SINGAPORE: No doubt that demand for cloud services is booming during and after the coronavirus crisis.
As workplaces and schools migrate into homes, a surge in the use of communications software such as DingTalk and Zoom is putting pressure on cloud services.
The crisis hardly hides the boon for companies such as Alibaba Cloud. Alibaba knows it had better move quick to upgrade and expand its cloud infrastructure.
Its US$28 billion investment announced on Monday (Apr 20), almost exactly half of its entire 2019 revenue, is certainly going to get them far, maybe even far enough to make a play for the market share of other cloud services operators Amazon and Microsoft in places other than their home US market.
Much of this investment will go into the expansion of data centres and networks, with another chunk into technology development in software and semiconductors, the tech behemoth said in its announcement.
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Since 2016, Alibaba has articulated a vision of global expansion and a target for half of all revenue to come from outside China. While its growth has been closely tied to the story of China’s incredible rise, it knows it must look to the world for its next stage of evolution amid evolving geopolitical and economic headwinds.
But, neither the peak demand nor global ambition is the real driver of this massive investment.
ALIBABA IS BETTING ON THE CLOUD
One reason for betting big on cloud is the challenges to Alibaba’s core business. When we talk about Alibaba, people forget the company is an ecosystem of various businesses; some winning, some less so.
While Alibaba Cloud is seeing massive growth of 84 per cent in the last financial year, other Alibaba business arms have come under strain.
It is no surprise that some of Alibaba’s core business in e-commerce has been badly hit by the coronavirus crisis, as consumer demand collapsed amid China’s first contraction in about 30 years.
But Alibaba’s e-commerce arm was already seeing thinner margins before the pandemic burst onto the scene, with revenue growth half compared to its golden years before 2017.
Add to that the intensifying competition of new players such as Pinduoduo and Bytedance, and the rejuvenated competitor JD.com, and the picture becomes clearer. Alibaba Cloud might just have to become the core business, if Alibaba is to thrive in the long run.
Besides, Amazon has shown that a move to cloud services could be highly profitable. Alibaba knows the next phase of growth will come from cloud services. This became especially clear in 2018 when Daniel Zhang, CEO and chairman of Alibaba said:
I think cloud will be … the main business of Alibaba in the future.
Still, after 15 years of studying Alibaba and other Chinese business ecosystems, it is also clear that Alibaba is nothing like Amazon. Where Amazon Cloud Services is a business for Amazon, Alibaba Cloud is much more than just a business; it is holding together Alibaba’s ecosystem.
As the key ingredient for Alibaba’s ecosystem advantage, it powers, for instance, the Chinese superapp Alipay.
This is an advantage that is making Amazon and other American digital giants jealous, so much that Facebook, for instance, has started to imitate WeChat when it comes to payments and group chat functions in search for the ultimate user experience.
Maybe Amazon is next in benchmarking Alibaba’s ecosystem advantage?
TECHNOLOGY HOLDING TOGETHER ALIBABA’S ECOSYSTEM
Besides business revenue, the real reason why the cloud is so important lies deeper: You must understand how Alibaba’s ecosystem advantage is created.
Alibaba is one of about a dozen companies competing in a boundary-less world. It owns the largest online retail businesses in China, the world’s highest-valued FinTech (Ant Financial), a global logistics network (Cainiao), a massive digital health care platform (Alibaba Health), among many others.
Although it looks like a conglomerate or business network with financial synergies, in fact, it operates like an ecosystem. Each business is interdependent with another business in the ecosystem, mutually affecting each other.
For instance, any transaction and information exchange in, say, an Alibaba Health online consultation, is captured in the cloud, then this becomes part of the "brain" for recommending products on Tmall.
This advantage Alibaba Cloud creates can be leveraged by international brands, such as Mondelez and Mars.
They can use data analytics to grow their brand position in China, compared to if they did with Amazon, which does not share data with partners on their platform.
That interdependence is facilitated, captured and analysed by Alibaba Cloud since 2009. The cloud is a smart road system in Alibaba’s ecosystem and is the main source, next to AliPay, of this ecosystem advantage.
It should then come as no surprise that upgrading data centres into the next generation and keeping up with the exploding demand for data services have high priority.
What, however, is often ignored is that the cloud also plays a crucial role in enabling that other breakthrough technology that has become source of contention between China and the rest of the world: Quantum computing. Quantum computing requires massive amounts of data and that data comes from sophisticated clouds.
Already in 2018, it was Alibaba Cloud that offered quantum computing services with processing power of over 10 qubits.
While barely noticed until recently, Alibaba is currently the only real Chinese contender in the war for quantum supremacy. And it needs a powerful cloud to enable this and other breakthrough technologies in blockchain, artificial intelligence and 5G applications.
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So although Alibaba's recent cloud investment suggests business opportunism and Alibaba following Amazon’s lead, the truth is far from that.
AN EYE ON THE GLOBAL PIE
Alibaba Cloud has been recognised as a major upcoming player in Asia and has numerous data centres all over the world, in part to meet local data protection requirements.
The challenge abroad is one of massive incumbent competition. On the one hand, Alibaba faces markets where Amazon and Microsoft are dominant. Even though Alibaba Cloud is gaining some traction in markets like Asia, where it has the lead at 19 per cent market share over Amazon’s 11 per cent last year, the global gap is large.
Amazon has 47.8 per cent, Microsoft 15.5 per cent and Alibaba a mere 7.7 per cent of this global pie, though it has surpassed Google's 4 per cent market share.
The good news is there is space for this many players. The global cloud market could grow by 55 per cent to US$331.2 billion in three years, according to Gartner.
On the other hand, Tencent, Baidu and Huawei are making increasingly better bets in foreign markets as China’s tidal surge in demand for cloud services lifts all Chinese Big Tech boats. China’s cloud infrastructure market grew 66.9 per cent to US$3.3 billion in the last quarter of 2019.
In that context, this investment in cloud technology could help Alibaba stay head of the pack.
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Moreover, Ant Financial, the affiliated financial arm of Alibaba’s ecosystem is betting big on the European market for small- and medium-sized enterprises (SMEs) for financial services. They announced in 2019 a target of 10 million European SMEs by 2024.
On top of that, Alibaba announced it aims to get more international brands to Tmall, the business e-commerce subsidiary. All these expansions need top-notch cloud services to provide the necessary support and technology in international markets.
Alibaba is also likely eyeing markets outside of the US and Europe where concerns over data protection and national security have yet to be politicised, with countries that have strong bilateral ties with China.
Mark Greeven is Professor of Innovation and Strategy at IMD Business School in Switzerland and Singapore. He is also the author of Pioneers, Hidden Champions, Changemakers, and Underdogs and Business Ecosystems in China.