Alibaba cancels cloud spinoff, blames US chip sanctions

Export curbs strike again and stock prices come tumbling down

The US government's unrelenting efforts to prevent China from accessing advanced chips or chipmaking equipment has scored another victim after Alibaba said the scheduled IPO of its cloud division is off due to the impact of CPU export curbs.

The Chinese e-commerce giant reported the move alongside its calendar Q3 earnings, otherwise a generally positive quarter, with the group reporting an income from operations of $4.6 billion, up 34 percent year-on-year, and revenue of $30.8 billion, up 9 percent.

Alibaba also said US export restrictions could affect its business more generally by making it harder for the company to upgrade its existing hardware.

"We believe that these new restrictions [referring to expanded restrictions announced in October] may materially and adversely affect Cloud Intelligence Group's ability to offer products and services and to perform under existing contracts, thereby negatively affecting our results of operations and financial condition," Alibaba said. 

"We believe that a full spin-off of Cloud Intelligence Group may not achieve the intended effect of shareholder value enhancement," the company added. "Accordingly, we have decided to not proceed with a full spin-off, and instead we will focus on developing a sustainable growth model for Cloud Intelligence Group (CIG) under the fluid circumstances." 

It's worth noting that the Cloud Intelligence Group brought in $3.789 billion in revenue but earnings before income tax and amortization was $193 million, up 44 percent on the same period a year earlier. Cloud sales growth has stalled in 2023 as customers weigh up their spending.

The US Department of Commerce released an updated list of efforts it is undertaking to prevent the sale of advanced chips and chipmaking kit to China in mid-October. Previous sanctions resulted in companies like Nvidia, Intel and TSMC manufacturing chips that came in just under export limits for performance, after which they received huge orders from Chinese companies. 

"The US needs to stop politicizing and weaponizing trade and tech issues and stop destabilizing global industrial and supply chains," Chinese Foreign Ministry spokesperson Mao Ning said in response to the US's new restrictions. 

That hasn't stopped some banned equipment from finding its way to China, however, with the US-China Economic and Security Review Commission reporting yesterday that other countries were still selling parts to China, allowing the company to stockpile equipment ahead of sanction enforcement. 

The decision to not spin the cloud group into its own independent part comes after Alibaba announced plans to divide into six entities in March. The planned leader of the CIG, former Alibaba CEO and Jack Ma successor Daniel Zhang, quit the company in early September just months after announcing plans to focus on CIG's planned independence. 

It's unknown if Zhang's departure in September was due to difficulties in spinning the CIG off from Alibaba.

"Given the uncertainties in the current environment, we have decided not to pursue a full spin-off of Cloud Intelligence Group," CEO Eddie Wu said in the latest earnings report.

"Alibaba Group will continue to invest strategically in Cloud Intelligence Group in the long term. At the same time, Cloud Intelligence Group will continue to maintain its independent operation, to be managed by its CEO and overseen by its board."

Cainiao Smart Logistics Network and Alibaba International Digital Commerce Group, two of the other entities Alibaba intended to spin off, are proceeding with their plans for an IPO in Hong Kong and external fundraising, respectively. Freshippo, Alibaba's grocery chain, was also planning an IPO, but that's been put on hold as well. 

Alibaba reported yesterday that founder Jack Ma's family trusts plan to sell nearly $1 billion in Alibaba group holdings later this month. After climbing in anticipation of its quarterly earnings call yesterday, Alibaba stock has plummeted by roughly 8 percent since US markets opened this morning. ®

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