Inside the Crisis at Alibaba: How China’s Best-Known Tech Group Lost its Way.

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Date: Thursday January 4, 2024 04:22:03 pm
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    Inside the Crisis at Alibaba: How China’s Best-Known Tech Group Lost its Way.
    Nothing highlights Alibaba’s current problems more than the extraordinary wake-up call from Jack Ma, who founded China’s ecommerce pioneer back in 1999.
    By AI.
    Alibaba, share price to watch after Morgan Stanley downgrade | IG International

    “I firmly believe that Alibaba will change and reform,” said the country’s most famous entrepreneur in an internal blog post late last year. “Back to our mission and vision, Ali people, come on!”

    The intended rallying cry only served to show how China’s best-known tech group has lost its direction. Once Asia’s most valuable company, it was overtaken in market capitalisation for the first time in November by its Chinese rival PDD Holdings. Its shares are 75 per cent off their peak of three years ago, after a series of regulatory scraps, U-turns over strategy and amid declining staff morale.

    PDD overtaking Alibaba “was a real wake-up call for Alibaba”, said one person close to management. “People were really upset, but now Alibaba is thinking how do we deal with this,” they added. Part of the response was for new chief executive Eddie Yongming Wu to take direct control of Alibaba’s core ecommerce business late last month, replacing long-serving executive Trudy Dai, as he tries to strengthen his grip on the sprawling conglomerate.

    Company insiders and analysts say Alibaba has so far failed in combating aggressive new competitors effectively, keeping abreast of AI developments and capitalising on its strengths in domestic ecommerce to succeed in western markets.

    The Financial Times spoke to nine Alibaba employees, who painted a picture of a flailing enterprise trying to chart a new course after canning crucial planks of an ambitious restructuring plan that was supposed to revive its fortunes.

    Several Alibaba insiders, who declined to be named, spoke of the confusion that resulted. “Many people do not know what has and has not split,” said one Alibaba employee working across different businesses. “That is until they’ve been fired after their business unit has been spun off,” they added.

    In March, the tech group had announced its intention to split its empire into six units to unlock shareholder value and stimulate growth across the businesses. The plan was initially embraced by investors, with its share price climbing 20 per cent in the days following the announcement. But fading investor optimism about China’s economy after the end of pandemic-era lockdowns damped enthusiasm.

    In November Alibaba formally announced it was ditching plans to spin off its cloud business — which it has said is crucial to future growth — and paused the listing of its supermarket unit. It is not clear what is happening to the other four units. Lossmaking wings of the company have been lobbying to stay attached, according to company insiders. Multiple employees said plans to separate other businesses had either been axed or were under review.

    In one example of resistance to change, Alibaba created an IT team to handle infrastructure across the group after a review found that teams were replicating the same functions in the various business units.

    But this was then axed because of internal power struggles, according to two people familiar with the matter. “It was a bad and chaotic situation. Many of those who need to be fired have internal backers and cannot be easily dismissed,” said the executive.

    In another example of the disarray within, an employee at DingTalk, Alibaba’s enterprise communication platform, said their team had been logged out of the group’s intranet without warning, leaving them without access to Alibaba’s internal communications.

    Power struggles between the old guard led by former chief executive Daniel Zhang and Wu, who took over from him in September, have exacerbated the sense of chaos, insiders said.

    In March, the company had announced that Zhang would head the cloud business when it was spun off, but on the day in September he was scheduled to take control, he unexpectedly stepped down. The Financial Times reported that incoming chief Wu had pushed him out. Alibaba responded in December that this was not the case and Zhang had expressed his wish to transition away from his role.

    An Alibaba Cloud person said Zhang’s exit meant many people linked to him would likely be laid off. Last month’s departure of the cloud unit’s chief commercial officer Cai Yinghua was part of Wu’s efforts to reboot the business unit, according to Alibaba insiders.

    In the run-up to the planned split, tensions had been emerging over how much ecommerce platforms Taobao and Tmall would pay the cloud business for its services if it pursued the break-up and operated as a separate financial entity, according to company insiders. External customer sales for the cloud business declined in the third quarter, underscoring the unit’s reliance on revenues from other parts of the group.

    “The cloud spin-off was poorly handled. Alibaba should have thought about issues like data security and transfer pricing between Taobao and Cloud before they announced it,” said Robin Zhu, an analyst at Bernstein.

    During his first investor call as chief in November, Wu positioned the cloud business as the growth driver, during what he called the “advent of the AI era”. He pledged to invest in AI technology, but analysts are sceptical that Wu can revive Alibaba Cloud’s slowing growth.

    “Alibaba’s cloud growth faces multiple headwinds, including lacklustre private sector enterprise demand, SOEs [state-owned enterprises] increasingly seeking to partner with public-sector cloud service providers like Huawei and . . . ByteDance insourcing its domestic cloud workloads,” said Zhu.

    Furthermore, the promise to invest in building what Wu calls “revolutionary products for the future” is at odds with its attempt to bolster its share price through dividends and share buybacks. In November, Alibaba announced its first annual dividend, which would cost $2.5bn, and said it had $15bn remaining for its $25bn share buyback scheme.

    “Alibaba is sending mixed signals with its financial engineering,” said Kevin Xu, a cloud infrastructure investor at Interconnected Capital.

    “It is the worst of both worlds. Even large profitable tech companies like Alphabet and Amazon don’t issue dividends because they see a road map for more growth and innovation ahead,” he said.

    The company responded to the FT: “Alibaba has never been in a better financial position to invest for business growth and strategic opportunities. That’s our top priority.”

    Meanwhile, Alibaba is still moving towards an IPO of its logistics arm, Cainiao. A person close to the management team said it was still pushing for the listing because it was “pessimistic about future demand in ecommerce”, so it was best to “list as soon as possible”.

    Alibaba told the FT it remained confident in the business. “We have disclosed the IPO plan of Cainiao with a clear timetable, and we are proceeding on this front,” it said.

    The future of fintech affiliate Ant, in which Alibaba retains a roughly 33 per cent stake, also remains unclear, three years after the authorities halted its $34bn IPO as part of a crackdown on Big Tech. Ant is still awaiting regulatory approval to obtain a financial holding licence, a crucial step to pursue a more modest IPO in Hong Kong or China, according to people close to management.

    Experts say the restructuring chaos has also distracted Alibaba from tackling its “core problem” in its most profitable and cash-generating business of domestic ecommerce.

    It is “losing share to [ByteDance-owned] Douyin and also PDD in its main business”, said Duncan Clark, founder and chair of the Beijing-based consultancy BDA. “Alibaba has lost its halo as the dominant player, with the keenest insights on the market, merchants and consumers,” he said.

    PDD, which owns Pinduoduo and value-priced online retailer Temu, and ByteDance’s Douyin, the Chinese version of TikTok, have seen explosive growth this year, powered by their muscling into Alibaba’s territory. PDD nearly doubled revenue to $9.4bn in the third quarter compared with the same period in 2022. The FT reported that ByteDance, which is not listed, had $29bn in sales in the second quarter, up about 40 per cent from the previous year.

    Alibaba, which has a portfolio of overseas ecommerce companies, has watched as another Chinese company, Shein, and PDD’s Temu have grown rapidly in the US and Europe with their wildly popular ecommerce platforms, shipping products directly from Chinese factories to consumers in the west at a knockdown price.

    “There is no good reason why Alibaba, with its network of merchants in China, could not have built the same business,” said one China tech investor.

    Reviving Alibaba’s fortunes will require “something radical”, said Clark. “Alibaba needs to get back to basics. They have to regain their innovative spirit, focus on stopping the rot, and emphasise how this is an all-company effort,” he said.

    Breaking Wall With Painted Logo Of Alibaba. Crisis Conceptual Editorial 3D Rendering Stock Photo, Picture and Royalty Free Image. Image 120226856.

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