Alibaba's Cloud arm plans workforce reduction of 7% in overhaul: Report
3 min read 24 May 2023, 11:05 AM ISTChina’s most valuable online commerce firm invested tens of billions over more than a decade in the business of hosting computing for corporations over the internet.
PremiumAlibaba's cloud division, in preparation for a spinoff and eventual IPO, has initiated a restructuring process that may result in a workforce reduction of approximately 7%, Bloomberg reported citing sources.
China’s largest cloud service has begun informing affected staff, people familiar with the matter said. It’s offering severance to employees or transfers to other parts of the Alibaba empire, though those aren’t guaranteed, one of the people said.
According to an anonymous source familiar with the matter, the restructuring measures are aimed at streamlining the business and ultimately establishing the Alibaba cloud division as a separate company within the next year.
Alibaba's shares experienced a 3.7% decline in New York. As part of the six-way split of the parent company, Alibaba Cloud will be among the major entities formed, along with divisions like Cainiao logistics and international commerce, all aiming for independent fundraising and potential listings. While the specific staffing details of separate units are not disclosed, as of March, Alibaba Group had a workforce exceeding 235,000 employees.
Last week, Chief Executive Officer Daniel Zhang revealed the specifics of the significant reorganization. One notable aspect was the intention to completely divest control of Alibaba Cloud, a previously successful venture that had the potential to drive the company's growth, much like Amazon Web Services did for Amazon.com Inc. In an effort to stimulate growth, the division reduced prices this year, prompting similar actions from competitors like Tencent Holdings Ltd.
Alibaba’s savings from a 7% cut in its cloud workforce, Bloomberg reported on May 23, may not be enough to offset the segment’s profit drag from price cuts and fee waivers and meet consensus of 51% year-over-year growth in fiscal 2024 adjusted Ebita, we calculate. This is despite a 15% decline in the cloud profit estimate in the three weeks ended May 23. We believe a rise in cloud revenue of at least 15% vs. a year ago after the layoffs may help the segment meet profit expectations, said Catherine Lim and Trini Tan, analysts.
The business was estimated by certain analysts to be worth more than $30 billion, benefiting from the increasing demand for cloud resources to train advanced AI models in the wake of ChatGPT. There was no immediate response from representatives of the unit when contacted for comment.
Alibaba picked the cloud unit as an early IPO candidate because of its more developed business model and customer profile. Zhang has said the spinoff was intended to simplify the overall structure and respond to market needs. A standalone cloud platform could grow to some day even surpass Alibaba in size if it attracted the right external financing, he told analysts last week.
China’s most valuable online commerce firm invested tens of billions over more than a decade in the business of hosting computing for corporations over the internet.
For years, it was among Alibaba’s proudest and most often-touted accomplishments, a business that outstripped rival offerings from Tencent and Baidu Inc., grew more global in flavor than any other division, and spearheaded important inhouse initiatives.
But government scrutiny of cloud services operated by private firms intensified around 2020, when Beijing grew suspicious of privately owned repositories of sensitive and valuable data, triggering a now-infamous sweeping crackdown on the internet sphere.
Alibaba Cloud itself drew regulatory ire in 2021 for discovering then sharing a major software flaw before informing authorities, and was then investigated in 2022 for its role in China’s largest known cybersecurity data leak. The cloud division in recent years began to bleed market share to rivals including Huawei Technologies Co. and state-run China Mobile Ltd.
In fiscal 2022, it generated nearly $12 billion of revenue for the company — 8% of turnover. It was so important that in March, when Alibaba first unveiled its six-way breakup, Zhang personally took the helm of what he called the Cloud Intelligence division — seemingly signaling it was destined for greater things.
The “cloud business is relatively independent and different from other consumer facing business," Jefferies analyst Thomas Chong wrote Friday. They want to “introduce strategical investors who can help to grow the business."
Key Points of the Breakup
- Alibaba intends to separate its cloud services division and establish it as an independent entity by distributing stock to shareholders over the course of the next year.
- This move would result in Alibaba no longer holding shares in China's largest cloud services platform
- Additionally, Alibaba aims to list its Cainiao logistics arm on the stock market within the next 12 to 18 months.
- In the near term, the company is focused on completing an initial public offering (IPO) for its Freshippo grocery chain within the coming year.
- And it plans to secure external financing for its international commerce division, which encompasses overseas operations such as Singapore-based Lazada
