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(Bloomberg) -- Alibaba Group Holding Ltd. foresees its cloud services arm turning profitable for the first time this year, a milestone for the decade-old business that underscores how Asia’s largest corporation expects a return to pre-pandemic levels as China’s economy rebounds.Alibaba’s shares rose 3.8% on Wednesday in Hong Kong, their biggest gain in over a month. Its internet computing business is growing roughly 60% at an annual revenue run rate of about $7 billion, Chief Financial Officer Maggie Wu told investors at an annual company conference. The unit should turn profitable in the year ending March, she said.Cainiao, the logistics service Alibaba folded fully into its broader empire in 2017, should generate positive cash-flow on an operating basis over the same period, she added.China’s most valuable corporation has invested billions in hosting computing for corporations over the cloud, while building a nationwide logistics network that can handle the billions of parcels its e-commerce business throws out. Achieving profitability will boost Alibaba as it tries to revitalize growth alongside a recovery in the broader Chinese economy. The e-commerce giant is riding a pick-up in consumer spending -- particularly online -- in a country among the first to recover from Covid-19.“We typically spend 8 to 10 years incubating, nurturing and growing a new business,” Chief Executive Officer Daniel Zhang told investors. “We still regard ourselves to be in the nascent stage of the global cloud era.”Like Amazon.com Inc.’s, Alibaba’s cloud service emerged from the computational power needed to handle billions of online shopping transactions to become one of its fastest-growing initiatives. The Chinese company today relies on the service, which competes globally with Amazon Web Services, Microsoft Corp. and Google, to underpin both its global expansion and forays into newer arenas such as live-streaming.Read more: Alibaba Touts Post-Virus Rebound While Watching ‘Fluid’ U.S.What Bloomberg Intelligence SaysAlibaba’s announcement at its 2020 Investor Day that its cloud computing business is targeting positive profits in fiscal 2021 could come as a surprise to the market and lift consensus estimates. Alibaba has intentionally kept its cloud segment operating at a small loss in past years in order to gain market share, so the announcement marks a shift in messaging for the segment.\- Vey-Sern Ling and Tiffany Tam, analystsClick here for the research.Alibaba’s cloud business continued to grow during the global Covid-19 shutdowns this year. It held a leading 40.1% share of China’s total cloud infrastructure services spending in the June quarter, more than double its closest competitors, according to industry researcher Canalys. Even as economies start to recover, the company is aiming to take advantage of the shift to upgrade more corporate IT infrastructures to the cloud and boost cloud-based collaboration at work, Zhang told investors Wednesday.Retail sales in the world’s No. 2 economy rose for the first time this year in August, after virus restrictions eased. The comeback in consumer spending has allowed Alibaba to further expand a $700 billion empire that already spans online retail, food delivery and internet computing. It owns a third of Ant Group, the Chinese financial titan pursuing potentially the world’s largest initial public offering, and most recently outlined plans to create a new line of business by modernizing factories.Excluding its stake in Ant, Alibaba’s strategic investments are currently valued at $45 billion, Wu told investors on Wednesday, adding that the company will continue to invest in technology and research. Alibaba last year reported an $83 billion stake in its global portfolio of investments, which included its 33% stake in the fintech behemoth.Zhang -- credited with orchestrating Alibaba’s last big foray into a new arena, with a move into brick-and-mortar retail -- is responding in part to intensifying competition on multiple fronts. Pinduoduo Inc. has lured small-town buyers away with cheaper bargains, while traditional foe JD.com Inc. has ventured beyond its traditional strength in consumer electronics into groceries, a category that leapt to the fore during nationwide lockdowns.Even social media companies like ByteDance Ltd. and Tencent Holdings Ltd. are increasingly reaching out to shoppers through live-streaming -- a route Alibaba pioneered with Taobao Live -- after Covid-19 fueled online entertainment. While rival video apps like Tencent-backed Kuaishou and ByteDance’s Douyin typically directed traffic to Alibaba platforms, they’re now seeking to handle the transactions by themselves.Then there’s sustained competition in food delivery. Alibaba’s Ele.me now directs flowers, housekeepers and masseurs to doorsteps in addition to lunchboxes, while Tencent-backed Meituan Dianping tries its hand on beauty products and smartphones.With more than 1 billion annual active consumers, Alibaba generated over $1 trillion in gross merchandise value in the 12 months ended June, Wu said. Spending on its platforms accounted for about 18% of China’s total retail sales, up from about 10% in 2015.“Domestic consumption, cloud computing and data intelligence, and globalization -- these are the three growth engines for Alibaba’s future,” Zhang said. “Digitalization is the biggest opportunity of our time.”Read more: Chinese Consumers Join Industrial Recovery From Covid-19(Updates share price in second paragraph)For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.
The Chinese online retail giant has more than doubled in 2020. It may not be too late to hop on the hot stock.
(Bloomberg) -- As export orders started plummeting in March amid the coronavirus’s global spread, Chinese toothbrush maker Tommy Tu turned to the domestic market. With the help of Alibaba Group’s huge trove of data on what Chinese consumers are searching for, his factory shifted to making products that became local hits, like a battery-operated electric toothbrush for 9.9 yuan ($1.5).The strategy helped Tu recover most of the lost foreign sales and reduce his Jiangsu-based firm’s dependence on exports to 60% of revenue, down from 90% earlier.Spurred by the economic devastation unleashed by the pandemic, hundreds of thousands of Chinese factories like this -- some of which had exported almost everything they made -- are re-focusing on the domestic market of 1.4 billion people. They are turning to e-commerce giants like Alibaba, Pinduoduo Inc. and JD.com Inc. with deep pockets and years of observing consumer behavior, in what could be a long-term pivot.“We have to focus more on domestic sales,” said Tu, who doesn’t anticipate a “return to the old days” of robust overseas demand. “We have to move away from just blindly sticking labels on products to actively researching, designing and building our own brand.”Chinese factories are having trouble in overseas markets not just because of the global economic contraction caused by the pandemic. Political tensions are flaring between China and the U.S., Australia and Canada, while rising labor and material costs are propelling foreign clients to turn to more affordable exporters such as those in Southeast Asia.With China’s status as the factory to the world -- an economic model that powered its growth in the past two decades -- coming under pressure, President Xi Jinping is ambitiously seeking to boost domestic consumption in a revamp of the world’s second-largest economy.Though China’s exports demonstrated strength in feeding global demand recently-- rising 9.5% in dollar terms in August from a year earlier -- exports will be pressured in the long term as other nations increase output, according to Nomura Holdings Inc.“Amid the global weakness, domestic demand is where the market is,” said Raymond Yeung, chief greater China economist at ANZ Bank. “China has already become more of a domestically driven economy even before Covid-19.”Many exporters had already been seeking to expand domestic sales, and the pandemic accelerated that, said Wang Hai, a vice president at Alibaba overseeing consumer-to-manufacturer e-commerce. In just three months, Alibaba gathered more than 300,000 Chinese export factories to tap local demand directly.Alibaba’s app, Taobao Deals, is a business-to-consumer platform mainly for Chinese manufacturers that went online in March. By June, it had 40 million monthly active users, according to a company earnings call. Besides analyzing demand trends, Alibaba’s logistics arm Cainiao handles centralized shipping and customer services for the factories.Survival PivotStill, only about 10%-20% of Chinese exporters have taken action to extend their domestic reach, according to Bai Ming, deputy director of the Ministry of Commerce’s International Market Research Institute, based on a small survey. Challenges include switching standards, marketing unfamiliar brands amid local competition and the longer periods of credit payment allowed in China.Domestic demand is also not yet big enough to prop up China’s $2.5 trillion export sector which employs close to 200 million people. And without the premium commanded by global brand names attached to their goods, Chinese factories will be forced into a race to the bottom on price.“Most consumers will probably make their choices based on price or how the product functions are demonstrated, if there’s no brand identification,” said Jason Yu, managing director at Kantar Worldpanel Greater China. “So this won’t be a sustainable business model for most of those factories.”Bruce Zhu, manager of a high-end luggage manufacturer in Zhejiang province that focuses on exports, initially tried to crack the domestic market as the outlook for his sector has soured. However, the factory couldn’t withstand slashing its prices to compete with other local makers. “The domestic market is too fierce,” he said.For companies that can endure the price war, consumer data supplied by Alibaba and others help steer an adjustment to Chinese preferences. Informed by search data, a Zhejiang-based cushion maker pivoted to red, embroidered cushions, and started making a product that can be converted into a blanket.The revamp helped his firm’s sale hold steady amid a plunge in overseas orders, said Chief Executive Jin Zehua.Glass BottlesExperts say if China’s exports continue to demonstrate strength as seen in recent months, the inward push could help local makers become more diversified and resilient.“Turning to the domestic market adds one more option for Chinese exporters,” said Bai, the commerce ministry researcher. “In the future, exporters can sell to the market that’s most favorable, which reduces risks.”Some Chinese exporters are learning how to develop both inward and outward channels. In February, Alibaba contacted Guangdong Haoshun Odis Technology Co., an exporter of automobile cleansers and lubricants, to design an alcohol disinfectant after analyzing tens of millions of searches for such a product.Alibaba found that most alcohol disinfectants in China were sold in glass bottles, which were too fragile and dispensed too much liquid at a time. Haoshun Odis hence started making disinfectant spray in metal bottles, said director Qu Weihao.Sales have climbed 66% between January and July, Qu said, both from domestic demand and overseas markets like Japan. “Without big data, this could have been very difficult to achieve,” Qu said.For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.©2020 Bloomberg L.P.