Alibaba, one of the world's largest e-commerce companies, recently announced its split into six divisions: Alibaba Core, Tmall, Ant Financial, AliExpress, Cainiao, and Alibaba Cloud. The six divisions are expected to work collaboratively to leverage each other's strengths and create new opportunities for Alibaba's expansion. The split is expected to enable Alibaba to streamline its operations and better compete with rivals such as Amazon and JD.com. However, it also poses challenges, including the need to manage the relationships between the divisions and ensure they work together effectively. Overall, the split is expected to be a positive move for Alibaba, enabling it to capitalize on new opportunities and better serve its customers. It is a reflection of Alibaba's vision for growth and innovation, and its commitment to staying ahead in the fiercely competitive e-commerce market.
The Birth and Growth of Alibaba: From a Small Apartment in China to a Global E-Commerce Giant
Alibaba's story is one of a vision fulfilled. The company was founded in December 1999 by Jack Ma, a former teacher, and a group of 18 tech pioneers whose initial goal was to capitalize on the power of the Internet wholesale market. They made possible Ma's vision of building a China-based e-commerce company that could deliver to the country's 730 million Internet users in an efficient and timely manner.
Born on September 10, 1964, Jack Ma dreamed of becoming an English teacher during his childhood, as the demand for learning English was just at the beginning among capitalist-minded Chinese consumers. Although he managed to get the job he wanted in education, Ma changed his aspirations quickly, searching for a career in business. After being turned down for a job as a manager at Kentucky Fried Chicken in China, he traveled to the U.S. with the goal of enrolling in his dream school, Harvard University. Ma's quest for an Ivy League degree was put on the back burner after he started using the Internet and noticed the absence of Chinese companies in the burgeoning e-commerce market. As a result, Ma started a website focused on Chinese commerce in a similar manner to Steve Jobs and Steve Wozniak, but in a small apartment in Hangzhou, China.
Alibaba is the largest online commerce company in China and is even among the largest in the whole world, reaching over one billion monthly users, the largest numbers belonging to the US and China. Its three main sites are Taobao, Tmall and Alibaba.com, hosting millions of merchants and businesses. Moreover, Ma's company handles more business than any other e-commerce company.
Alibaba had opened for business at an opportune time. At the beginning of the 21st century, the idea of shopping online for goods and services became more and more attractive for citizens. Commerce-starved China, with hundreds of millions of consumers with money to spend, was the perfect landing spot for Alibaba. With additional venture funding rolling in, Alibaba launched two new sites: Taobao.com, an online consumer-to-consumer marketplace similar to eBay, and Aliwangwang, an instant messaging tool that made the online shopping process much easier for consumers.
As the first decade of the new century progressed, Alibaba found a business partner from an unlikely but welcomed source, the Chinese government, being suspicious of other foreign competitors. Thus, the Chinese government started a campaign to strictly control the Internet in the country, blocking the access of American giants such as Amazon in the Chinese market, therefore leaving the entire market for Alibaba and thus contributing to the company's success.
It was only in 2005 when China approved a partnership between the American giant Yahoo and Alibaba, but by that time Ma's empire was already a clear leader in the Asian market, and to this day, American and European companies are still trying to get closer to Alibaba. By 2014, the future was set for Alibaba on a worldwide basis, as its $25 billion initial public offering took Wall Street by storm. Since then, Alibaba is not only the main e-commerce company in China, but also one of the global leaders in this segment, along with Walmart and Amazon.
In order to accelerate its rise, after two years of regulatory pressures weighing the stock, the Alibaba group made a surprising announcement last week. Alibaba is separating the Chinese e-commerce company into six business groups, thus trying to react as efficiently as possible to market changes and increase their value. The parent company will split into the Cloud Intelligence Group, Taobao Tmall Business Group, Local Services Group, Global Digital Business Group, Cainiao Smart Logistics and Digital Media and Entertainment Group. It is expected that each group will be able to raise outside capital and possibly seek its own initial public offering, except for Taobao Tmall Business Group, which will remain wholly owned by Alibaba Group.
Alibaba's story is one of a vision fulfilled. The company was founded in December 1999 by Jack Ma, a former teacher, and a group of 18 tech pioneers whose initial goal was to capitalize on the power of the Internet wholesale market. They made possible Ma's vision of building a China-based e-commerce company that could deliver to the country's 730 million Internet users in an efficient and timely manner.
Born on September 10, 1964, Jack Ma dreamed of becoming an English teacher during his childhood, as the demand for learning English was just at the beginning among capitalist-minded Chinese consumers. Although he managed to get the job he wanted in education, Ma changed his aspirations quickly, searching for a career in business. After being turned down for a job as a manager at Kentucky Fried Chicken in China, he traveled to the U.S. with the goal of enrolling in his dream school, Harvard University. Ma's quest for an Ivy League degree was put on the back burner after he started using the Internet and noticed the absence of Chinese companies in the burgeoning e-commerce market. As a result, Ma started a website focused on Chinese commerce in a similar manner to Steve Jobs and Steve Wozniak, but in a small apartment in Hangzhou, China.
Alibaba is the largest online commerce company in China and is even among the largest in the whole world, reaching over one billion monthly users, the largest numbers belonging to the US and China. Its three main sites are Taobao, Tmall and Alibaba.com, hosting millions of merchants and businesses. Moreover, Ma's company handles more business than any other e-commerce company.
Alibaba had opened for business at an opportune time. At the beginning of the 21st century, the idea of shopping online for goods and services became more and more attractive for citizens. Commerce-starved China, with hundreds of millions of consumers with money to spend, was the perfect landing spot for Alibaba. With additional venture funding rolling in, Alibaba launched two new sites: Taobao.com, an online consumer-to-consumer marketplace similar to eBay, and Aliwangwang, an instant messaging tool that made the online shopping process much easier for consumers.
As the first decade of the new century progressed, Alibaba found a business partner from an unlikely but welcomed source, the Chinese government, being suspicious of other foreign competitors. Thus, the Chinese government started a campaign to strictly control the Internet in the country, blocking the access of American giants such as Amazon in the Chinese market, therefore leaving the entire market for Alibaba and thus contributing to the company's success.
It was only in 2005 when China approved a partnership between the American giant Yahoo and Alibaba, but by that time Ma's empire was already a clear leader in the Asian market, and to this day, American and European companies are still trying to get closer to Alibaba. By 2014, the future was set for Alibaba on a worldwide basis, as its $25 billion initial public offering took Wall Street by storm. Since then, Alibaba is not only the main e-commerce company in China, but also one of the global leaders in this segment, along with Walmart and Amazon.
In order to accelerate its rise, after two years of regulatory pressures weighing the stock, the Alibaba group made a surprising announcement last week. Alibaba is separating the Chinese e-commerce company into six business groups, thus trying to react as efficiently as possible to market changes and increase their value. The parent company will split into the Cloud Intelligence Group, Taobao Tmall Business Group, Local Services Group, Global Digital Business Group, Cainiao Smart Logistics and Digital Media and Entertainment Group. It is expected that each group will be able to raise outside capital and possibly seek its own initial public offering, except for Taobao Tmall Business Group, which will remain wholly owned by Alibaba Group.
Overview of the Six Divisions
Alibaba’s ambitious plan to split the company into six independent business units is ultimately designed to unlock higher market value while also leading to a sum-of-the-parts (SOTP) valuation for the group itself. In addition, the reorganization, which will transform the group from a single business operator to “an asset and capital operator,” should give investors greater transparency into the value of the various businesses while helping Alibaba conform with the government’s aim to prevent over-concentration of market power in a single firm. The firm believes that, by giving greater ownership and accountability to each management team, they can drive better alignment of outcomes. It will also enable the management of each team to lay the foundation for future fundraising and/or an eventual IPO. An eventual IPO would require a business to meet the listing requirements of the Hong Kong Main Board. In the interim, the corporate group intends to retain control of the six units via a holding company. Each company, nicknamed as “Baby Babas,” will have its own CEO and Board.
Investors view BABA’s reorganization plan as positive, from both equity valuation and business competitiveness perspectives. The move is likely to provide better visibility into the value of the company’s various businesses, on top of its previous segment reporting. It also lays the foundation for future fundraising, spinoff and market debut of each business group (except Taobao Tmall Commerce), which could potentially unlock higher market value and encourage sum-of-the-parts (SOTP) valuation of the group. On the business side, the move could enable greater ownership of the management teams and key employees, as each business group and investment unit will have tailored incentive plans while taking full responsibility for its business and financial performance. The agile and nimble new organizational structure should also increase decision-making efficiency and empower faster responses to industry changes and market competition. On the other hand, the main risks include reduced business synergies and bigger-than-estimated holding company discount.
Following is an overview of each of the six business units as well as a brief summary of their expected financial performance. Analysts seem particularly favorable on three of the business units: Chinese E-Commerce, Cloud Intelligence/Computing and Digital Media.
Chinese ecommerce (Tmall and Taobao)
This business is the core of the Alibaba franchise and most profitable segment. Together, Tmall and Taobao constitute the world’s largest digital retail business in terms of GMV for the twelve months that ended on March 31 2022. This business reported a 30.7% margin for FY22 and is projected to remain the most dominant of all Alibaba’s business. However, analysts note that this unit will face a persistent pressure and eventual erosion of its margins, which can be partially attributed to the increasingly hyper-competitive e-commerce landscape. Competitors include JD.Com and TenCent. This unit will be led by Trudy Dai who is a member of Alibaba’s founding team.
Digital Media and Entertainment
This division includes Youku, which is the company's video streaming site, as well as Alibaba Pictures, which is a movie producer. Youku, the third largest online long-form video platform in China in terms of monthly active users in March 2022, according to QuestMobile, serves as one of Alibaba’s key distribution platforms for digital media and entertainment content. In addition, Alibaba Pictures, driven by high-quality content and technology, is an integrated platform that provides content production, promotion and distribution, intellectual property-related licensing and commercial operation, cinema ticketing management and Internet data services for the entertainment industry. This business reported a -14.5% margin in FY22 but is expected to see a very significant turnaround in its margins in the coming years with a project margin of 5.2% in FY25. Luyuan Fan will serve as CEO.
Cloud Computing and Intelligence
Alibaba Group is the world’s third largest and Asia Pacific’s largest Infrastructure-as-a-service provider by revenue in 2021, according to Gartner’s April 2022 report. This business unit consists of three parts. Aliyun provides cloud computing services to ecommerce businesses as well as Alibaba itself, Damo Academy is the company’s research arm for Artificial Intelligence (AI) and DingTalk is a workplace messaging app. Alibaba’s cloud division reported a 1.5% EBITA margin for FY22 and is projected to improve marginally by 2025 to 1.6%. This new unit will be led by Daniel Zhang and is also expected to garner interest among investors particularly as the Covid lock-down hurdles are removed and businesses recover in China.
Global digital commerce
This unit, which consists of Lazada and AliExpress, enables Alibaba to serve customers outside of China (Europe, South East Asia and Latin America). Lazada, a leading and fast-growing e-commerce platform in Southeast Asia, serves one of the largest user bases among the global e-commerce platforms by providing consumers with access to a broad range of offerings from local SMEs, and regional and global brands. AliExpress, one of Alibaba’s international retail marketplaces, enables global consumers to buy directly from manufacturers and distributors in China and around the world. Alibaba additionally operates Alibaba.com, China’s largest integrated international online wholesale marketplace in 2021 by revenue, according to analysts. During fiscal year 2022, buyers who sourced business opportunities or completed transactions on Alibaba.com were located across over 190 countries. Alibaba’s global digital commerce reported a -14.7% margin in FY22 but is projected to rebound in the coming years with an expected margin of 5.1% in FY25.
Local Services
This business unit includes both “To-Home'' and “To-Destination” businesses. Alibaba’s “To-Home'' businesses, including Ele.me and Taoxianda, enable consumers to easily access merchants’ services at home. Ele.me, a leading local services and on-demand delivery platform, enables consumers to order food and beverages, groceries, FMCG, flowers and pharmaceutical products anytime and anywhere. Taoxianda, Alibaba’s online-offline integration service solution for FMCG brands and third-party grocery retail partners, facilitates the digitalization of retailers’ operations, helps them open online stores and provides customized marketing recommendations.
Alibaba’s “To-Destination” businesses, including Amap, Fliggy and Koubei, provide consumers with convenient access to quality services at their destinations. Amap, a leading provider of mobile digital map, navigation and real-time traffic information in China, provides users with a simple one-stop access point to services such as navigation, local services and ride-hailing. Fliggy, a leading online travel platform, provides comprehensive services to meet consumers’ travel needs. Koubei, Alibaba’s restaurant and local services guide platform for in-store consumption, provides merchants with targeted marketing solutions, digital operation capabilities and analytics tools and allows consumers to discover local services content on the platform. This unit had a -50.1% EBITA margin for FY 22 and analysts projections to 2025 do not foresee substantial improvement. This unit will be run by Yongfu Yu.
Cainiao Logistics
Cainiao logistics handles logistics from simply shipping items to homes in Shanghai to the shipping of packages sent abroad by consumers who purchased on AliExpress. Analysts expect this business unit to attract attention as it was the group’s fastest growing business line with sales up 27% from the previous year and is seen to be operating at near break-even.
Cainiao offers domestic and international one-stop-shop logistics services and supply chain management solutions, addressing various logistics needs of merchants and consumers at scale. Cainiao also uses data insights and technology to digitalize the entire logistics process and enhance the capabilities of Alibaba’s logistics partners, thereby improving consumer experience and efficiency across the logistics value chain. For consumers, Cainiao offers parcel pick-up services through Cainiao Post, Alibaba’s neighborhood logistics solution that operates a network of neighborhood, campus and rural village stations and residential self-pick-up lockers. Consumers can also enjoy parcel pick-up at the doorstep and time-guaranteed delivery service through Cainiao. Lin Wan will continue to serve as CEO.
Alibaba’s ambitious plan to split the company into six independent business units is ultimately designed to unlock higher market value while also leading to a sum-of-the-parts (SOTP) valuation for the group itself. In addition, the reorganization, which will transform the group from a single business operator to “an asset and capital operator,” should give investors greater transparency into the value of the various businesses while helping Alibaba conform with the government’s aim to prevent over-concentration of market power in a single firm. The firm believes that, by giving greater ownership and accountability to each management team, they can drive better alignment of outcomes. It will also enable the management of each team to lay the foundation for future fundraising and/or an eventual IPO. An eventual IPO would require a business to meet the listing requirements of the Hong Kong Main Board. In the interim, the corporate group intends to retain control of the six units via a holding company. Each company, nicknamed as “Baby Babas,” will have its own CEO and Board.
Investors view BABA’s reorganization plan as positive, from both equity valuation and business competitiveness perspectives. The move is likely to provide better visibility into the value of the company’s various businesses, on top of its previous segment reporting. It also lays the foundation for future fundraising, spinoff and market debut of each business group (except Taobao Tmall Commerce), which could potentially unlock higher market value and encourage sum-of-the-parts (SOTP) valuation of the group. On the business side, the move could enable greater ownership of the management teams and key employees, as each business group and investment unit will have tailored incentive plans while taking full responsibility for its business and financial performance. The agile and nimble new organizational structure should also increase decision-making efficiency and empower faster responses to industry changes and market competition. On the other hand, the main risks include reduced business synergies and bigger-than-estimated holding company discount.
Following is an overview of each of the six business units as well as a brief summary of their expected financial performance. Analysts seem particularly favorable on three of the business units: Chinese E-Commerce, Cloud Intelligence/Computing and Digital Media.
Chinese ecommerce (Tmall and Taobao)
This business is the core of the Alibaba franchise and most profitable segment. Together, Tmall and Taobao constitute the world’s largest digital retail business in terms of GMV for the twelve months that ended on March 31 2022. This business reported a 30.7% margin for FY22 and is projected to remain the most dominant of all Alibaba’s business. However, analysts note that this unit will face a persistent pressure and eventual erosion of its margins, which can be partially attributed to the increasingly hyper-competitive e-commerce landscape. Competitors include JD.Com and TenCent. This unit will be led by Trudy Dai who is a member of Alibaba’s founding team.
Digital Media and Entertainment
This division includes Youku, which is the company's video streaming site, as well as Alibaba Pictures, which is a movie producer. Youku, the third largest online long-form video platform in China in terms of monthly active users in March 2022, according to QuestMobile, serves as one of Alibaba’s key distribution platforms for digital media and entertainment content. In addition, Alibaba Pictures, driven by high-quality content and technology, is an integrated platform that provides content production, promotion and distribution, intellectual property-related licensing and commercial operation, cinema ticketing management and Internet data services for the entertainment industry. This business reported a -14.5% margin in FY22 but is expected to see a very significant turnaround in its margins in the coming years with a project margin of 5.2% in FY25. Luyuan Fan will serve as CEO.
Cloud Computing and Intelligence
Alibaba Group is the world’s third largest and Asia Pacific’s largest Infrastructure-as-a-service provider by revenue in 2021, according to Gartner’s April 2022 report. This business unit consists of three parts. Aliyun provides cloud computing services to ecommerce businesses as well as Alibaba itself, Damo Academy is the company’s research arm for Artificial Intelligence (AI) and DingTalk is a workplace messaging app. Alibaba’s cloud division reported a 1.5% EBITA margin for FY22 and is projected to improve marginally by 2025 to 1.6%. This new unit will be led by Daniel Zhang and is also expected to garner interest among investors particularly as the Covid lock-down hurdles are removed and businesses recover in China.
Global digital commerce
This unit, which consists of Lazada and AliExpress, enables Alibaba to serve customers outside of China (Europe, South East Asia and Latin America). Lazada, a leading and fast-growing e-commerce platform in Southeast Asia, serves one of the largest user bases among the global e-commerce platforms by providing consumers with access to a broad range of offerings from local SMEs, and regional and global brands. AliExpress, one of Alibaba’s international retail marketplaces, enables global consumers to buy directly from manufacturers and distributors in China and around the world. Alibaba additionally operates Alibaba.com, China’s largest integrated international online wholesale marketplace in 2021 by revenue, according to analysts. During fiscal year 2022, buyers who sourced business opportunities or completed transactions on Alibaba.com were located across over 190 countries. Alibaba’s global digital commerce reported a -14.7% margin in FY22 but is projected to rebound in the coming years with an expected margin of 5.1% in FY25.
Local Services
This business unit includes both “To-Home'' and “To-Destination” businesses. Alibaba’s “To-Home'' businesses, including Ele.me and Taoxianda, enable consumers to easily access merchants’ services at home. Ele.me, a leading local services and on-demand delivery platform, enables consumers to order food and beverages, groceries, FMCG, flowers and pharmaceutical products anytime and anywhere. Taoxianda, Alibaba’s online-offline integration service solution for FMCG brands and third-party grocery retail partners, facilitates the digitalization of retailers’ operations, helps them open online stores and provides customized marketing recommendations.
Alibaba’s “To-Destination” businesses, including Amap, Fliggy and Koubei, provide consumers with convenient access to quality services at their destinations. Amap, a leading provider of mobile digital map, navigation and real-time traffic information in China, provides users with a simple one-stop access point to services such as navigation, local services and ride-hailing. Fliggy, a leading online travel platform, provides comprehensive services to meet consumers’ travel needs. Koubei, Alibaba’s restaurant and local services guide platform for in-store consumption, provides merchants with targeted marketing solutions, digital operation capabilities and analytics tools and allows consumers to discover local services content on the platform. This unit had a -50.1% EBITA margin for FY 22 and analysts projections to 2025 do not foresee substantial improvement. This unit will be run by Yongfu Yu.
Cainiao Logistics
Cainiao logistics handles logistics from simply shipping items to homes in Shanghai to the shipping of packages sent abroad by consumers who purchased on AliExpress. Analysts expect this business unit to attract attention as it was the group’s fastest growing business line with sales up 27% from the previous year and is seen to be operating at near break-even.
Cainiao offers domestic and international one-stop-shop logistics services and supply chain management solutions, addressing various logistics needs of merchants and consumers at scale. Cainiao also uses data insights and technology to digitalize the entire logistics process and enhance the capabilities of Alibaba’s logistics partners, thereby improving consumer experience and efficiency across the logistics value chain. For consumers, Cainiao offers parcel pick-up services through Cainiao Post, Alibaba’s neighborhood logistics solution that operates a network of neighborhood, campus and rural village stations and residential self-pick-up lockers. Consumers can also enjoy parcel pick-up at the doorstep and time-guaranteed delivery service through Cainiao. Lin Wan will continue to serve as CEO.
Implications and Impact
In order to fully understand the implication of this split, we must first mention the underlying rationale behind it: the bottleneck effect.
The increasing number of regulations for what concerns the tech sector in China has posed a significant threat to the almost-stagnant Alibaba, which as a response had to find a new way to deal with such a sensitive issue in its main market. By splitting the company, regulations (and government oversight) which previously applied to Alibaba as a whole, are now only a concern for specific groups, the ones which were originally meant as targets of said regulations.
Outside of reduction of regulations for some of the groups, the main and most visible implication of the split for the company itself is the increased flexibility of each functional group: not only they will have their own C-Suite and Board of Directors, but each one of them will also be able to raise liquidity via IPOs and other market operations previously reserved for the group as a whole. The groups would be able to each pursue their own strategy, both in the short- and long-term, thus enabling them to act without the restraints posed by budget constraints and Alibaba’s own strategy.
On the other side, when the groups will start acting on their own, they will tautologically exert both positive and negative externalities on each other, leading thus to a final outcome which is less competitive than the one before, strictly economically speaking; this is because the group will no longer be able to internalize the externalities as it was happening before.
This consideration becomes even more relevant once we take into account that, despite the weaker “anti-revolving-door policies” enacted by China, measures of this kind are still in place and will prevent synergies at the managerial level from taking place.
Only time will tell whether the decision to split the company will be beneficial or not in the long term, but in the meanwhile the markets have shown strong signs of appreciation for the decision. As a matter of fact, in the week of the announcement, Alibaba shares rose to +19.17 % before closing at +13.53% on Friday.
Going back to the long-term view, one factor we surely ought to consider when evaluating the consequences for the broader market is that, despite the split being paramount for Alibaba as a company, analysts are keen on considering it nothing more than a physiological response to a policy move by the Chinese government. In this case, instead of perturbing the market, the move would instead take Alibaba back to its original competitive position in the market. This is because, as briefly mentioned before, the split is allowing Alibaba to minimize the governmental inference in its activities, both in the domestic and international markets.
To summarize, it may be too early to judge the move in a comprehensive way, but as long as the markets hold a positive opinion about the reorganization, Alibaba has nothing to lose and plenty to gain.
Challenges and Opportunities
Alibaba had designed the restructuring to shorten the decision-making process, unlock shareholder value and foster market competitiveness. As CEO Daniel Yang said: “This transformation will empower all our businesses to become more agile, enhance decision-making, and enable faster responses to market changes”; but how will this happen?
Firstly, with this change, Alibaba has the opportunity to slim down middle and back-office functions at the group level and only retain functions required for listed company compliance. The middle and back-office capabilities the group has built over the years will transition into the relevant business groups and companies.
The reorganization also comes at a time when there are signs that Beijing is warming back up to technology businesses, as the government seeks to revive economic growth in the world’s second-largest economy. This will probably lead to a positive development in terms of regulations, a field that slowed Alibaba’s growth a lot in the past years.
From Alibaba's side, the restructuring will do a lot in terms of clearing the way for it to continue growing. Each of the six units operate in different areas, and therefore must respond to different sets of regulations. After the businesses are spun off from Alibaba, the regulatory risks they face may actually decrease, rather than being subject to Jack Ma's personal risk. This will make it easier for investors to assess regulatory risks more clearly. For instance, separating the logistics business from the cloud business should be better for the former because the data security requirements on cloud are stricter and, of course, cloud business executives are better placed at responding to these requirements.
Spin-offs represent a step in the direction of China's policy to reduce the monopolistic nature of the tech giants, and it is a move that could serve as a model for the industry in the future. Tencent also looks like a candidate for a break-up, which could split apart its financial and entertainment businesses. But the danger in aping Alibaba is that it would inspire further cynicism.
Additionally, the company sees the creation of the six businesses as a way to be nimbler and to unlock the value in divisions such as cloud computing which haven’t gotten the credit they deserve, but there are still questions left unanswered. It isn’t clear what will happen to the mini-Babas, which include several money-losing businesses as well as the company’s core e-commerce operations. And all of those operations remain vulnerable to geopolitics and domestic policy.
In conclusion, this split is likely to generate value for shareholders, as the market sentiment says. Greater flexibility, and less stringent regulations are the main reasons why this will happen, but Alibaba will have to be good at managing the less profitable divisions toward which the market is not very hospitable.
Alibaba had designed the restructuring to shorten the decision-making process, unlock shareholder value and foster market competitiveness. As CEO Daniel Yang said: “This transformation will empower all our businesses to become more agile, enhance decision-making, and enable faster responses to market changes”; but how will this happen?
Firstly, with this change, Alibaba has the opportunity to slim down middle and back-office functions at the group level and only retain functions required for listed company compliance. The middle and back-office capabilities the group has built over the years will transition into the relevant business groups and companies.
The reorganization also comes at a time when there are signs that Beijing is warming back up to technology businesses, as the government seeks to revive economic growth in the world’s second-largest economy. This will probably lead to a positive development in terms of regulations, a field that slowed Alibaba’s growth a lot in the past years.
From Alibaba's side, the restructuring will do a lot in terms of clearing the way for it to continue growing. Each of the six units operate in different areas, and therefore must respond to different sets of regulations. After the businesses are spun off from Alibaba, the regulatory risks they face may actually decrease, rather than being subject to Jack Ma's personal risk. This will make it easier for investors to assess regulatory risks more clearly. For instance, separating the logistics business from the cloud business should be better for the former because the data security requirements on cloud are stricter and, of course, cloud business executives are better placed at responding to these requirements.
Spin-offs represent a step in the direction of China's policy to reduce the monopolistic nature of the tech giants, and it is a move that could serve as a model for the industry in the future. Tencent also looks like a candidate for a break-up, which could split apart its financial and entertainment businesses. But the danger in aping Alibaba is that it would inspire further cynicism.
Additionally, the company sees the creation of the six businesses as a way to be nimbler and to unlock the value in divisions such as cloud computing which haven’t gotten the credit they deserve, but there are still questions left unanswered. It isn’t clear what will happen to the mini-Babas, which include several money-losing businesses as well as the company’s core e-commerce operations. And all of those operations remain vulnerable to geopolitics and domestic policy.
In conclusion, this split is likely to generate value for shareholders, as the market sentiment says. Greater flexibility, and less stringent regulations are the main reasons why this will happen, but Alibaba will have to be good at managing the less profitable divisions toward which the market is not very hospitable.
By Stefano Graziosi, Alejandro Lockhart, Laurian David Pop and Emanuele Sanvito
SOURCES
- Alibaba Reorganizes To Unlock Shareholder Value (alizila.com)
- Alibaba says it will split into 6 units that can raise funds and IPO (cnbc.com)
- Alibaba to split into six units | Reuters
- Alibaba's Breakup Plan Is a Hit for Now. Why China Is Still a Concern. | Barron's (barrons.com)
- Alibaba bets on split to survive Chinese tech’s new battlefields | Financial Times (ft.com)
- Alibaba plans to split into six in radical overhaul | Financial Times (ft.com)
- Alibaba may cede control of new businesses if they list after break-up | Financial Times