For years, Alibaba Group Holding Ltd. had a legitimate shot at becoming the Amazon.com Inc. of China, an e-commerce juggernaut that would use its customer relationships and technological prowess to dominate wide swaths of the internet landscape. Its market valuation soared to more than $850 billion in 2020 as it expanded into new businesses and closed the gap with its U.S. rival.
Beijing’s crackdown on the private sector has laid waste to that strategy. Alibaba’s core e-commerce operation is under siege from regulators, and its finance arm has been forced to pull back from some of its most lucrative initiatives. But nothing may illustrate its changing fortunes more than the recent troubles of its cloud computing operation, Aliyun, which is often referred to as AliCloud. (The English translation of yun is cloud.)
Cloud computing is a vital part of Amazon’s formula, with its Amazon Web Services throwing off so much cash it can subsidize the e-commerce business and fund new initiatives that may not pay off for years. In fourth quarter 2021, AWS accounted for more than 100% of the company’s operating profit. Alibaba envisioned its cloud business serving much the same function, identifying it as one of the company’s “strategic pillars.” Chief Executive Officer Daniel Zhang once said the business could eventually become the “main business of Alibaba.” He told analysts during an earnings call in February that China’s cloud market would grow into a “trillion RMB opportunity” by 2025.
But Beijing has derailed Alibaba’s ambitious plans, suggesting China’s tech giant may never achieve Amazon-level success. In recent years, the Communist Party has increasingly focused on the use and security of data, and declared data to be a critical factor of production, making its defense a priority for the government. That designation, which also applies to land and fuel, requires companies and government agencies to safeguard their data as a matter of national security. A broad swath of Chinese institutions, including China Construction Bank and local municipalities, have responded by moving closer to state-backed cloud platforms instead of those by private firms like Alibaba, according to people familiar with the matter.
Aliyun has been under particular pressure because of its parent’s strained relationship with the Chinese government, which started to sour in 2020 when co-founder Jack Ma criticized regulators in a speech in Shanghai. China’s government quickly scrapped the planned initial public offering of Alibaba’s finance affiliate, and then slapped its e-commerce business with a $2.8 billion penalty for antitrust violations. The company has since clashed with regulators over cybersecurity, stirring fresh worries that Alibaba’s troubles aren’t over and that its cloud business could become a target. “AliCloud has an Alibaba problem,” says Shen Meng, director of Beijing-based boutique investment bank Chanson & Co.
Alibaba even considered spinning off the cloud business last year with a potential valuation of more than $100 billion, say the people, asking not to be named because the discussions are private. The company eventually shelved the plan because of business and political obstacles, they say.
Alibaba declined to comment. China Construction Bank didn’t respond to a request for comment.
During the December quarter, Aliyun sales missed analyst forecasts by a wide margin, growing at the slowest pace in more than five years. Up-and-coming cloud providers such as Huawei Technologies Co. and China Telecom Corp., which have more cordial relationships with the government, have increasingly lured away users. In cloud infrastructure services, one key segment of the market, Aliyun’s market share decreased to 37% last year from 46% in 2019, although it continues to lead the market, according to global consultancy Canalys. Huawei doubled its market share over the same period.
“Alicloud’s business growth definitely won’t be as fast as during previous ‘golden years’,” say Livia Li, senior analyst at Frost & Sullivan. “The rise of state-owned cloud complies with China’s status quo and we would expect more state-owned players to enter the arena.”
Aliyun has also struggled outside its home market. Last year, it lost ByteDance Ltd.’s viral video service TikTok as a customer in a painful blow. An ongoing cybersecurity review led by the Biden administration has raised questions about Aliyun’s prospects in the U.S., the world’s largest cloud market.
Alibaba’s market value has tumbled 70% from a high in 2020, even after boosting a buyback program twice in a year to prop up its stock price. It just booked its slowest revenue growth on record.
If Aliyun could turn things around at home, it would have a lot to gain. China’s cloud computing market is the world’s second-largest after the U.S., and it’s growing fast. Cloud spending in the country climbed to $27.4 billion in 2021, up from $19 billion the previous year, according to Canalys, which predicts that China’s cloud market will reach $85 billion by 2026.
Aliyun has ramped up efforts to diversify its sources of income. It introduced a Dropbox-like service last year, tapping into the emerging demand from individual users. DingTalk—Alibaba’s enterprise communication application, with 500 million users has also transformed itself into a cloud platform upon which businesses can build their own software. While anyone can take advantage of DingTalk’s free toolkits, analysts say companies that are sold on its convenience will likely want to buy related services from Alibaba.
Still, much of the growth will come from the Chinese government’s push for domestic development of cloud services. President Xi Jinping has endorsed a $1.4 trillion “new infrastructure” strategy under which banks, factories, and public institutions move operations to the cloud. Last year, the so-called “digital government” program was written into China’s five-year development plan for the first time.
Still, state-backed cloud providers are likely to benefit most. The city of Tianjin last year asked municipally controlled companies to migrate their data from private cloud operators such as Alibaba to a state-backed cloud system, according to a leaked government document viewed by Bloomberg News. (Its authenticity was verified by two people with knowledge of the matter.)
The move had to be completed within two months of the previous cloud contract’s expiration, the document stated. Tianjin later modified the policy because of complaints about discrimination, but the shift in priorities remained. The municipal government of Nantong, a city near Shanghai, is also considering moving additional data into its own computing centers instead of relying on public cloud platforms for hosting, two people familiar with the matter say. They asked to not be identified because of sensitivities around issues of data security.
Tianjin and Nantong didn’t respond to requests for comment.
While this trend could be bad for all of the commercial cloud service providers, many worry that Aliyun’s political standing means it’ll be hit harder than competitors like Huawei.
In December, China’s powerful Ministry of Industry and Information Technology, or MIIT, upbraided Aliyun for not reporting a software flaw in a timely fashion. As a result, the Chinese tech overseer suspended cooperation with the cloud service provider on a cybersecurity information-sharing platform for six months, and required “rectification measures” before deciding whether to resume their partnership.
Alibaba admitted that it was slow to report the flaw to the Chinese government, but said its researcher abided by global industry practices. Cybersecurity researchers typically reveal software vulnerabilities to no one other than the software’s developer until the problem is fixed. It remains unclear exactly when Aliyun reported the bug, and MIIT hasn’t publicly spelled out its expectations.
Nevertheless, people in and outside the company say the incident could fuel distrust between Alibaba and Chinese regulators, putting at risk its ability to win contracts from government-linked entities.
“Since MIIT publicly criticized AliCloud of having problems [in cybersecurity reporting], it makes sense for many risk-averse state-owned enterprises and government agencies to avoid using its services,” says Shen of Chanson. “When it comes to choosing a cloud partner, political considerations often outweigh technological considerations.”