Alibaba bets on split to survive Chinese tech’s new battlefields

The last time Alibaba made a radical move to reorganise its business the Chinese tech group set in motion a train of events that led to a clash with regulators, the disastrous cancellation of what would have been the world’s biggest initial public offering and a crackdown by Beijing on Big Tech.

This time around Alibaba hopes to please investors and Beijing bureaucrats with a major restructuring into six business units, heralding the biggest shake-up of China’s best-known ecommerce company since Jack Ma founded it 24 years ago.

Back in 2020, a speech by Ma attacking China’s financial watchdogs and banks led to the abandonment of its blockbuster $37bn initial public offering of Ant Group, its fintech affiliate. It was a trigger for President Xi Jinping’s campaign to reduce the influence of the country’s largest tech companies.

This week’s move by Ma’s successor as chief executive, Daniel Zhang, may make Big Tech seem smaller to Beijing. He is dividing up a conglomerate weighed down by 240,000 employees — twice the size of chief rival Tencent — and consisting of a smorgasbord of business lines that runs from groceries to cloud computing.

The sprawling empire had left Chinese officials regretting that they let it grow so big and Wall Street investors scratching their heads at how to value it properly. Add on nimbler rivals eating into its market share and Alibaba executives led by Zhang had begun to worry that they, too, had lost control.

“We need to figure out how to really make the organisation simpler and more agile and I think that starts from the top,” Zhang told employees in a video message aired by state media.

“With these changes, everyone can set their own strategy to fit their respective battlefields.”

One obvious intended beneficiary is Alibaba’s share price, which is languishing around where Ma rang in its New York stock’s first trading in 2014. Investors are betting the shake-up will unlock value: Alibaba’s shares jumped 14 per cent in New York on Tuesday.

“Alibaba is a set of disparate businesses run by a single management team, a pure conglomerate, and it is now moving in the direction of splitting into fully independent businesses,” said Jesse Fried, a corporate governance expert at Harvard. “It’s unlikely they will go all the way, because management won’t want to fully give up control.” 

But Fried said even the restructuring outlined so far should improve operations by allowing more focus. It should also lead to higher valuations by making it easier for investors to assess the worth of individual business units.

Under the restructuring, Alibaba’s six business groups will be dedicated to domestic and international ecommerce, cloud computing, local services, digital media, as well as logistics. Alibaba will retain its full ownership of the Chinese ecommerce unit, which includes online shopping sites Tmall and Taobao, and in its last fiscal year generated more profits than the group as a whole.

However, at its headquarters in Hangzhou, some employees who spoke to the Financial Times worried the plan would mean job cuts, particularly at unprofitable business units that have been kept afloat by the cash spouting online sales platforms.

“This is not a good omen. Lots of businesses will not survive outside of the Ali system, they rely on support from other units,” said an Alibaba executive at a lossmaking unit. “This is a huge task with not much time, there are also so many inter-party transactions to sort out.”

A US investor in Chinese tech, who asked not to be named, pointed out that some business lines may fold. “The cash generated by ecommerce is utilised across other businesses . . . there will be no engine to feed the other businesses,” the person said, arguing that the company was stronger as a whole rather than as individual business units.

How far Zhang will go in splitting up Alibaba remains unclear. For now, Alibaba has indicated the corporate group will retain control of the six units via a holding company structure. The shake-up will put chief executives and boards in place for each unit and will lead to some of the “baby Babas” going for separate public listings.

Analysts expect one of the first units to attract additional outside investors will be Cainiao, a logistics group that does everything from delivering spring dresses or EarPods to apartments in Shanghai to shipping packages to Paris that shoppers have bought on AliExpress, the group’s international sales platform.

In the December quarter Cainiao was the group’s fastest-growing business line, with sales up 27 per cent from a year earlier, and was operating at nearly break-even.

Alibaba’s cloud computing unit could also attract outside interest as its business recovers after China’s zero-Covid lockdowns ended. Zhang took direct control of the unit in December.

“Cloud and Cainiao are the two entities that offer the clearest value,” said Robin Zhu of Bernstein.

But he cautioned that any IPO for either unit was probably some way off. “The market seems to expect announcements of spin-offs in the very near future,” Zhu said. “This is not an Alibaba break-up in the sense that we’re going to get Alibaba IPO one through six.”

Other Alibaba units may face greater challenges. Local services, which include food delivery and Alibaba’s mapping app, as well as the group’s international commerce business, were operating at negative ebita margins in the December quarter.

The restructuring sets Alibaba on the path taken by its ecommerce rival JD.com, which retained control while spinning out its logistics, fintech and healthcare businesses. JD’s logistics and healthcare business first raised capital from outside investors, including a politically connected private equity group tied to the son of China’s most powerful financial official, Liu He, then went on to list in Hong Kong. 

“Most investors don’t generally view what JD did with the spin-offs as unlocking significant value,” said Zhu. “JD’s business outperformed in 2021, but that was mainly driven by business growth rather than the IPOs.”

Chinese anti-trust regulators have scrutinised Alibaba since Ma inadvertently kicked off the tech crackdown more than two years ago, hitting the group with a record fine for monopolistic behaviour and handing it additional penalties for failing to seek approval of acquisitions.

Alibaba executives this time round have kept officials well informed of their restructuring plans and found a receptive and welcoming audience, two people involved said.

A regulator in Alibaba’s hometown said Beijing would encourage public offerings for any of the units spun out of the group, including the two most likely to attract investor attention, the cloud and logistics arms. The official said it would also make sense for Alibaba to take in outside capital for its semiconductor unit T-Head. “Now is a good time for T-Head to bring in more funding and get more support,” the person said.

Alibaba is keen to avoid repeating the saga of Ant, which has been in limbo for more than two years and is yet to complete a Beijing-demanded revamp. To appease regulators, Ma opted to give up control of Ant in January, a change that under Hong Kong listing rules will delay any IPO for at least a year.

Ma himself returned to China this week for a rare public visit — a trip that one Alibaba employee said was intended as a show of support for Zhang as he pushes through the latest restructuring.