Alibaba's cloud business spin-off plan has been canceled due to the ongoing chip war

17 Nov, 2023

Alibaba's cloud business spin-off plan has been canceled due to the ongoing chip war

Alibaba has decided to abandon its earlier intentions to spin off its cloud computing arm, citing the recent tightening of US controls on chip exports to China as a source of "uncertainties" for the division's future prospects.

The announcement unfolded mere hours after pivotal talks between Chinese President Xi Jinping and US President Joe Biden seemed to stabilize the often tumultuous relationship between the world's top two economies. In a statement released on Thursday, Alibaba (BABA) expressed concerns that the new US restrictions could significantly and adversely impact the Cloud Intelligence Group's ability to operate, affecting profitability and raising doubts about the value of a separate listing for shareholders. Consequently, Alibaba's US-listed shares experienced a nearly 10% decline.

"We will focus on developing a sustainable growth model for Cloud Intelligence Group under the fluid circumstances," the company stated. "These new restrictions may also affect our businesses more generally by limiting our ability to upgrade our technological capabilities."

Alibaba, which had confirmed as recently as September its plans to list its cloud unit as a separate entity, is now compelled to reconsider this strategy due to the escalating chip war between the United States and China.

The ongoing feud, lasting for over a year, revolves around China's access to advanced semiconductors and the materials necessary for their production, which are integral to products ranging from smartphones and medical equipment to electric vehicles. Last month, the US government intensified a set of export controls first introduced a year ago, effectively reducing the range of semiconductors that American companies can sell to China.

During talks with President Biden, Xi described these restrictions as "technological containment," to which Biden responded that the United States would not provide technology to China that could be used against it by the Chinese military.

China, in response, has imposed its own restrictions, including the limitation of exports of gallium and germanium—essential elements in semiconductor manufacturing. Additionally, after the announcement of the latest US chip restrictions, Beijing unveiled plans to restrict exports of graphite, a mineral crucial for manufacturing batteries for electric vehicles.

In contrast, this week showcased more amicable relations between the two countries. President Biden characterized the talks as "some of the most constructive and productive discussions we've had," expressing agreement with President Xi to maintain open communication during periods of disagreement.

Xi also met with American business leaders in San Francisco, emphasizing China's willingness to be "a partner and a friend." He advocated against a zero-sum game between China and the United States, calling for increased people-to-people exchanges rather than erecting obstacles.

These developments transpire against a backdrop of declining foreign investment in China, coupled with a deepening property crisis and weak consumer spending.

Alibaba, founded by billionaire Jack Ma 25 years ago, is currently undergoing a historic overhaul originally intended to create six separate units, each with its own CEO and board. The group announced on Thursday a pause in plans to list its supermarket chain, Freshippo, citing the need to "evaluate market conditions." However, Alibaba confirmed its intentions to proceed with an IPO for its logistics arm, Cainiao, in Hong Kong, without specifying a date for the listing.

Alibaba reported a 9% increase in revenues for the June-to-September quarter compared to the previous year, totaling 224.8 billion renminbi ($31 billion). Net profit reached 26.7 billion renminbi ($3.7 billion), a reversal from previous net losses, attributed to the increased value of the group's equity investments.