Just over a year ago, with Alibaba facing an antitrust investigation and founder Jack Ma under political pressure, finance chief Maggie Wu was quick to talk up the company’s rapidly expanding and uncontroversial cloud business to investors.

“China is going to be the largest economy in 10 years’ time, enterprises and millions of businesses will migrate to cloud,” she said at a Goldman Sachs conference last February, according to notes provided to the Financial Times.

But Wu’s suggestions that Ali Cloud’s 50 per cent year-on-year growth rate was sustainable proved overly optimistic. Today, growth has stagnated at its cloud computing division, with sales up just 12 per cent in the first quarter of 2022 from a year earlier. Top rival Tencent reported its cloud arm shrank in the same period.

The faltering cloud businesses reveal how China’s tech giants are struggling to regain their footing as they battle a regulatory onslaught from Beijing and a slowing economy caused in part by a draconian coronavirus regime that has paused commercial activity in much of the country.

The lacklustre growth has defied expectations that cloud computing could transform the Chinese tech groups in the way that Amazon Web Services revamped the US ecommerce giant and Azure bolstered Microsoft.

Competition from politically favoured vendors such as national champion Huawei and state-backed telecoms companies including Tianyi Cloud, run by China Telecom, and Tsinghua Unigroup is adding to the pressure.

Unlike its Silicon Valley peers, growth at Alibaba’s cloud unit has slowed considerably over the past 12 months while profits remain nascent. Tencent, meanwhile, has shifted from maximising growth to chasing profitability.



One piece of the slowdown puzzle is the structure of China’s cloud market. The country’s public cloud represents about 60 per cent of the market, with Alibaba and Tencent the two leading players.

In the public cloud, multiple companies share a vendor’s platform. This part of the market is so dominant in the US that it is generally known as “the cloud”, with Amazon, Microsoft and Google dominating the sector.

However, in China, 40 per cent of the market is devoted to the private cloud, where companies use dedicated and often highly customised computing resources, according to the China Academy of Information and Communications Technology, a government-run think-tank. Customers in this part of the market include large state-owned enterprises and governments. The leading vendors are Huawei, state-owned providers and also Alibaba.

In the public cloud, internet industry customers represent about half of all end users, which has left Alibaba and Tencent’s cloud arms vulnerable to China’s tech crackdown. Alibaba cited waning usage from edtech companies, which had their business model outlawed by Beijing, and online entertainment firms, which have faced tougher rules.



The regulatory shift has also spurred venture capitalists to ditch the consumer internet space. “Lots of small internet companies with less than 100 people have closed this year,” said a person close to Alibaba’s cloud division. “They are the main cloud users, if they’re gone, we’re hurting.”

Yi Zhang, an expert at Canalys, said growing competition and slowing demand in the public cloud market meant tougher times for cloud vendors. “The overall market is getting saturated,” she said.

In the 12 months to March 31, Ali Cloud’s growth has slipped, with sales up just 23 per cent on the year to Rmb75bn ($11bn) and an operating loss of Rmb5bn. In comparison, Amazon grew its cloud revenue 38 per cent in the same period, contributing $21bn of operating income on $67bn in sales.

“Cloud is Alibaba’s second most important business after ecommerce, so the slowdown is concerning,” said Shawn Yang, managing director at Blue Lotus Capital Advisors. “Alibaba has been saying it was because of losing a key customer, which was ByteDance’s TikTok, but clearly there are other reasons too,” he said.

Aside from losing TikTok, Alibaba’s chief executive Daniel Zhang last month also blamed the Covid-19 outbreak for delaying projects, the faltering economy and declining demand from internet companies, while asserting the growth slowdown was only temporary. “Digitisation of other industries is just starting and we see plenty of opportunities,” he said.

But analysts said the structural issues and growing competition would remain at least near-term challenges for Alibaba and Tencent.

“Only small companies want to use the public cloud,” said Evan Zeng at Gartner. Large enterprises “don’t trust the public cloud providers . . . they want control over security and the entire environment”.

Boris Van, China software senior analyst at Bernstein, added that Beijing’s rollout of a slew of cyber security and data privacy policies last year convinced more companies to opt for private cloud computing. “They want better control over their data environments,” he said.

Tencent, meanwhile, said it was turning away from lossmaking services such as offering discounted cloud infrastructure and highly customised projects, which caused its sales to fall in the first quarter.

James Mitchell, Tencent’s chief strategy officer, said many cloud vendors provided “cost-heavy solutions” akin to acting as an IT consultancy. “While that is achievable in an environment of kind of infinite capital . . . it’s not sustainable,” he told investors last month.

With rising competition from telecoms and Huawei, Tencent and Alibaba are shifting away from low value-add private cloud work, said Robin Zhu, China internet analyst at Bernstein. “They are focusing on higher-margin cloud services — we expect slower growth in the next few quarters.”

Recent public procurement contracts reviewed by the FT show dozens of vendors competing for government contracts. Several local governments, such as the city of Changsha, awarded renewals to Huawei in no-bid competitions, but the tenders showed fewer automatic deals for Alibaba or Tencent.

An official in Alibaba’s home province of Zhejiang said the company had done well in winning government contracts before 2020, when founder Ma crossed a political red line with a speech in Shanghai criticising regulation.

“That era has gone as Alibaba fell out of favour with President Xi [Jinping],” said the official. “These days we are leaning towards state-backed cloud services like Tianyi as they are considered more politically reliable. That will be the trend in the coming years.”

Additional reporting by Nian Liu in Beijing

In a vast warehouse on the arid outskirts of Pakistani megacity Karachi, hundreds of young workers sort through boxes of nappies, cooking oil and mobile phones.

The items are handpicked off the maze of shelves, carried by forklifts and ultimately packed into trucks to be dispatched to Karachi’s roughly 20mn residents and beyond.

Though Alibaba’s name and orange logo are not visible, this warehouse is a central part of the Chinese tech giant’s strategy to crack South Asia, one of the world’s fastest-growing ecommerce markets.

Daraz, an ecommerce company that Alibaba acquired in 2018, has proved a promising avenue into a tricky region for the Hangzhou-based company, which has effectively been shut out of India after the country curtailed Chinese investment over geopolitical tensions.

Through Daraz, Alibaba has expanded its reach as the Pakistan-based group spread to Bangladesh, Sri Lanka, Nepal and Myanmar, becoming the region’s largest ecommerce company outside India.

It comes as Alibaba steps up its global push. Its international business — including Daraz, south-east Asia’s Lazada, Trendyol in Turkey and AliExpress — is one of its more promising segments at a time when China’s tech crackdown, slowing economy and rising competition have left its domestic operations sputtering.



Chief executive Daniel Zhang told investors in December that the international business had “huge potential” with a “long runway ahead of us”. This year, new finance chief Toby Xu said it was one of two segments expected to become “increasingly important growth drivers in the future”.

Daraz was founded in Pakistan by Germany’s Rocket Internet in 2012 and expanded around South Asia before being acquired by Alibaba for $194mn in 2018. The company, which says it has about 40mn users, is primarily an ecommerce marketplace for small vendors but has expanded into lending and even streams cricket matches.

Bjarke Mikkelsen, Daraz’s chief executive, said the company was “just at the beginning”.

“By integrating [with Alibaba’s] ecosystem there’s a huge opportunity,” he added.

Daraz operates in one of the world’s most populous regions, with about 440mn people across its markets. Tech adoption is growing rapidly. For example, smartphone take-up in Pakistan and Bangladesh is set to grow faster than in other large Asian markets such as India or Indonesia.

“Pakistan was being looked at as a very unstable market,” said Jehan Ara, a Pakistan-based tech and software executive, but she added that it was now among the last sizeable untapped opportunities. “This is the largest market that’s left.”



Before he stepped down in 2019, billionaire chair Jack Ma envisioned making Alibaba “a platform for global small business”, acquiring Lazada, Trendyol and Daraz and expanding homegrown cross-border platform AliExpress.

The addition of the three local players deepened Alibaba’s position in three separate emerging markets, while AliExpress shipped cheap Chinese goods globally and spearheaded its European push.

But after Ma, a new generation of more inward-looking leaders took over and the international business — which contributed only about 7 per cent of total revenue — became less of a priority, according to one person close to Alibaba’s overseas operations.

Now, the internal pendulum is swinging back towards international expansion. In December, Jiang Fan, one of Alibaba’s most promising young managers, was handed control of a reorganised international division.

But the renewed global effort is likely to be rocky. Sales at Alibaba’s international division have been volatile and appear to be slowing after a boom during the Covid-19 pandemic. A 14 per cent growth in sales in the fourth quarter, compared with the previous year, dropped to a 4 per cent rise in the first three months of the year as the division was hit by Turkey’s inflation crisis and new taxes for packages shipped into the EU.



The growth of ecommerce and tech in countries such as Pakistan and Bangladesh has lagged behind other markets including India and south-east Asia. While venture capitalists invested a record $366mn in Pakistani start-ups last year, for example, they invested $38.5bn into neighbouring India, according to data from Pakistan’s Data Darbar and Bain & Company.

“Where India was in 2012, we’re here in 2022 . . . So we’re catching up, the change is happening, but the size is still very low,” said Mohammad Sohail, chief executive of Topline Securities brokerage in Karachi.

Daraz is one of the most visible examples of Chinese tech investment in a region where Beijing has spent tens of billions of dollars on infrastructure projects through its Belt and Road Initiative, but private sector follow-up has been slower.

“Generally our countries are very pro-China and they’re all in some shape or form part of One Belt, One Road,” Mikkelsen said. “Having a Chinese shareholder . . . has been seen as quite positive, that we’re attracting that kind of investment.”

While Daraz utilises Alibaba infrastructure such as Alipay for payments or Cainiao for logistics, executives said the company has also benefited from a more hands-off approach.

At Lazada, the largest of its overseas businesses, Alibaba parachuted in Chinese executives in a largely unsuccessful attempt to stave off competition from Singapore’s Shopee. But at Daraz and Trendyol, it left existing leaders in place. Mikkelsen, a former Goldman Sachs banker from Denmark, joined Daraz in 2015, before Alibaba’s acquisition.

While its foray into South Asia has proved promising, the short-term outlook has become more uncertain. Daraz’s markets have been particularly hard hit by global economic shocks. Sri Lanka became the first Asian country in more than two decades to default on its foreign debt last month amid an economic crisis, while Pakistan and Nepal have imposed import restrictions to try to control rising prices and dwindling foreign reserves.

The surge in fuel and other commodity prices has also pushed up Daraz’s costs. Some of its competitors, such as Lahore-based ecommerce company Airlift, have turned to mass lay-offs.

While Mikkelsen acknowledged that budget discussions with Alibaba’s leadership were “tougher this year than they have been for a while”, he argued that Daraz was better placed to withstand the storm — thanks to its deep-pocketed parent.

“Ecommerce is sexy. It’s high growth. The money is pouring in in good times [but] sometimes people forget a little about the efficiency and path to profitability,” Mikkelsen said. “Alibaba is a long-term investor. Right now it’s a good time to have a strategic long-term investor with lots of cash.”