Alibaba and Tencent’s darkening clouds


Just over a yr in the past, with Alibaba dealing with an antitrust investigation and founder Jack Ma beneath political stress, finance chief Maggie Wu was fast to speak up the corporate’s quickly increasing and uncontroversial cloud enterprise to buyers.

“China is going to be the largest economy in 10 years’ time, enterprises and millions of businesses will migrate to cloud,” she mentioned at a Goldman Sachs convention final February, in accordance with notes supplied to the Financial Times.

But Wu’s options that Ali Cloud’s 50 per cent year-on-year development price was sustainable proved overly optimistic. Today, development has stagnated at its cloud computing division, with gross sales up simply 12 per cent within the first quarter of 2022 from a yr earlier. Top rival Tencent reported its cloud arm shrank in the identical interval.

The faltering cloud companies reveal how China’s tech giants are struggling to regain their footing as they battle a regulatory onslaught from Beijing and a slowing financial system precipitated partially by a draconian coronavirus regime that has paused business exercise in a lot of the nation.

The lacklustre development has defied expectations that cloud computing might rework the Chinese tech teams in the best way that Amazon Web Services revamped the US ecommerce big and Azure bolstered Microsoft.

Competition from politically favoured distributors akin to nationwide champion Huawei and state-backed telecoms firms together with Tianyi Cloud, run by China Telecom, and Tsinghua Unigroup is including to the stress.

Unlike its Silicon Valley friends, development at Alibaba’s cloud unit has slowed significantly over the previous 12 months whereas earnings stay nascent. Tencent, in the meantime, has shifted from maximising development to chasing profitability.

One piece of the slowdown puzzle is the construction of China’s cloud market. The nation’s public cloud represents about 60 per cent of the market, with Alibaba and Tencent the 2 main gamers.

In the general public cloud, a number of firms share a vendor’s platform. This a part of the market is so dominant within the US that it’s commonly known as “the cloud”, with Amazon, Microsoft and Google dominating the sector.

However, in China, 40 per cent of the market is dedicated to the non-public cloud, the place firms use devoted and infrequently extremely customised computing sources, in accordance with the China Academy of Information and Communications Technology, a government-run think-tank. Customers on this a part of the market embody giant state-owned enterprises and governments. The main distributors are Huawei, state-owned suppliers and in addition Alibaba.

In the general public cloud, web trade clients symbolize about half of all finish customers, which has left Alibaba and Tencent’s cloud arms weak to China’s tech crackdown. Alibaba cited waning utilization from edtech firms, which had their enterprise mannequin outlawed by Beijing, and on-line leisure corporations, which have confronted harder guidelines.

China’s cloud industry by end user and vendor

The regulatory shift has additionally spurred enterprise capitalists to ditch the patron web area. “Lots of small internet companies with less than 100 people have closed this year,” mentioned an individual near Alibaba’s cloud division. “They are the main cloud users, if they’re gone, we’re hurting.”

Yi Zhang, an knowledgeable at Canalys, mentioned rising competitors and slowing demand within the public cloud market meant harder instances for cloud distributors. “The overall market is getting saturated,” she mentioned.

In the 12 months to March 31, Ali Cloud’s development has slipped, with gross sales up simply 23 per cent on the yr to Rmb75bn ($11bn) and an working lack of Rmb5bn. In comparability, Amazon grew its cloud income 38 per cent in the identical interval, contributing $21bn of working revenue on $67bn in gross sales.

“Cloud is Alibaba’s second most important business after ecommerce, so the slowdown is concerning,” mentioned Shawn Yang, managing director at Blue Lotus Capital Advisors. “Alibaba has been saying it was because of losing a key customer, which was ByteDance’s TikTok, but clearly there are other reasons too,” he mentioned.

Aside from shedding TikTok, Alibaba’s chief govt Daniel Zhang final month additionally blamed the Covid-19 outbreak for delaying initiatives, the faltering financial system and declining demand from web firms, whereas asserting the expansion slowdown was solely momentary. “Digitisation of other industries is just starting and we see plenty of opportunities,” he mentioned.

But analysts mentioned the structural points and rising competitors would stay a minimum of near-term challenges for Alibaba and Tencent.

“Only small companies want to use the public cloud,” mentioned Evan Zeng at Gartner. Large enterprises “don’t trust the public cloud providers . . . they want control over security and the entire environment”.

Boris Van, China software program senior analyst at Bernstein, added that Beijing’s rollout of a slew of cyber safety and information privateness insurance policies final yr satisfied extra firms to go for non-public cloud computing. “They want better control over their data environments,” he mentioned.

Tencent, in the meantime, mentioned it was turning away from lossmaking companies akin to providing discounted cloud infrastructure and extremely customised initiatives, which precipitated its gross sales to fall within the first quarter.

James Mitchell, Tencent’s chief technique officer, mentioned many cloud distributors supplied “cost-heavy solutions” akin to performing as an IT consultancy. “While that is achievable in an environment of kind of infinite capital . . . it’s not sustainable,” he instructed buyers final month.

With rising competitors from telecoms and Huawei, Tencent and Alibaba are shifting away from low value-add non-public cloud work, mentioned Robin Zhu, China web analyst at Bernstein. “They are focusing on higher-margin cloud services — we expect slower growth in the next few quarters.”

Recent public procurement contracts reviewed by the FT present dozens of distributors competing for presidency contracts. Several native governments, akin to the town of Changsha, awarded renewals to Huawei in no-bid competitions, however the tenders confirmed fewer computerized offers for Alibaba or Tencent.

An official in Alibaba’s house province of Zhejiang mentioned the corporate had accomplished effectively in successful authorities contracts earlier than 2020, when founder Ma crossed a political pink line with a speech in Shanghai criticising regulation.

“That era has gone as Alibaba fell out of favour with President Xi [Jinping],” mentioned the official. “These days we are leaning towards state-backed cloud services like Tianyi as they are considered more politically reliable. That will be the trend in the coming years.”

Additional reporting by Nian Liu in Beijing