Alibaba has been leveraging its vast cloud computing infrastructure to become a leading investor in China’s generative artificial intelligence start-ups, offering them credits to use the scarce network resources needed to train models rather than conventional cash-for-equity funding.
The Chinese ecommerce giant is trying to replicate the
success of Microsoft’s investment in the US leader, OpenAI, by taking stakes in
prominent start-ups Moonshot, Zhipu, MiniMax and 01.ai. They have all been
developing local versions of US applications such as OpenAI’s ChatGPT and
Character.ai’s avatar chatbot.
In one example, Alibaba led a $1bn fundraising round in
Moonshot AI that valued the start-up at $2.5bn in February. It put $800mn into
the developer of the fast-growing Kimi AI chatbot, with just under half coming
in the form of cloud computing credits, according to two people familiar with
the deal. Alibaba declined to comment.
Over the past year, Alibaba chief executive Eddie Yongming
Wu has personally overseen investments in the four leading AI start-ups,
according to people familiar with the matter, as the company seeks to reinvent
itself as an AI innovator.
The splurge in investment comes at a pivotal time for
Alibaba. It is trying to chart a new path as it grapples with rising
competition from ByteDance and PDD Holdings in its core ecommerce market and
after the chaotic unwinding of its ambitious restructuring plan, under which
its cloud business was supposed to pursue an initial public offering.
Alibaba cancelled that plan in November, citing the impact
of US chip restrictions. Wu then took direct control of the cloud business,
pledging to invest in AI and putting the business at the centre of his strategy
to boost growth.
The cloud arm had been averaging single-digit quarterly
growth since 2022, following Beijing’s crackdown on large internet companies.
Its profitability has lagged far behind that of US rivals such as AWS.
Charlie Dai, vice-president and principal analyst at tech
consultancy Forrester, said Alibaba was “facilitating the start-ups by offering
a public cloud platform with comprehensive capabilities boosted by its broad
ecosystem for their open-source models” while generating new revenue for its
cloud business by providing computing resources to train their models.
The structure of Alibaba’s investment in Moonshot echoes
those of Microsoft and Amazon, under which cash is transferred to AI start-ups
on the agreement that they will use the money to train and run models on Azure
and AWS servers, respectively.
However, as one person noted, the difference with Alibaba’s
investment is that the money is never transferred to the Chinese start-ups.
Instead, it is held in an escrow account that the company can count as incoming
revenue.
Computing-for-equity offers are more enticing in China,
where cloud resources are scarce due to US restrictions on the export of
advanced chips. “Providing compute is actually more valuable than cash,” said
one Chinese AI scientist. “With the shortage of semiconductors, it’s very hard
to get access to a 10,000 GPU [processing] cluster, which Alibaba has.”
Social media group Xiaohongshu is pursuing an even more
creative investment method, offering increased traffic for the start-ups’
products through promotiona on its popular Instagram-like platform in exchange
for equity, according to two people with knowledge of the matter. Xiaohongshu
did not respond to a request for comment.
China’s major internet companies, including Alibaba,
Meituan, Xiaohongshu and Tencent, are playing an outsized role in financing
this wave of start-ups compared with the previous crop of AI start-ups
dominated by surveillance groups SenseTime and Megvii.
During that phase of the investment wave, which peaked
between 2017 and 2019, large tech investors such as Tiger Global and SoftBank,
along with a wide pool of domestic venture capital firms, competed with the
internet giants for deals.
But deteriorating relations between Beijing and Washington
and a downturn in China’s VC industry over the past two years have made today’s
crop of AI start-ups more reliant on financing from domestic internet
companies, which in turn means they have less negotiating power when
determining the price for cloud services, said one person with knowledge of the
deals.
Alibaba has become a top investor just as it seeks to
monetise its hoard of AI chips. Alibaba Cloud purchased high-end Nvidia
graphics processing units, including large orders of the watered-down A800 and
H800s series, before the US restricted advanced chip sales to Chinese
companies. It has them in data centres in China and south-east Asia, according
to a person familiar with the matter.
The cloud provider is seeking to capitalise on these chips
before they lose their value when Nvidia releases its next generation of AI
processors. Alibaba will be barred from buying the new chips under Washington’s
tightened export controls, said one person close to the company.
Wu’s focus on AI investments represents a new chapter for
Alibaba after a regulatory crackdown on its alleged monopolistic behaviour
starting in 2021 required it to divest stakes in other internet companies under
pressure from regulators.
Alibaba has become such a pivotal backer of AI start-ups in
China that industry insiders have started to joke: “If you want to invest in
China AI, just buy Alibaba stock. It’s a China AI ETF,” said one manager at an
Alibaba-backed AI start-up.