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joined discussion · Aug 8, 2022 11:50

The Contraction and Expansion of Alibaba Cloud

Amid the major trend of industrial digitalization, Alibaba Cloud has refocused its efforts on the core technology R&D of the digital economy, while delegating more business operations to professional partners. Serving as the foundational layer in this industrial chain, Alibaba Cloud aims to collaborate with other partners to expand the market and share the benefits. $Alibaba (BABA.US)$$BABA-W (09988.HK)$ Alibaba released financial results that largely met market expectations. Affected by overall consumption trends, Alibaba’s total revenue and core e-commerce income both declined by 1% in the second quarter. However, cloud business revenue grew to RMB 23.985 billion before inter-segment transaction offsets, becoming the fastest-growing segment among the main divisions. It is evident that Alibaba Cloud is actively preparing for the next opportunity, with its strategy summarized as “one contraction and one expansion.” “Contraction” refers to simplifying complexity by refocusing on the core of the digital economy: technology R&D. “Expansion” refers to entrusting more business operations to its partners, allowing specialized partners to take on more responsibilities.As the foundational layer of this industrial chain, Alibaba Cloud will serve other partners to jointly expand the market and share the benefits. The measures of 'one tightening and one loosening' point to the same goal: focusing resources on core tasks such as strengthening the technological foundation, enhancing cutting-edge technologies, and exploring key incremental markets. Against the backdrop of the overall trend towards industrial digitization remaining unchanged, these efforts akin to 'sharpening the axe' will manifest their true utility during the subsequent 'woodcutting' phase....
Amid the major trend of industrial digitalization, Alibaba Cloud has refocused its efforts on the core technology R&D of the digital economy, while delegating more business operations to professional partners. Serving as the foundational layer in this industrial chain, Alibaba Cloud aims to collaborate with other partners to expand the market and share the benefits.
$Alibaba (BABA.US)$$BABA-W (09988.HK)$
Alibaba released financial results that largely met market expectations. Affected by overall consumption trends, Alibaba’s total revenue and core e-commerce income both declined by 1% in the second quarter. However, cloud business revenue grew to RMB 23.985 billion before inter-segment transaction offsets, becoming the fastest-growing segment among the main divisions.
It is evident that Alibaba Cloud is actively preparing for the next opportunity, with its strategy summarized as “one contraction and one expansion.”
“Contraction” refers to simplifying complexity by refocusing on the core of the digital economy: technology R&D. “Expansion” refers to entrusting more business operations to its partners, allowing specialized partners to take on more responsibilities.As the foundational layer of this industrial chain, Alibaba Cloud will serve other partners to jointly expand the market and share the benefits.
The measures of 'one tightening and one loosening' point to the same goal: focusing resources on core tasks such as strengthening the technological foundation, enhancing cutting-edge technologies, and exploring key incremental markets. Against the backdrop of the overall trend towards industrial digitization remaining unchanged, these efforts akin to 'sharpening the axe' will manifest their true utility during the subsequent 'woodcutting' phase.
01 Back to Basics
Although the public cloud market has significant growth potential in the long term, it has been affected by various factors recently, resulting in short-term volatility within the industry.
According to IDC data, starting from 2018, the growth rate of the domestic public cloud market has shown a year-on-year decline. In 2021, the growth rate of the domestic public cloud market fell by nearly 0% compared to 2020, and in the second half of 2021, it further declined by 6% compared to the first half.
Currently, the top five players already account for 75% of the domestic market share, and the industry structure has initially stabilized.The theme of cloud computing development has shifted from high speed to high quality. A renewed focus on technology itself has become a common trend within the cloud computing industry.
Amid the major trend of industrial digitalization, Alibaba Cloud has refocused its efforts on the core technology R&D of the digital economy, while delegating more business operations to professional partners. Serving as the foundational layer in this industrial chain, Alibaba Cloud aims to collaborate with other partners to expand the market and share the benefits. $Alibaba (BABA.US)$$BABA-W (09988.HK)$ Alibaba released financial results that largely met market expectations. Affected by overall consumption trends, Alibaba’s total revenue and core e-commerce income both declined by 1% in the second quarter. However, cloud business revenue grew to RMB 23.985 billion before inter-segment transaction offsets, becoming the fastest-growing segment among the main divisions. It is evident that Alibaba Cloud is actively preparing for the next opportunity, with its strategy summarized as “one contraction and one expansion.” “Contraction” refers to simplifying complexity by refocusing on the core of the digital economy: technology R&D. “Expansion” refers to entrusting more business operations to its partners, allowing specialized partners to take on more responsibilities.As the foundational layer of this industrial chain, Alibaba Cloud will serve other partners to jointly expand the market and share the benefits. The measures of 'one tightening and one loosening' point to the same goal: focusing resources on core tasks such as strengthening the technological foundation, enhancing cutting-edge technologies, and exploring key incremental markets. Against the backdrop of the overall trend towards industrial digitization remaining unchanged, these efforts akin to 'sharpening the axe' will manifest their true utility during the subsequent 'woodcutting' phase....
Over the past year, leading companies in the cloud computing sector have increased their investment in research and development.Huawei has increased its R&D investment despite a significant decline in business; Tencent’s R&D investment in the first quarter rose by 36% year-on-year, with cumulative R&D investment over the past three years reaching approximately 130 billion yuan; Baidu also invested 22 billion yuan to raise its R&D ratio above 20%.
Alibaba's investment in technology has been even more aggressive. In the fiscal year 2022 alone, Alibaba's R&D investment exceeded 120 billion yuan, with more than 60% allocated to hardcore technology areas such as cloud computing, artificial intelligence, and chips.
At the Alibaba Cloud Summit in June this year, Wu Jianfeng, President of Alibaba Cloud Intelligence, proposed 'Back to Basic,' which means returning to fundamental technological groundwork.Wu Jianfeng stated that this would be Alibaba Cloud's most important strategy this year, signaling that Alibaba Cloud is refocusing its efforts to concentrate on refining its technological foundation.
Alibaba's layout in core technologies has been ongoing for a long time. As early as 2018, Alibaba established a chip company, which was personally named 'Pingtouge' by Jack Ma.
After releasing multiple chips, in October 2021, Pingtouge released its self-developed CPU, Yitian 710, for cloud computing. In April this year, Alibaba tested these CPUs through an elastic computing service called g8m. It is reported that in September this year, Yitian 710 will officially submit instances to customers.
The self-developed CPU is just a transition for Alibaba Cloud. In June this year, Alibaba Cloud also released a specialized processor for cloud data centers, the CIPU. According to reports, in the future, the CIPU will replace the CPU as the control and acceleration center of cloud computing.
Amid the major trend of industrial digitalization, Alibaba Cloud has refocused its efforts on the core technology R&D of the digital economy, while delegating more business operations to professional partners. Serving as the foundational layer in this industrial chain, Alibaba Cloud aims to collaborate with other partners to expand the market and share the benefits. $Alibaba (BABA.US)$$BABA-W (09988.HK)$ Alibaba released financial results that largely met market expectations. Affected by overall consumption trends, Alibaba’s total revenue and core e-commerce income both declined by 1% in the second quarter. However, cloud business revenue grew to RMB 23.985 billion before inter-segment transaction offsets, becoming the fastest-growing segment among the main divisions. It is evident that Alibaba Cloud is actively preparing for the next opportunity, with its strategy summarized as “one contraction and one expansion.” “Contraction” refers to simplifying complexity by refocusing on the core of the digital economy: technology R&D. “Expansion” refers to entrusting more business operations to its partners, allowing specialized partners to take on more responsibilities.As the foundational layer of this industrial chain, Alibaba Cloud will serve other partners to jointly expand the market and share the benefits. The measures of 'one tightening and one loosening' point to the same goal: focusing resources on core tasks such as strengthening the technological foundation, enhancing cutting-edge technologies, and exploring key incremental markets. Against the backdrop of the overall trend towards industrial digitization remaining unchanged, these efforts akin to 'sharpening the axe' will manifest their true utility during the subsequent 'woodcutting' phase....
At the same time, Alibaba Cloud also released the OpenTrek platform. This is a multi-industry platform built by Alibaba Cloud after summarizing years of experience and logic in industrial intelligence. As the name suggests, OpenTrek will be open to the outside world to help partners.
In addition, Alibaba Cloud recently released many cutting-edge technology products such as the terminal application cloud computer Wuying and the distributed container management platform ACK One.
Currently, Alibaba Cloud's technical strength is at a relatively leading level both domestically and internationally, such as having self-developed chips.It owns the only self-developed cloud operating system in China, Feitian.In the authoritative institution Gartner’s global cloud computing vendor IaaS capability ranking, Alibaba Cloud received the highest score.
However, competitors both domestically and internationally are currently making large-scale R&D investments. To maintain its own advantages, Alibaba Cloud cannot remain aloof from this 'arms race' in the cloud computing field.
02 Shared Revenue
Throughout the history of the entire Alibaba Group, there has been a deep-rooted 'obsession' with collaboration and sharing: Alibaba's shareholder structure is based on a partnership system, its e-commerce model involves cooperation with merchants, and its corporate vision is to 'make it easy to do business anywhere.'
Building a technological foundation and then jointly operating with partners while sharing benefits is a pathway deeply ingrained in Alibaba’s DNA.
This same spirit and approach are being replicated within today's Alibaba Cloud. At present, Alibaba Cloud is actively 'letting go,' handing over more and more operations to professional partners while taking on the role of providing foundational support.
In March 2019, at the Beijing stop of the Alibaba Cloud Summit, Alibaba Cloud first proposed an ecosystem strategy for partners.It can be summarized into two directions: entrusting SaaS businesses to partners; Alibaba Cloud itself adopting a 'being integrated' strategy, allowing partners to build, implement, and replicate industry solutions, while Alibaba Cloud only takes charge of infrastructure (IaaS), technology middleware (PaaS), and data platform-level product technologies.
Amid the major trend of industrial digitalization, Alibaba Cloud has refocused its efforts on the core technology R&D of the digital economy, while delegating more business operations to professional partners. Serving as the foundational layer in this industrial chain, Alibaba Cloud aims to collaborate with other partners to expand the market and share the benefits. $Alibaba (BABA.US)$$BABA-W (09988.HK)$ Alibaba released financial results that largely met market expectations. Affected by overall consumption trends, Alibaba’s total revenue and core e-commerce income both declined by 1% in the second quarter. However, cloud business revenue grew to RMB 23.985 billion before inter-segment transaction offsets, becoming the fastest-growing segment among the main divisions. It is evident that Alibaba Cloud is actively preparing for the next opportunity, with its strategy summarized as “one contraction and one expansion.” “Contraction” refers to simplifying complexity by refocusing on the core of the digital economy: technology R&D. “Expansion” refers to entrusting more business operations to its partners, allowing specialized partners to take on more responsibilities.As the foundational layer of this industrial chain, Alibaba Cloud will serve other partners to jointly expand the market and share the benefits. The measures of 'one tightening and one loosening' point to the same goal: focusing resources on core tasks such as strengthening the technological foundation, enhancing cutting-edge technologies, and exploring key incremental markets. Against the backdrop of the overall trend towards industrial digitization remaining unchanged, these efforts akin to 'sharpening the axe' will manifest their true utility during the subsequent 'woodcutting' phase....
For IaaS, PaaS, and SaaS cloud services, there is a widely circulated analogy: IaaS is like selling laptops, PaaS is like selling operating systems, and SaaS is like selling applications. In short, Alibaba Cloud will take on the foundational work by building infrastructure, while the implementation of specific business operations and the flourishing of the ecosystem will be completed by partners.
Since then, the proportion of partners within Alibaba Cloud's ecosystem has gradually increased. Data shows that by 2021, the scale of business brought by Alibaba Cloud's partners reached 18.5 billion yuan, compared to 2.58 billion yuan in the fiscal year 2019—a growth of over seven times in four years.
In July this year, Alibaba officially held a 2022 Partner Conference for its business partners. At the conference, Alibaba Cloud introduced its 'Partner First' strategy, formally establishing the core position of partners within Alibaba Cloud’s ecosystem.
During the conference, Alibaba once again emphasized that Alibaba Cloud would focus on core technologies and general capabilities, while industry knowledge and specific application capabilities would be primarily supplemented by partners. Additionally, an important signal was conveyed during the conference:Alibaba Cloud’s model will shift from 'partners cooperating with Alibaba Cloud' to 'Alibaba Cloud supporting partners.' This signifies a more thorough transformation of Alibaba Cloud's role from solution integration towards becoming a foundational service provider.
The signals have been implemented in specific service measures and data indicators for partners.
Currently, Alibaba Cloud categorizes its partners into distribution partners, integration partners, consulting partners, solution ISV partners, product ISV partners, etc., and has established corresponding ecosystem teams for each type of partner to provide specialized services.
Amid the major trend of industrial digitalization, Alibaba Cloud has refocused its efforts on the core technology R&D of the digital economy, while delegating more business operations to professional partners. Serving as the foundational layer in this industrial chain, Alibaba Cloud aims to collaborate with other partners to expand the market and share the benefits. $Alibaba (BABA.US)$$BABA-W (09988.HK)$ Alibaba released financial results that largely met market expectations. Affected by overall consumption trends, Alibaba’s total revenue and core e-commerce income both declined by 1% in the second quarter. However, cloud business revenue grew to RMB 23.985 billion before inter-segment transaction offsets, becoming the fastest-growing segment among the main divisions. It is evident that Alibaba Cloud is actively preparing for the next opportunity, with its strategy summarized as “one contraction and one expansion.” “Contraction” refers to simplifying complexity by refocusing on the core of the digital economy: technology R&D. “Expansion” refers to entrusting more business operations to its partners, allowing specialized partners to take on more responsibilities.As the foundational layer of this industrial chain, Alibaba Cloud will serve other partners to jointly expand the market and share the benefits. The measures of 'one tightening and one loosening' point to the same goal: focusing resources on core tasks such as strengthening the technological foundation, enhancing cutting-edge technologies, and exploring key incremental markets. Against the backdrop of the overall trend towards industrial digitization remaining unchanged, these efforts akin to 'sharpening the axe' will manifest their true utility during the subsequent 'woodcutting' phase....
Alibaba Cloud has also committed to investing 1 billion yuan in special funds over the next three years to deepen cooperation with distribution partners, establish a distribution network, with the ultimate goal of jointly serving 300 cities across the country with partners.
The 'infrastructure approach' is a choice based on years of practice and consideration by Alibaba Cloud.At present, the domestic cloud service market is gradually transitioning from internet companies to traditional industries. The business models of various industries vary greatly, making it difficult for Alibaba Cloud to cover the vastly different needs of all sectors. However, through the experience and capabilities of industry partners, this aligns with Alibaba's principle of 'letting professionals do professional work.'
This is increasingly becoming an industry consensus. Within the cloud computing sector, companies like Amazon and Microsoft are also continuously collaborating with other enterprises to optimize their services.
Cai Yinghua, President of Global Sales at Alibaba Cloud Intelligence, stated at the partner conference: 'We hope that for every dollar Alibaba Cloud earns, our partners can earn two or three dollars.' This spirit of 'helping others make money' has been an essential factor in the success of Alibaba and many internet companies, and it may now become the foundation for Alibaba Cloud's continued success.
03 Alibaba Cloud's Growth
Among the main divisions of the group, Alibaba Cloud has maintained double-digit growth, becoming the backbone business of the entire group.
In the second quarter, Alibaba Group's revenue and its China commerce segment experienced a slight decline of 1%, whereas Alibaba Cloud’s revenue grew by 10% year-on-year after offsetting inter-segment transactions, reaching 17.685 billion yuan. Its adjusted EBITA profit was 247 million yuan, which, although down, remains profitable, marking the seventh consecutive profitable quarter for Alibaba Cloud.
Amid the major trend of industrial digitalization, Alibaba Cloud has refocused its efforts on the core technology R&D of the digital economy, while delegating more business operations to professional partners. Serving as the foundational layer in this industrial chain, Alibaba Cloud aims to collaborate with other partners to expand the market and share the benefits. $Alibaba (BABA.US)$$BABA-W (09988.HK)$ Alibaba released financial results that largely met market expectations. Affected by overall consumption trends, Alibaba’s total revenue and core e-commerce income both declined by 1% in the second quarter. However, cloud business revenue grew to RMB 23.985 billion before inter-segment transaction offsets, becoming the fastest-growing segment among the main divisions. It is evident that Alibaba Cloud is actively preparing for the next opportunity, with its strategy summarized as “one contraction and one expansion.” “Contraction” refers to simplifying complexity by refocusing on the core of the digital economy: technology R&D. “Expansion” refers to entrusting more business operations to its partners, allowing specialized partners to take on more responsibilities.As the foundational layer of this industrial chain, Alibaba Cloud will serve other partners to jointly expand the market and share the benefits. The measures of 'one tightening and one loosening' point to the same goal: focusing resources on core tasks such as strengthening the technological foundation, enhancing cutting-edge technologies, and exploring key incremental markets. Against the backdrop of the overall trend towards industrial digitization remaining unchanged, these efforts akin to 'sharpening the axe' will manifest their true utility during the subsequent 'woodcutting' phase....
Overall, the growth rate of Alibaba Cloud has started to show a noticeable slowdown, but it still maintains a respectable growth rate against the broader industry backdrop. In terms of market share, Alibaba Cloud is about twice as far ahead of the second-place competitor, and its leading position remains solid.
While deepening its technological capabilities to maintain its status, Alibaba Cloud is also actively seeking new growth drivers across three areas: industries, overseas markets, and customers.
In terms of industry, Alibaba Cloud is expanding into emerging sectors such as autonomous driving, establishing multiple partnerships. Recently, for instance, Alibaba Cloud built the largest domestic autonomous driving computing center in Ulanqab, Inner Mongolia, for XPeng Motors. Additionally, Alibaba Cloud provides computational power and technical support to companies like SAIC Zhiji, Haomo.AI, and Inceptio Technology.
In overseas markets, Alibaba Cloud has been highly active. Recently, it added two new data centers in Thailand and Germany and formed a joint venture with Saudi Telecom in Riyadh.
Alibaba Cloud is also building its first regional service center in Europe, located in Porto, Portugal. This is only the first step in upgrading its overseas technical service system. By the end of this year, Alibaba Cloud plans to complete the establishment of three major regional service centers in Porto, Mexico City, and Kuala Lumpur, which will cover the European, American, and Southeast Asian regions, respectively.
During the Q2 earnings call, Alibaba Chairman Daniel Zhang emphasized that Alibaba aims to capture new opportunities in overseas markets from a cloud computing perspective. Currently, Alibaba Cloud operates 85 availability zones across 28 regions globally.In the global cloud computing market, Alibaba Cloud ranks third, surpassing Google and trailing only Amazon and Microsoft. However, the gap between Alibaba Cloud and these two companies is still significant, indicating substantial growth potential for Alibaba Cloud in overseas markets.
Amid the major trend of industrial digitalization, Alibaba Cloud has refocused its efforts on the core technology R&D of the digital economy, while delegating more business operations to professional partners. Serving as the foundational layer in this industrial chain, Alibaba Cloud aims to collaborate with other partners to expand the market and share the benefits. $Alibaba (BABA.US)$$BABA-W (09988.HK)$ Alibaba released financial results that largely met market expectations. Affected by overall consumption trends, Alibaba’s total revenue and core e-commerce income both declined by 1% in the second quarter. However, cloud business revenue grew to RMB 23.985 billion before inter-segment transaction offsets, becoming the fastest-growing segment among the main divisions. It is evident that Alibaba Cloud is actively preparing for the next opportunity, with its strategy summarized as “one contraction and one expansion.” “Contraction” refers to simplifying complexity by refocusing on the core of the digital economy: technology R&D. “Expansion” refers to entrusting more business operations to its partners, allowing specialized partners to take on more responsibilities.As the foundational layer of this industrial chain, Alibaba Cloud will serve other partners to jointly expand the market and share the benefits. The measures of 'one tightening and one loosening' point to the same goal: focusing resources on core tasks such as strengthening the technological foundation, enhancing cutting-edge technologies, and exploring key incremental markets. Against the backdrop of the overall trend towards industrial digitization remaining unchanged, these efforts akin to 'sharpening the axe' will manifest their true utility during the subsequent 'woodcutting' phase....
Another area of growth for Alibaba Cloud comes from small and medium-sized enterprises (SMEs). In September 2020, Alibaba Cloud launched its “Cloud-Nail Integration” strategy, integrating DingTalk into its cloud services to target SMEs and broaden its customer base. Data shows that by March 31, 2022, DingTalk had served 21 million businesses and organizations and facilitated the development of over 3.5 million DingTalk applications.
Government agencies and educational institutions have traditionally been DingTalk's primary client base. Currently, DingTalk is also aggressively pursuing clients in the manufacturing sector. Over the past year, DingTalk has consecutively released Manufacturing Industry Solution 2.0 and a specialized solution for “specialized, refined, distinctive, and innovative” enterprises. According to data, by December 31, 2021, self-developed applications by manufacturing companies on DingTalk grew nearly 300% year-on-year. Manufacturing has now become DingTalk’s third-largest customer segment.
However, compared to these short-term opportunities, both Alibaba and external observers place greater emphasis on the long-term prospects of the cloud business.
Despite a slowdown in Alibaba Cloud and the overall industry, Alibaba CEO Daniel Zhang remains highly optimistic about the future of Alibaba Cloud. During the earnings call, he emphasized two points: First, IT expenditure as a percentage of GDP in China is much lower than in developed countries like the United States. Second, industrial digitization is a major trend. From a macro perspective, cloud computing represents not a cyclical opportunity but a structural one. Therefore, whether in the domestic market or internationally, we will continue to treat cloud as a core strategy.
The message conveyed by Zhang is clear.Although Alibaba Cloud and the cloud industry’s growth have experienced some short-term fluctuations, as long as the broader trend of industrial digitization continues, the long-term outlook for Alibaba Cloud remains very positive.

Author | Yang Zhichao
Editor | Yuan Ye
Risk Disclaimer: The above content only represents the author's view. It does not represent any position or investment advice of Futu. Futu makes no representation or warranty.Read more
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