Why Alibaba Decides to 'Reset Everything to Zero' - What's the Real Reason Behind It?

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At the AI Crossroads: Alibaba's Strategy of Choice

To have the entire company 'reset everything to zero' and start anew, new CEO Wu Yongming has outlined a strategic blueprint for Alibaba's future.

During the earnings call on November 16, Wu Yongming demonstrated his approach to decision-making. He plans to reassess Alibaba's business priorities, categorizing them into core and non-core businesses.

For core businesses, the focus will be on maintaining long-term dedication and high-intensity investment to ensure products continuously evolve with user needs, sustaining long-term vitality and competitiveness. For non-core businesses, various capitalization methods will be employed to realize asset value as quickly as possible.

A clear distinction has been made between core and non-core businesses—those aligning with the group's new strategic focus: technology-driven internet platform businesses, AI-driven technology businesses, and a globalized commercial network; as well as new businesses that meet future user demands and AI-driven development directions. These are the areas where Alibaba will concentrate and increase investment intensity in the long term. Wu Yongming also clarified the development strategies and priorities for each business group in the coming years:

• Taobao and Tmall will prioritize 'user-first,' adhering to the concept of 'Everything on Taobao' and maintaining a strategy of consumption grading and price competitiveness;
• Alibaba Cloud will adhere to 'AI-driven, public cloud first,' driving development with the dual engines of AI and cloud computing;
• The International Digital Commerce Group is committed to building a globally leading digital supply chain network and AI + digital retail core technology capabilities;
• Cainiao will increase technological investment to accelerate the construction of a global intelligent logistics network;
• Local services, primarily through Amap and Ele.me, will develop into destination and home-based technology services, seizing the opportunities presented by AI development;

Alibaba's entertainment division will continue to focus on premium content and strive for profitability as soon as possible.

Additionally, the company unveiled its first batch of strategic innovative businesses—1688, Xianyu, DingTalk, and Quark. The selection criteria include substantial market potential, unique positioning, alignment with user demand trends, and the group's "AI-driven" strategy.

These strategic innovative businesses will operate as independent subsidiaries, breaking free from previous constraints within the group. Alibaba plans to invest in them continuously over a 3-5 year cycle.

This strategic blueprint reflects both the outcomes of Alibaba's organizational reforms and Wu Yongming's insights into current market dynamics and future opportunities.

Shortly after assuming the CEO role in early September, Wu Yongming swiftly charted Alibaba's future course. In a company-wide letter, he outlined two strategic priorities: user-first and AI-driven approaches.

Now, he has fully laid out the comprehensive strategic vision for the future.

For Alibaba, with over 220,000 employees serving more than 1 billion users globally, initiating a full-scale transformation is no small feat. Clarifying the development path of such a vast organization and drafting a new strategic blueprint require wisdom, determination, and decisiveness—but Alibaba has no other choice.

Today, Alibaba has grown into a diversified business group with annual revenue of $125 billion and free cash flow of $27 billion. A company of this scale typically possesses extensive core capabilities and resources, but these must be effectively allocated and utilized to achieve strategic goals.

The sheer size of the organization and business operations demands extra caution in company-wide strategic adjustments. At the same time, maintaining innovation and exploring new business models and market opportunities are essential for sustained growth and leadership.

Moreover, Alibaba faces challenges such as complex organizational structures and management difficulties. Strategic adjustments can help optimize the organizational framework, improving management efficiency and market responsiveness.

"Today, Alibaba confronts rapidly evolving technologies and shifting market expectations. No matter how successful past business models were, we must reset and reawaken a startup mentality," the company stated.

Wu Yongming's strategic blueprint reflects Alibaba's resolute approach to resource allocation: investing limited resources in the right businesses has become the growth engine for the new Alibaba post-organizational restructuring.

Unleashing Transformation Power

The effectiveness and dividends of organizational restructuring continue to emerge, enabling Alibaba to deliver financial results combining stability with highlights.

In Q3 2023, Alibaba regained growth momentum, with revenue exceeding market expectations at 224.79 billion yuan (up 9% YoY), maintaining approximately 10% growth for two consecutive quarters. Non-GAAP net profit reached 40.188 billion yuan, a 19% YoY increase.

This demonstrates the remarkable success of Alibaba's proactive transformation.

As Alibaba's core business, Taobao-Tmall Group achieved 97.654 billion yuan in revenue (up 4% YoY). Customer management revenue (comprising Taobao and Tmall advertising and commissions) grew 3% YoY for two consecutive quarters, primarily due to increased merchant advertising investment.

Since last quarter, Alibaba resumed reporting Taobao's DAU metrics. This quarter, Taobao App achieved healthy organic DAU growth YoY thanks to its content and price competitiveness strategies.

Alibaba's financial report shows Taobao-Tmall boosted user numbers, engagement time, buyers and orders through: enhanced content encouraging consumer interaction; more merchants and precise ad placements; increased price-competitive product offerings; and AI tools improving user experience and merchant efficiency.

Going forward, Taobao-Tmall's business priorities are "user-first" - maintaining its position as the "Everything Store" through consumption stratification and price competitiveness strategies, representing clear strategic choices in intense competition.

After temporary revenue decline in Q1, Cloud Intelligence Group returned to growth for two consecutive quarters with 27.648 billion yuan revenue (up 2% YoY). Profitability improved (adjusted EBITA up 44% YoY) through increased public cloud revenue and reduced low-margin project contracts.

Prioritizing public cloud services represents a crucial strategic decision aligned with global industry trends. During the earnings call, Wu Yongming revealed that Alibaba Cloud will streamline its product portfolio and business models, reducing project-based sales while increasing investment in core public cloud products. "By prioritizing public cloud, we aim to achieve future scale effects and technological dividends," he stated.

The financial report mentioned that Alibaba will no longer pursue the complete spin-off of its Cloud Intelligence Group, instead focusing on establishing a sustainable growth model for the unit.

Alibaba Cloud is regarded as the company's most promising business after Taobao and Tmall. Given the current AI boom and external uncertainties, a full spin-off would not enhance shareholder value as originally envisioned. After evaluation, Alibaba has decided to maintain long-term strategic investments in Alibaba Cloud's development direction, while keeping the Cloud Intelligence Group as an independently operated company under a CEO accountability system authorized by its board.

Alibaba International Digital Commerce Group maintained strong growth momentum in Q3, with revenue increasing 53% year-over-year. Its adjusted EBITA loss narrowed to 384 million yuan from 748 million yuan in the same period last year. Retail commerce orders across platforms including Lazada, AliExpress, Trendyol and Daraz grew approximately 28% year-over-year.

Both the Local Services Group and Digital Media and Entertainment Group achieved double-digit year-over-year revenue growth in Q3. Cainiao Group's revenue grew 25% to 22.823 billion yuan, primarily driven by cross-border logistics business. Xianyu, which was upgraded to a first-tier business unit under Taobao and Tmall Group ahead of Double 11, saw rapid revenue growth from advertising, commissions, and value-added services. Its DAU increased over 20% year-over-year in the month ending September 30.

Wu Yongming emphasized during the earnings call that the restructured Alibaba has become more agile. The company will establish highly flexible governance mechanisms and incentive systems for quick decision-making, with each business unit operating more independently in the market.

Powering Up with AI

If organizational changes were the main driver for Alibaba's development last quarter, this quarter the company has installed a new engine: AI.

Wu Yongming predicts that the most significant transformation in the next decade will come from AI-driven industry-wide changes. As the group enters a new development phase, Alibaba aims to seize opportunities created by AI technological revolution to deliver greater customer value.

Amid the AI wave, Alibaba Cloud stands out as one of the most notable players at the table.

In August this year, Alibaba Cloud open-sourced its Tongyi Qianwen 70-billion-parameter general and dialogue models on the AI open-source community ModelScope, making it the first major Chinese tech company to open-source a large model. So far, more than half of China's large model companies operate on Alibaba Cloud, with ModelScope attracting 2.8 million developers, over 2,300 high-quality models, and more than 100 million AI model downloads.

Wu Yongming believes that with the advent of the AI era, represented by large models, the demand for AI-driven transformation and innovation across industries will lead to exponential growth in IT investments and an equally rapid expansion in cloud computing needs, creating enormous incremental opportunities for the era.

At the end of October, during the Apsara Conference, Alibaba Cloud Intelligence Group unveiled a series of new technologies under development, including version 2.0 of its proprietary large language model, Tongyi Qianwen, and the one-stop AI application development platform, Alibaba Cloud Bailian. Additionally, Alibaba Cloud plans to release a new open-source large model with 72 billion parameters.

Wu Yongming stated that Alibaba Cloud will focus on two key initiatives moving forward: first, building the "most open cloud in the AI era," providing stable and efficient AI infrastructure for the entire industry; and second, fostering an open and thriving AI ecosystem.

Indeed, financial reports clearly show that Alibaba's various businesses are rapidly integrating AI.

During the reporting period, Taotian Group expanded multiple AI products and services for Alimama, upgrading its ad placement platform, Wanxiangtai Wujie Edition, with AI technology. In September, it also began internal testing of "Taobao Wenwen," an AI application developed based on Alibaba's large model.

Wu Yongming believes that Taobao, as a super app, has the capacity to accommodate multiple product tiers—from branded to generic—and diverse value propositions. Through AI technology and iterative operational models, Taobao aims to become a consumer app that embraces a pluralistic market, with competitive pricing as the core strategy across all product levels.

As Alibaba's newly launched strategic innovation businesses, DingTalk and Quark are among the biggest beneficiaries of the AI era. Office software and search naturally align with AI, as seen with Microsoft and Google integrating AI capabilities into their productivity and search products. Alibaba, with its strong product foundation, is no exception.

Wu Yongming believes that every individual and enterprise will have personalized intelligent assistants, and DingTalk is expected to become the best AI assistant platform. In the era of large models, Quark has a tremendous opportunity to create revolutionary search products for young people.

Over the past 24 years, Alibaba's strategic decisions have always been based on a deep understanding and judgment of the industry. From the 2002 vision of 'focusing on e-commerce infrastructure construction' to the 2007 proposal of building 'an open and collaborative e-commerce ecosystem,' and then to the 2010 vision of a 'big data platform.' These strategic adjustments not only reflect Alibaba's insight into market trends but also demonstrate its clear understanding of its own capabilities and strengths.

Standing at the threshold of 2023, Alibaba continues to signal its long-term commitment to AI, marking a decisive strategic shift: turning the page to start anew and rekindling an entrepreneurial mindset. As Wu Yongming stated, Alibaba is embarking on a new entrepreneurial journey, fully prepared to wholeheartedly embrace technological transformation.