Alibaba uses cloud services to become the leading AI investor of China

Alibaba is leveraging its cloud computing infrastructure in order to become the leading investor for China’s artificial intelligence start ups. It offers them credits that they can use to access the limited network resources required to train models, rather than traditional cash-for equity funding.

By investing in Moonshot, Zhipu MiniMax, and 01.ai, the Chinese ecommerce giant is attempting to duplicate the success that Microsoft achieved with its investment into OpenAI’s US leader. All of them have been working on localized versions of US apps such as OpenAI ChatGPT or Character.ai avatar chatbot.

In February, Alibaba raised $1bn for Moonshot AI. The start-up was valued at $2.5bn. According to two people who were familiar with the deal, Alibaba invested $800mn in the developer of a fast-growing AI chatbot called Kimi. Just under half of that money came as cloud computing credits. Alibaba declined to comment.

Alibaba’s chief executive Eddie Yongming Wu personally oversaw investments in four of the leading AI start ups during the last year, according to sources familiar with the situation, as Alibaba seeks to reinvent itself to become an AI innovator.

Alibaba is at a critical point in its development. The company is trying to chart out a new course as it struggles with the rising competition of ByteDance Holdings and PDD Holdings on its core e-commerce market, and after chaos unraveling its ambitious restructuring plan. Under this plan its cloud business had been supposed to pursue a public offering.

Alibaba canceled that plan in November citing US chip restrictions. Wu took control of the cloud division, promising to invest in AI. He also put the business as the core of his growth strategy.

Since 2022, the cloud division had averaged a single-digit growth rate every quarter. This was due to Beijing’s crackdown against large internet companies. Its profitability is far behind US competitors such as AWS.

Charlie Dai is vice president and principal analyst for Forrester. He said Alibaba “facilitated the start-ups” by providing a public cloud with comprehensive capabilities, boosted by its wide ecosystem for their open source models, while generating revenue for its cloud service by providing computing resources for training their models.

Alibaba’s investment structure in Moonshot is similar to that of Microsoft and Amazon. Cash is transferred to AI startups on the understanding that they will train and run their models on Azure or AWS servers.

As one person pointed out, Alibaba’s money is not transferred to Chinese start-ups. It is instead held in an account called escrow, which the company can use to count as revenue.

The computing-for-equity offer is more attractive in China where cloud resources are limited due to US export restrictions. One Chinese AI scientist said that “providing compute is more valuable than cash.” Alibaba’s 10,000 GPU [processing] Cluster is very difficult to access due to the shortage of semiconductors.

According to two sources with knowledge of the situation, the social media group Xiaohongshu has adopted an even more innovative investment strategy. It offers increased traffic for start-ups through promotiona on Instagram like platform, in exchange for equity. Xiaohongshu didn’t respond to a comment request.

Alibaba, Meituan and Xiaohongshu, China’s largest internet companies, play a major role in funding this new wave of AI start ups, compared to the previous batch of AI start ups dominated SenseTime and Megvii.

The internet giants competed for deals with large investors like Tiger Global, SoftBank and a variety of domestic venture capital companies during the peak of the wave between 2017 and 2019.

One person familiar with the deals said that the deteriorating relationship between Beijing and Washington, as well as the downturn of China’s VC sector over the last two years, has made AI start-ups today more reliant upon financing from domestic internet firms. This, in turn, means they are less able to negotiate when determining cloud service prices.

Alibaba is a major investor, as it tries to monetize its AI chips. Alibaba Cloud bought high-end Nvidia graphic processing units including large orders for the watered down A800 and H800s before the US restricted advanced chips sales to Chinese companies. According to a source familiar with the situation, it has them in its data centres in China as well as south-east Asia.

Cloud provider wants to capitalize on these chips now before their value drops when Nvidia releases the next generation of AI-processors. One person familiar with the company said that Washington’s new export controls will prevent Alibaba from purchasing the new chips.

Wu’s focus is on AI investments, which represents a new chapter in Alibaba after regulators imposed a crackdown in 2021 on Alibaba for its alleged monopolistic behavior. Alibaba was forced to divest its stakes in internet companies.

Alibaba is now such a major backer of AI startups in China, that insiders are joking: “If want to invest in China AI just buy Alibaba stock.” One manager of an Alibaba-backed AI startup said: “It’s a China AI ETF.”

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