The government prevents Alibaba from becoming the Amazon of China

For years, Alibaba Group Holding Ltd. It had a legitimate opportunity to become Amazon China, the e-commerce giant that would use customer relationships and technological prowess to dominate vast swaths of the internet landscape. Its market valuation rose to more than $850 billion in 2020 as it expanded into new business and bridged the gap with its North American competitor.

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Beijing’s crackdown on the private sector has dispelled this strategy. Alibaba’s flagship e-commerce operation is under siege by regulators, and its financial arm has been forced to pull back from some of its most profitable initiatives. But nothing can explain its change in fortunes better than the recent problems of cloud computing, Alyoun, which is often called AliCloud. (The English translation of yun is cloud.)

Cloud computing is such a vital part of the Amazon formula that Amazon Web Services (AWS) generates so much money that it is now able to support digital businesses and fund new initiatives that may not come to fruition for years. In the fourth quarter of 2021, AWS accounted for more than 100% of the company’s operating income. So Alibaba envisioned its cloud business serving the same function, and defined it as one of the company’s “strategic pillars.” CEO Daniel Chang once said the deal could become Alibaba’s “core business.” He even told analysts during an earnings call in February that China’s cloud market would turn into a “CNY trillion opportunity” by 2025.

But Beijing has scrapped Alibaba’s ambitious plans, suggesting the Chinese tech giant may not have the same success as Amazon. In recent years, the Communist Party has increasingly focused on the use and security of data, declaring data a critical factor in production, making its defense a priority for the government. This designation, which also applies to land and fuel, requires companies and government agencies to protect their data as a matter of national security. According to experts, a wide range of Chinese institutions, including local banks and municipalities, have responded by approaching state-backed cloud platforms rather than opting for platforms from private companies such as Alibaba.

Problems with Aliyun

Aliyun is under particular pressure over her father’s strained relationship with the Chinese government, which began to suffer in 2020 when co-founder Jack Ma criticized regulators in a speech in Shanghai. The Chinese government quickly canceled a planned initial public offering of Alibaba’s financial subsidiary, Alibaba, and then punished its e-commerce business with a $2.8 billion fine for antitrust violations. The company has since clashed with regulators over cybersecurity, raising new concerns that Alibaba’s problems are far from over and that its cloud business could become a target. “Ali Cloud has a problem with Alibaba,” said Shen Ming, director of Beijing-based investment bank Chanson & Co.

Alibaba even considered splitting the cloud business last year, with a potential valuation of more than $100 billion. But the company ended up putting the plan on hold due to commercial and political obstacles. The information is from anonymous sources, but Alibaba declined to comment.

In the fourth quarter of last year, Aliyun’s sales fell short of analyst expectations by a wide margin, growing at the slowest pace in more than five years. To make matters worse for the company, promising cloud service providers such as Huawei Technologies Co. And China Telecom Corp., which has more friendly relations with the government, has increasingly attracted users. In cloud infrastructure services, an important market segment, Aliyun’s market share fell from 46% in 2019 to 37% last year, although it continues to lead the market, according to global consultancy Canalys. It is worth noting that in the same period Huawei doubled its market share.

“Alicloud’s business growth will not be as fast as it has been during the previous ‘golden years’,” said Livia Lee, senior analyst at Frost & Sullivan. “The emergence of the state-owned cloud is in line with the status quo in China and we expect more state-owned players to enter the arena.”

Alioune was also struggling outside her home market. Last year, ByteDance Ltd.’s video service, TikTok, went viral. As a client in a painful blow. An ongoing cybersecurity review led by the Biden administration has raised questions about the prospects for Aliyun in the United States, the world’s largest cloud market.

Alibaba’s market capitalization is down 70% from its 2020 highs, even after pressing a twice-yearly buyback program to prop up its share price. It just recorded the slowest revenue growth ever.

If Alyoun could change things around the house, she would have a lot to gain. China’s cloud computing market is the second largest in the world after the United States and is growing rapidly. Cloud spending in the country rose to $27.4 billion in 2021, up from $19 billion a year earlier, according to Canalys, which expects the cloud market in China to reach $85 billion by 2026.

Also read: Alibaba: Speculation about the founder’s arrest leads to a drop in shares

The government interferes with other alternatives

Alioune has intensified its efforts to diversify its sources of income. It introduced a Dropbox-like service last year, capitalizing on emerging demand from individual users.

Ding Talk – Alibaba’s business communication app with 500 million users – has also turned into a cloud platform on which businesses can build their own software. While anyone can benefit from free DingTalk toolkits, analysts say companies that are sold for convenience are more likely to want to purchase Alibaba-related services.

However, much of the growth will come from pressure from the Chinese government to develop cloud services locally. President Xi Jinping has endorsed a $1.4 trillion “new infrastructure” strategy under which banks, factories, and public institutions will move operations to the cloud. Last year, the so-called “digital government” program was included in China’s five-year development plan for the first time.

However, state-backed cloud service providers are likely to benefit the most. The city of Tianjin last year asked city-controlled companies to migrate their data from private cloud operators like Alibaba to a state-backed cloud system, according to a leaked government document seen by Bloomberg News.

The document states that this step must be completed within two months of the expiration of the previous cloud contract. Tianjin later modified the policy due to complaints of discrimination, but the shift in priorities remained. The municipal government of Nantong, a city near Shanghai, is also considering moving additional data to its own computing centers rather than relying on public cloud platforms for hosting.

While this trend may be bad for all commercial cloud providers, many fear that Aliyun’s political stance means it will be affected more than competitors like Huawei.

An incident exacerbating Elyon’s situation with the government

In December, China’s Ministry of Industry and Information Technology, or MIIT, criticized Aliyun for failing to report a software glitch in a timely manner. As a result, the Chinese technical supervisor suspended cooperation with the cloud service provider on the cybersecurity information-sharing platform for six months and demanded “corrective measures” before deciding whether to resume their partnership.

Alibaba admitted it was slow to report the failure to the Chinese government, but said its researcher followed global industry practices. Cybersecurity researchers usually disclose software vulnerabilities to anyone other than the software developer until the problem is fixed. It is still unclear exactly when Aliyun reported the error, and the Ministry of Communications and Information Technology has not publicly released its forecast.

However, people inside and outside the company say the incident could fuel mistrust between Alibaba and Chinese regulators, jeopardizing its ability to win contracts from government-linked entities.

The Massachusetts Institute of Technology (MIIT) has also publicly criticized AliCloud for its problems [nos relatórios de segurança cibernética]“It makes sense that many risk-averse SOEs and government agencies would avoid using their services,” Chanson said. Coco Liu and Dong Cao added: “When it comes to choosing a cloud partner, political considerations often trump technology considerations.”

Source: Bloomberg

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