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Alibaba Doubles Down on Maintaining Its Chinese Cloud Lead

The company is promising to invest more than $28 billion in its cloud services unit over the next three years, and to direct some of the funds towards chip and operating system R&D.
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Much like  (AMZN) - Get Inc. Report, Alibaba  (BABA) - Get Alibaba Group Holding Limited American Depositary Shares each representing eight Report isn’t squeamish about dialing up its spending amid the COVID-19 pandemic.

On Monday, Alibaba said that it plans to invest RMB200 billion ($28.3 billion) over the next three years in its Alibaba Cloud unit, which is China’s biggest public cloud services provider. Along with data center infrastructure investments, Alibaba indicated the spending would go towards R&D investments in areas such as chip and operating system development. Other likely spending areas include sales, marketing and the development of new cloud services.

The announcement comes two months after Alibaba cautioned that China’s COVID-19 outbreak would weigh on its March quarter sales, as the merchants and delivery partners that its giant Taobao and Tmall marketplaces work with see their operations disrupted.

At the same time, like fellow Chinese tech giant Tencent  (TCEHY) , Alibaba has seen usage spikes for some of its offerings, such as its grocery delivery services and DingTalk collaboration platform. DingTalk, which is hosted on Alibaba’s infrastructure, was said in February to be seeing “explosive” daily active user (DAU) growth, as businesses adopt it to support remote work activities and schools adopt it to support remote learning.

In Alibaba’s December quarter, the Alibaba Cloud unit saw revenue grow 62% annually to RMB10.72 billion ($1.52 billion). For the whole of Alibaba’s fiscal 2020 (it ended in March), the consensus is for Alibaba Cloud’s revenue to be up 62% to RMB39.49 billion ($5.58 billion).

However, with Alibaba investing aggressively in the business, Alibaba Cloud is also expected to report fiscal 2020 EBITA of negative RMB1.81 billion (negative $256 million). And judging by its Monday announcement, Alibaba is comfortable absorbing additional near-term losses for the unit in the name of boosting long-term growth.

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Research firm Canalys estimates Alibaba Cloud had a 46.4% share of China’s cloud infrastructure (IaaS) market in Q4, and a 46.1% share over the whole of 2019. Tencent, the market’s No. 2 player, had an estimated 18% Q4 share, while No. 3 Baidu  (BIDU) - Get Baidu Inc. Report had an estimated 8.8% share.

All other players -- a group that includes  (AMZN) - Get Inc. Report and Microsoft’s Chinese public cloud businesses, as well as the cloud units of local firms such as Huawei and China Telecom -- were estimated to collectively have a 26.8% share.

Though dominant in China, Alibaba Cloud’s global scale is still significantly smaller than that of Amazon and Microsoft’s public cloud businesses. Amazon Web Services (AWS) saw its revenue grow 37% last year to $35.03 billion, and though Microsoft  (MSFT) - Get Microsoft Corporation Report doesn’t break out revenue for its Azure cloud unit, many third-party estimates for it are now comfortably above $10 billion.

While Alibaba has made some attempts to grow its international cloud footprint, traction in the U.S. and Europe appears to be relatively limited for now. Aside from the competitiveness of rival public cloud platforms, concerns among Western companies about having their data hosted on a Chinese firm’s infrastructure have been a headwind.

Meanwhile, Alibaba’s plans to invest more in chip R&D are noteworthy in light of China’s broader efforts to become less dependent on Western chip suppliers. Last September, Alibaba unveiled the Hanguang 800, an ASIC that’s being deployed in its cloud servers to perform AI inference, the running of trained AI models against real-world data and content.

Nonetheless, for the time being, Alibaba’s plans to invest heavily in its data center infrastructure are a positive for the U.S. chip suppliers that it still relies heavily upon. This is a list that includes Nvidia  (NVDA) - Get NVIDIA Corporation Report, whose server GPUs are used by Alibaba both to train AI models and perform inference, as well as server CPU suppliers Intel  (INTC) - Get Intel Corporation Report and AMD  (AMD) - Get Advanced Micro Devices Inc. Report.

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