The microchip war between the U.S. and China has resulted in a reversal of corporate strategy as Alibaba Group Holding Ltd. decided to halt the spin-off and public listing of its $11 billion cloud business. This announcement was made on Thursday, marking an unprecedented divergence in the firm’s planned direction.
Chairman Joseph Tsai and CEO Eddie Wu, both long-time associates of Alibaba’s founder Jack Ma, stated the leading e-commerce and internet computing behemoth needed a “reset” in strategy. Wu, in his inaugural public statement since assuming the top spot in the organization, noted that the increasing U.S. restrictions on chip sales to China necessitated a reevaluation of the company’s initial plan. This plan originally intended to split up the vast empire that Ma constructed during his tenure into six separate entities. Alibaba also communicated its decision to suspend the listing of its popular grocery chain, Freshippo.
This surprising move by Alibaba triggered a prompt reaction from Wall Street, resulting in a 10% dip in the company’s shares in Hong Kong. This nosedive erased over $22 billion of market value, representing the sharpest fall in more than a year.
The timing of this decision brings additional challenges for Alibaba. The e-commerce titan is attempting to rebound from the blows dealt by the COVID-19 pandemic and a rigorous industry-wide tech sanction in China. Concurrently, they are striving to regain the trust of customers and merchants who have migrated to rivals, including PDD Holdings Inc. and newer players like ByteDance Ltd.’s Douyin, along with corporate clients that have opted for state-supported cloud services.
As if these hurdles were not enough, the Biden administration’s restrictions on the export of certain chips are further complicating matters. These chips, explicitly designed for artificial intelligence applications, are vital for the data center operations and high-level computing functions that power Alibaba’s cloud services.
Now, instead of splitting up the business, Alibaba’s executives said that “the company will focus on growing the cloud unit organically and issuing its first-ever annual dividend totaling $2.5 billion, a bid to assuage shareholders who were hoping for a big payout from the unit’s debut,” according to Bloomberg.