Alibaba cloud development shows China’s two-speed economy
Alibaba Group Holding Ltd. stands out as a prime example of both the promises and perils inherent in China’s current growth model. The technology giant’s latest quarterly earnings serve as a clear example of the contradictions inherent in Beijing’s two-speed economy — exhibiting both strength and fragility simultaneously. First, the positive development: Revenue at its flagship cloud division increased by an impressive 34 percent compared to the previous year, surpassing expectations. The unit’s contribution to total sales stood at a mere 16 per cent in the three months leading to September; however, this proportion has been consistently growing throughout the year. Home of the popular Qwen AI model, which has been downloaded over 10 million times since its relaunch last week, the rapid growth in this business indicates that Alibaba’s investment in data centers may be beginning to yield positive results. 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 significantly more assertive than competitor Tencent Holdings Ltd., which has committed a comparatively modest $1.8 billion in capital investment in its latest quarter. This strategy is favored by investors. This aligns closely with President Xi Jinping’s objective of fully committing to self-reliance across various industries, particularly in advanced technology. It is not solely an issue of economic development; it also pertains to national security. Beijing’s rivalry with Washington persists despite the trade truce reached last month. The techno-nationalist ambitions of Beijing, alongside the response from Washington, will serve as primary factors contributing to this strained relationship. Concerns arise regarding the potential risks linked to Alibaba’s aspirations in the field of AI. Intelligence highlighted that a measure of operating profit known as adjusted EBITA in the cloud division saw an annual increase of only $132 million in the latest quarter. That represents a disappointing return on investment, especially given that quarterly capital expenditure has nearly doubled over the past year to $4.4 billion. The concerns are justified, particularly when considering broader questions regarding the absence of groundbreaking AI applications and reliable methods for achieving profitability.
It appears that private companies and their shareholders are effectively subsidizing the national AI rollout. However, considering Alibaba’s notable history with regulatory challenges, it is prudent to stay in sync with government priorities — and even more advantageous if it aligns with investor rewards. However, similar to the Chinese economy, Alibaba is not operating at its full potential. The e-commerce unit, responsible for half of the revenue, has been burdened by involution, a phenomenon characterized by fierce competition and margin-eroding price wars. Net income was reduced by half to $2.9 billion as a result. In February, online retailer JD.com Inc. unexpectedly ventured into food delivery, a sector largely controlled by market leader Meituan and Alibaba. The incumbents employed forceful tactics to safeguard their positions. Alibaba has unveiled a substantial $7 billion in subsidies and is fast-tracking the launch of its quick-commerce business, with the goal of delivering daily essentials in under an hour. The competition has led to losses in that segment of the broader delivery business, which one analyst has described as “horrifying.”
During this week’s investor call, Jiang Fan, chief executive of the e-commerce group, stated that the situation had improved. The per-order loss decreased by fifty percent in November relative to the summer months, though he did not specify the exact loss amount. Felix Wang, a partner at US-based Hedgeye Risk Management, stated that the quick delivery business was estimated to have incurred losses of 36 billion yuan, impacting the overall performance of the larger online shopping unit. The firm reported two consecutive quarters of negative cash flow, attributed to its substantial investments in both AI and e-commerce. This marks the first occurrence of such an event in over a decade. The immediate strain on cash is concerning; however, Alibaba is far from being the only entity grappling with the repercussions of involution. JD’s net profit in the latest quarter fell by a significant 55 per cent to approximately $740 million. Meituan is poised to announce its first quarterly loss in over three years this week. I have previously discussed how the trio ought to simply shake hands and come to a mutual agreement to conclude price-based competition. Considering the Darwinian dynamics present in this and other industries, such as electrical vehicles, that outcome is unlikely to occur. Alibaba’s latest earnings provide a clear insight into the current situation in the country. China’s economy is not as formidable as it seems.
