Shares of Chinese e-commerce giant Alibaba plunged almost 10% on Friday after the company stunned investors by announcing the cancellation of the planned spin-off of its cloud computing unit.
Alibaba Blames US Chip Export Controls
In an earnings report released Thursday, Alibaba said it will no longer proceed with spinning off its cloud business into a separate publicly traded entity. The company cited recent expanded US restrictions on exports of advanced computing chips as the reason for scrapping the spin-off plan.
Alibaba stated that the “uncertainties” created by the new US semiconductor export controls could “adversely affect” the cloud unit’s ability to offer products and services. Instead of a full spin-off, Alibaba will now focus on developing a “sustainable growth model” for the cloud business amid the “changing circumstances.”
The decision shocked investors, resulting in Alibaba’s Hong Kong-listed shares plunging 9.96% on Friday. The stock’s value declined by over $19 billion in a single day. Alibaba’s US-traded shares also fell 9.14% on Thursday following the announcement.
Part of Major Restructuring Initiative
The now-canceled cloud unit spin-off was a key component of a major restructuring plan Alibaba unveiled earlier this year. The initiative aimed to divide the e-commerce conglomerate into six separate business units that could potentially pursue individual stock listings.
Other divisions still moving forward with public listings include the logistics subsidiary Cainiao and the international e-commerce unit housing Alibaba’s AliExpress platform. However, the supermarket chain Freshippo has also paused IPO plans for now to assess market conditions.
US Aims to Limit China’s Tech Capabilities
Analysts say Alibaba’s decision exemplifies how US export restrictions are hindering Chinese tech firms’ expansion plans. In October, the Biden administration issued new sweeping controls to severely limit China’s access to advanced computing chips, supercomputers, and semiconductor manufacturing equipment.
The White House stated the measures were necessary to prevent China from obtaining technology that could be used “to undermine US national security interests.” Beijing has harshly criticized the moves, accusing the US of overusing national security as justification for unfairly suppressing Chinese economic advancement.
However, Washington insists a tough approach is needed to curb China’s military capabilities and safeguard US technological superiority. Limiting China’s progress in cutting-edge fields like artificial intelligence and supercomputing is seen as vital for preserving America’s competitive edge.
Uncertain Outlook for Alibaba Cloud
With the spin-off halted, the future looks far less certain for Alibaba Cloud. The unit is China’s largest cloud services provider but now faces major barriers to obtaining the powerful computing chips required to meet customers’ needs.
That could open opportunities for rivals such as Tencent Cloud to grab market share in the booming Chinese cloud industry. Alibaba Cloud’s revenue growth already slowed to just 4% year-over-year in the latest quarter.
To navigate the challenging conditions, Alibaba will need to focus on bolstering its domestic data centers and localizing more of its hardware and software supply chains. However, becoming less reliant on US semiconductors could prove difficult to achieve quickly.
Intensifying US-China Tech Tensions
The latest developments punctuate the rapidly escalating technology tensions between the world’s two largest economies. Chinese firms like Alibaba are caught in the crosshairs as the US and China spar over tech leadership.
Just this week, China’s Commerce Minister Wang Wentao expressed “concerns” to US officials about American semiconductor export curbs and investment restrictions targeting Chinese companies. However, Washington has continued touting the need for stern measures to curb China’s tech rise.
With bipartisan support in Congress, the Biden administration is expected to maintain pressure on Beijing. That indicates Chinese enterprises will likely face an extended period of uniquely harsh US policy headwinds.
For Alibaba and its peers, adapting to the unfavorable climate will require strategic flexibility and steady government engagement. But with semiconductors taking center stage in the US-China struggle, the tech crackdown seems destined to intensify further.
Outlook Remains Unpredictable
The sudden reversal of spinning off Alibaba Cloud underscores the unpredictable environment Chinese companies are operating today. Geopolitical tensions and national security considerations are impacting business plans and investment prospects.
It’s clear the US campaign to hamper China’s tech progress will continue shaping policies, regulations, and corporate strategies. While Alibaba tries charting a new course for its cloud arm, prolonged uncertainties lie ahead.
Ongoing US-China friction means companies will have to carefully weigh their moves and expect new challenges around each corner. For Chinese firms in the crosshairs, simply surviving and adapting may prove difficult enough in the years to come.
Alibaba’s decision to abandon the cloud unit IPO marks a new phase in US-China technology competition. Limiting Beijing’s access to semiconductors is becoming Washington’s main mechanism for slowing China’s development. For Chinese companies, arms-race politics now looks set to disrupt even the most ambitious plans.