Alibaba will invest $28 billion in the cloud as it challenges Microsoft and Amazon head-on
Alibaba Group Holding Ltd. will invest 200 billion yuan ($28 billion) on cloud infrastructure such as datacenters over the next three years, a major effort to extend one of its fastest-growing businesses to more countries.
That huge outlay — equivalent to about half the revenue the entire company generated in fiscal 2019 — underscores the importance of a division Alibaba relies on to spearhead its international expansion. The Chinese e-commerce giant now plans to build more datacenters to complement an existing network covering 21 regions globally and support the development of technologies in areas such as AI-inference chips, it said in a statement.
Cloud computing has become one of Alibaba’s fastest-growing initiatives beyond the traditional e-commerce sphere. The division’s revenue rose 62% to 10.7 billion yuan in the December quarter as Alibaba chipped away at Amazon.com Inc.’s and Microsoft Corp.’s global lead in the business of providing online computing as a service. The Chinese company is now recognized as one of Asia’s leading cloud players, though Tencent Holdings Ltd. and Baidu Inc. are stepping up competition at home and abroad.
“The key focus in the medium term is to gain scale, in customers, infrastructure and product offerings,” Bloomberg Intelligence analyst Vey-Sern Ling said of the cloud division. “Profitability is not a near-term focus. The amount they are spending over three years should be just about equivalent to the revenue they generate, keeping the segment at near-break-even level as it has been for the past few quarters.”
Like Amazon’s, Alibaba’s cloud service emerged from the computational power needed to handle millions of online shopping transactions. But unlike its U.S. counterpart, it enjoys home-field advantage in a vast Chinese market where web-based computing is still novel to many enterprises. Its push into the cloud, where software and services are provided to customers via server farms the size of football fields, could help cushion Alibaba against domestic consumption shocks to its core operation.
Even before China recorded its first economic contraction in decades, Alibaba had warned that the novel coronavirus outbreak would have a broad impact on its business. The cloud computing division is also key to the company’s efforts to harness the enormous amounts of data generated daily — what Alibaba co-founder Jack Ma once referred to as “new oil.” The unit now accounts for about 7% of Alibaba’s revenue but is expected to climb.
“By increasing our investment on cloud infrastructure and fundamental technologies, we hope to continue providing world-class, trusted computing resources to help businesses speed up the recovery process, and offer cloud-based intelligent solutions to support their digital transformation in the post-pandemic world,” Jeff Zhang, president of the Alibaba Cloud Intelligence division, said in the statement.
More must-read international coverage from Fortune:
—U.S. small business aid is marred by delays and confusion. Germany is different.
—How Global 500 companies are responding to the coronavirus
—Trump’s withdrawal of U.S. funding would make China WHO’s biggest benefactor
—World War II offers lessons—and warnings—for the coronavirus fight
—Listen to Leadership Next, a Fortune podcast examining the evolving role of CEO
—WATCH: The global crisis in recycling
Catch up with Data Sheet, Fortune’s daily digest on the business of tech.