Alibaba has decided to cancel its plans to spin off its cloud computing arm due to concerns over recent US restrictions on chip exports to China. The company expressed concerns about the potential impact of these restrictions on its cloud division's operations, profitability, and the value of a separate listing for shareholders. The announcement came shortly after a meeting between Chinese President Xi Jinping and US President Joe Biden, which appeared to improve relations between the two countries. However, the escalating chip war between the US and China has forced Alibaba to reconsider its plans.
Alibaba stated in a Thursday statement that the new US restrictions could have a significant adverse effect on the operations of its Cloud Intelligence Group. This could also limit the company's ability to upgrade technological capabilities, impacting its businesses more broadly. The news led to a nearly 10% drop in Alibaba's US-listed shares.
The trade tensions between the US and China have revolved around China's access to advanced semiconductors and the materials and equipment required for their production. The US government has recently tightened export controls, reducing the range of semiconductors that American companies can sell to China. These measures have hindered Alibaba's plans to list its cloud unit as a separate company.
President Xi Jinping referred to these restrictions as "technological containment" during the talks with President Biden. In response, President Biden emphasized that the US will not provide technology to China that could be used against the US by the Chinese military. China has also imposed its own restrictions, such as limiting the exports of gallium, germanium, and graphite, which are crucial for semiconductor and battery production.
Despite the tension, the talks between President Xi and President Biden were seen as productive and constructive. Both leaders agreed to maintain communication during periods of disagreement. President Xi also met with American business leaders, highlighting China's willingness to be a partner and friend rather than engaging in a zero-sum game.
Alibaba's decision to cancel the spinoff comes as the company undergoes a significant restructuring. The initial plan was to create six separate units, each with its own CEO and board. Along with the cloud unit, Alibaba also paused the listing of its supermarket chain Freshippo to evaluate market conditions. However, they confirmed plans to proceed with the IPO of their logistics arm, Cainiao, in Hong Kong, without specifying a date.
Alibaba reported revenue growth of 9% for the June-to-September quarter, reaching 224.8 billion renminbi ($31 billion). The company's net profit was 26.7 billion renminbi ($3.7 billion), attributable to an increase in the value of its equity investments.
Overall, Alibaba's decision to cancel the spinoff of its cloud computing arm highlights the challenges posed by the US-China chip war and the uncertainties caused by recent restrictions. The company intends to focus on developing a sustainable growth model for its cloud division in the current circumstances, while also evaluating market conditions for its other business units.