financial performance, Alibaba reported second-quarter revenue of 224.79 billion yuan ($31.01 billion), which aligned with analysts’ expectations. China’s economic recovery has been uneven, with the industrial and retail sectors performing better than expected, while the property sector’s crisis has dampened consumer confidence. Customer management revenue from Alibaba’s commerce retail grew by 3% year-on-year. Alibaba’s international digital commerce business, including platforms like Lazada and AliExpress, saw a 53% increase in revenues, with retail revenue up 73% year-on-year. Strong international growth has helped Alibaba offset a weaker domestic market.

Alibaba’s decision to abandon the spin-off of its cloud business highlights the challenges faced by Chinese tech companies due to strict US export restrictions. Nonetheless, the company remains committed to growing its cloud business and investing in AI capabilities. Through its restructuring efforts, Alibaba aims to prioritize and generate value from its core businesses while navigating China’s uneven economic recovery. Going forward, Alibaba will continue to adapt and innovate in an ever-changing market.

Useful links:
Bloomberg: Alibaba Opts Against US IPO of Cloud Unit Amid Chip Uncertainty
Reuters: Alibaba scraps $30 billion spinoff after China trading plan torpedoed