Alibaba’s earnings call on May 18 was the first small test “report card” after the drastic breakup reform. Beyond the specific details of the financial report, the central idea is the effort to reduce losses and continue to improve. While Alibaba conveyed its resolve to investors, it remained cautious in describing the past quarter and its outlook for the future.
Alibaba has been divided into six business groups, the restructuring is aimed at boosting the company’s shareholder value and market competitiveness. These new business units are: Cloud Intelligence Group, Taobao Tmall Business Group, Local Service Group, Cainiao Intelligent Logistics, Global Digital Commerce Group and Digital Media Entertainment Group. Each group is governed by its own CEO and board of directors. While each group operates around its core business, it still covers many business units and projects that are not yet separate. Many analysts pointed out that the intention of this reorganization is to ease the government’s concerns about “too big to fail” through “slimming down” on the one hand, and on the other hand, let each business line operate independently and be responsible for their own profits and losses, which can get rid of the “big pot rice” situation.
Alibaba must strike a balance between diversification and operational complexity. As an enterprise group with Chinese characteristics, Alibaba is promoting three core reform tasks in parallel.
The first is valuation management. During the earnings call, Alibaba revealed the way forward, announcing the establishment of a capital management committee under the Alibaba Group Board of directors. The committee, which includes key members such as Vice Chairman Joe Tsai, former CFO Wu Wei, CEO Yong Zhang and President Michael Evans, will manage major capital allocations for each business unit.
Under the new holding structure, the newly established Compliance and Risk Committee is highly weighted. This committee oversees an extensive list of “set-aside matters,” which, while separate from the Capital Management Committee, requires the committee’s approval for compliance matters other than financial reporting.
In other words, fiscal and regulatory power is once again in the hands of a small group of people who can make decisions. But transparency in decision-making and governance helps to bolster investor confidence and thus valuations.
At the same time, Alibaba must continue to make share buybacks and attract strategic investors to support its valuation. On the one hand, the current operations are changes under pressure, but they can also be interpreted as “making full use of” surplus value and transforming it through financial means. The successful listing of companies including Cainiao Logistics and Hema Xiansheng will be an important test of whether Alibaba can properly handle the restructuring and effectively manage its relationships and interests with various holding companies. If those ipos don’t go smoothly, that could raise questions about Alibaba’s strategy. Therefore, the execution results of these ipos will be a key indicator of Alibaba’s future direction.
Alibaba’s restructuring will undoubtedly change its relationship with investors, but it will also have a profound impact on its internal working methods and power games. However, the success of these changes ultimately depends on whether Alibaba can continue to grow while meeting investors’ expectations while maintaining its position as China’s largest e-commerce platform. On a larger scale, Alibaba’s restructuring and changes may reflect larger industry trends. In China and globally, technology companies face growing competitive pressures, as well as new challenges arising from regulatory pressures and increasing public expectations. Businesses need to reform and remain competitive.
The second is to look at relationships with competitors and regulatory regimes. The global competitive landscape of the technology industry is changing. Emerging challengers, such as PDD and Bytedance, have taken market share away from leading tech giants like Alibaba in domestic and foreign markets with their more Wolf execution. Alibaba’s business restructuring can be seen as a strategy to cope with this new competitive landscape, by becoming more flexible after the breakup, easier to attract new strategic investments, and thus improve transparency to investors. There is no doubt that Alibaba is now at a critical turning point and must adapt to this increasingly complex and competitive environment in order to stay ahead in this new stage of development.
One way is to optimize the size of the workforce. Over the past year, Alibaba has reduced its workforce by 7.7 percent, or about 19,725 full-time employees. In addition to cost cutting, potential spin-offs, subsidiary fundraising and planned ipos all further signal a strategic shift from expansion to liquidisation. In the context of increased government regulation of the technology industry, which involves stricter requirements for fair competition, data security and user rights, Alibaba will also face new pressures and responsibilities to adjust and re-examine its business model and strategy.
The third is to divest businesses that are not performing well enough, and businesses that have financing potential but consume a lot of cash. Using financial means, the prospect of focusing on improving capital efficiency and profits makes sense, but Ali’s ongoing series of initiatives to increase revenue and reduce expenses is also a double-edged sword.
Alibaba Cloud Intelligence Group is preparing to go public in the next 12 to 18 months, which involves a series of complex issues. First of all, Alibaba Cloud’s decision to go public independently involves asset restructuring, and faces the responsibility of future hardware depreciation and capital expenditure. This could have an impact on the profitability of the newly listed company and Alibaba Group’s stake in one of China’s largest cloud platforms after its successful listing.
Valuation is also a thorny issue. According to Interconnected’s research, Alibaba Cloud’s revenue in the past quarter contracted by 2% year over year. The reason is that Bytedance, which once accounted for a third of Alibaba Cloud’s revenue, has moved its overseas operations to Oracle to meet technical requirements to protect US user data. Goldman Sachs recently valued Alibaba Cloud at $41 billion (3.7 times its EV/ sales TTM). Compared with Alibaba, which has a market value of about $215 billion, if Alibaba Cloud wants to achieve a market value of the same size after the breakup, it obviously needs to go a long way.
“The future belongs to those who are more determined, more agile, and more embracing of the future”, which is full of expectations for Ali, who is undergoing the baptism of reform, but also contains a warning taste.
Source: FT Chinese