A Surprise Change In Leadership At Alibaba Spooks Wall Street, Sends Stock Downwards

Alibaba announced its CEO and chairman was stepping down and will be replaced by other co-founders.
A Surprise Change In Leadership At Alibaba Spooks Wall Street, Sends Stock Downwards

Key takeaways

  • Alibaba CEO and chairman Daniel Zhang stepping down from the top job to focus on the company’s cloud computing arm
  • Top execs Eddie Yongming Wu and Joseph Tsai taking the respective CEO and chairman roles
  • The move comes as Alibaba marches forward with its massive restructuring plan

There’s a big change in the ranks at one of China’s biggest tech companies. Alibaba announced its CEO and chairman was stepping down and will be replaced by other co-founders. The changes are being made in a bid to ensure its massive restructuring goes smoothly and so the company can focus on the AI opportunities that lie ahead with its cloud computing business.

As Chinese tech company restrictions appear to be easing off and the Chinese economy has slumped, Alibaba is making big decisions now for the company’s long-term success. But Wall Street doesn’t like surprises, and the stock fell on Tuesday. Let’s get into the details.

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What’s happened at Alibaba?

E-commerce giant Alibaba’s CEO and chairman, Daniel Zhang, is stepping down from the top job at the company. He’s soon to be replaced by Eddie Yongming Wu, one of the Alibaba co-founders, as soon as September.

Wu has a long tenure in the Chinese tech company: he was former CEO Jack Ma’s special assistant for five years and now leads the Alibaba websites Taobao and Tmall. Another Alibaba co-founder, vice-chair Joseph Tsai, will take the board’s chairman position.

Zhang will remain in charge of the company’s cloud computing unit, which he took over at the end of last year. “This is the right time for me to make a transition, given the importance of Alibaba Cloud Intelligence Group as it progresses towards a full spin-off,” he said in a statement.

An Alibaba statement thanked Zhang for his “extraordinary leadership in navigating unprecedented uncertainties affecting the company’s business over the past few years”.

What was the market reaction?

The overhaul in management, especially given it was a surprise announcement, wasn’t taken well by Wall Street. Alibaba shares are currently 4.53% down at the news. Alibaba’s Hong Kong-listed stock also closed down 1.5%, in a more cautiously optimistic view from the market there.

President Xi’s clampdown on the tech industry has cost Alibaba dearly: it lost $500 billion of its value thanks to the changes, with a total of $1 trillion lost overall from Alibaba and other Chinese tech companies. Alibaba shares are trading well under their peak of $303 in October 2020 and the company is down 4.4% this year to date.

Big Tech woes in China

Some of Alibaba’s woes have arguably been of its own making. When former CEO Jack Ma criticized China’s regulatory regime and banks in 2020, it sparked an aggressive counter-strategy from the Chinese government to assert its power over companies it deemed to have concentrated too much power.

A swift and brutal response followed for two years afterwards. Ant Group, Alibaba’s fintech affiliate, was forced to scrap its Hong Kong and Shanghai IPO as it was deemed not to meet requirements. Alibaba was slapped with massive antitrust fines and the Chinese government said it was concerned with how much private data tech companies were holding, introducing strict new data protection rules.

But there are signs of life in the Chinese tech industry. CEO Zhang announced in March that Alibaba would be converting into a holding company and splitting up the tech conglomerate, worth roughly $220 billion and has 240,000 employees, into six separate companies. The company said the restructuring would “designed to unlock shareholder value and foster market competitiveness”.

The upside of such a move was that Wall Street investors felt the announcement was a sign Chinese tech might be more competitive again and that they were more confident hey could properly value the different businesses. At the time, Alibaba shares jumped 14% as investors salivated at the thought of several new IPOS
for the market.

Time for an Alibaba reboot

It’s no secret Alibaba faces battles on multiple fronts: rivals eating into its market share, the worsening geopolitical landscape and a sluggish recovery after the pandemic. Its competitors include JD.com, PDD Holdings
and ByteDance, the parent company of TikTok.

Last month Alibaba reported a third straight quarter of single-digit revenue growth. Alibaba’s latest earnings reflect the sluggish Chinese economy as it returns to post-pandemic life: in May, retail sales rose 12.7%, missing forecasts of 13.6% and considerably under April’s 18.4% figure.

A shock move announced last month was that Alibaba was entirely divesting its $12 billion cloud services arm by distributing stock to its shareholders over the next year, meaning Alibaba may have no shares in the platform at all. Zhang stepping down to focus on the cloud unit means Alibaba is alive to the AI opportunities the business presents, but it’s also a prudent move ahead of the unit’s proposed IPO this year, given Zhang’s tenure in the business.

Putting Wu in the top position also makes sense because Alibaba’s online shopping business, which Wu will continue to run, brings in more revenue than all of the other divisions put together. While the path forward might make investors nervous, it’s clear that Alibaba recognizes the challenges in front of it and has a plan of action to manage the headwinds.

The bottom line

Alibaba has had a rough few years after the pandemic, strict government regulations and a slumped Chinese economy. Not to mention that Alibaba is arguably a victim of its own success, with investors left scratching their heads on valuing such a behemoth business.

The unexpected shake-up in leadership may have temporarily spooked Wall Street, but the long-term benefit of Alibaba focusing on growing the profitability of its cloud computing business while letting the lion’s share of the company handle the day-to-day operations is a solid move from a business looking to complete a massive restructure.

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