Alibaba: The cycle always swings, and the most important thing is concentration

In the 21st century, the speed of technological change is jaw-dropping. For more than 20 years, the Internet revolution has still been heard, and the curtain of intelligent economy with artificial intelligence as the core has been opened. 

From PC to iPhone to ChatGPT, it is only 15 letters, but it has exhausted the vicissitudes of the global technology industry. 

Between the booms, most of the pigs chasing the wind have become meat on the cutting board; The survivors who finally cross the cycle and are still full of tension are all those who are determined to the mission and keep the right and surprising windcatchers. 

Among them, the most resilient sample of Chinese technology companies is undoubtedly Alibaba: starting with the vision of "making it easy to do business in the world" and becoming the underlying infrastructure of China's digital economy, this strategic thread has not changed course for 24 years. 

From the Yellow Pages, to Taobao, Alipay, Tmall, Cainiao, and then to cloud computing, this is the straight-line distance from the Internet to the mobile Internet to the intelligent economy (a new stage of intelligent economy with artificial intelligence as the core driving force), and it is also the path context of the strategic theme of "making it easy to do business in the world". 

In the past 24 years, there have been highs and lows, and the most important thing is determination. At the handover of the Internet economy and the intelligent economy, what does this strategic focus of reuse to iron out gains and losses and cross the cycle mean for Alibaba? 

With the latest earnings report just released, we try to explore the logic of this key proposition. 

01 E-commerce: stabilizing and upward 

Take one example. E-commerce is Alibaba's basic plate, and it is still the topic to understand its current and future logic. 

In the past three years, the downward resonance of the global economic cycle, coupled with the disruption of the epidemic, has maintained maximum stability in the macroeconomic turbulence, which is the first nature of business infrastructure such as e-commerce. 

According to the latest financial report released yesterday (February 23), Alibaba's entire e-commerce sector, after the past two quarters of solid capital Peiyuan, has sent a clear signal of stabilization and recovery: 

In the fourth quarter of 2022, subject to the maturity logic of the economic cycle and e-commerce mode, Alibaba's commercial sector experienced a slight decrease of 1% in the overall revenue, and the revenue of self-operated business with Hema and Ali Health as the core increased by 10% year-on-year to 74.421 billion yuan; International commerce, consisting of Lazada, AliExpress, Trendyol and Daraz, saw overall order intake increase of 3% year-over-year, a significant improvement from the same period last year. 

In the quarterly report analyst conference call, Daniel Zhang said that with the elimination of the impact of the epidemic and the holiday in February, work and life have returned to normal, consumption has shown a recovery momentum, especially the growth rate of clothing, sports and outdoor categories has recovered well, and the overall business has also shown a strong desire to operate. This recovery momentum is expected to continue. 

At present, Alibaba's e-commerce business has stabilized and upward, which is a natural return with certainty: 

1. Commercial infrastructure such as e-commerce is a barometer of total social demand, and macro consumption is integrated. The recovery of Alibaba's e-commerce business is an objective result of getting out of the epidemic and returning the economy to normal. 

2. E-commerce is the first sector in the entire Internet economy sector to enter a high maturity level. This means that the pursuit of efficiency and cost has been the main line of the industry in the last cycle (around 2018). Therefore, for the e-commerce industry, it is not the main contradiction at present, so it is not a decisive factor for stability and recovery. 

3. Under the situation of maintaining high-intensity competition within the e-commerce industry, the important parameter to test the quality of competitors' capabilities is not only the number of users, but also user stickiness. According to data from QM and Huaan Securities, Taobao's monthly active users have reversed the downward trend in December and returned to the industry leader, while Taobao's monthly active users are higher than their competitors. At the same time, by the end of 2022, the user stickiness of Taojie e-commerce will still maintain a relatively large lead. 

Figure: Mainstream e-commerce data comparison, source: Huaan Securities Research Institute 

To a large extent, such a basic fact also responds to external concerns about Alibaba's response to the challenges of live streaming e-commerce: in the trend of e-commerce from traditional graphic display to equal emphasis on graphics and live broadcast, Ali has not lost its position, but has followed this trend according to its own comparative advantages - from the underlying logic, Ali's e-commerce advertising billing model is rich enough and efficient, so that merchants of different sizes can find a model that maximizes their own interests on the Taojie e-commerce platform. 

Figure: Ali e-commerce advertising product introduction, source: Guosen Securities Economic Research Institute 

4. The return of the core e-commerce business to a healthy and stable situation is a definite pill, and the new potential energy shown by the sub-gradient force represented by Hema proves that "e-commerce never gets old, there is always a new engine". 

According to data from Runwise Innovation Consulting, the current Hema APP MAU is about 23 million, compared with the scale of 60 million + registered users, this stickiness is no less than Xiaohongshu and B station. After several ups and downs in fresh food e-commerce, it was finally corrected: the real trend of entering thousands of households has formed - following the positive cash flow of Hema stores opened for more than a year in the September quarter, and the full profitability of Hema in January this year, the latest quarterly report data shows that Hema achieved a 20% same-store sales growth rate, while new stores also reached double-digit growth. It can be seen that the self-operated offline format represented by Hema has initially formed the ability of another new engine of Alibaba's domestic business. 

Above, e-commerce is Alibaba's basic plate, nurturing all its ecological members. After experiencing the triple grind of the economic cycle, the epidemic and the new format of live streaming goods, this basic market has stabilized healthily and presented a new value growth curve. 

02 Rookie: Fly high 

There is no doubt that in the past three years, in the process of coping with the challenges of external economic cycles and internal competition in the industry, the health of Alibaba's basic market has stabilized and rebounded, and it is Cainiao that plays a key role as a stabilizer and metronome within it. 

Generally speaking, in public perception, Cainiao is the logistics infrastructure of Alibaba Commerce. But in reality, it's worth much more than that. Looking at the development trajectory of Cainiao, it eventually became one of the biggest tricks of Alibaba's business map: 

The first layer: logistics infrastructure, a key element in shaping user stickiness; The second layer: the second growth pole outside the commercial sector; The third layer: the artery of Alibaba's business globalization; The fourth layer: In the global macroeconomic downturn, he was ordered to take off against the wind and became the second source of Ali's spirit after Ali's iron army. 

The logic is clear enough and the execution is in place. This year is the 10th year of Cainiao's establishment, and looking back on the past few years, Cainiao deserves enough respect. 

The data that continues to evolve says it all: we can see from Cainiao's market performance that Cainiao's revenue has been in a positive state of year-on-year growth, and the growth rate has clearly entered the fast lane. According to the latest quarterly report, Cainiao's revenue growth rate reached 27%, which is the fastest growing segment of all Alibaba's businesses. 

Figure: Cainiao's fiscal year revenue and growth rate, source: Choice Financial Client 

Here are a few data that better reflect Cainiao's core values: 

Cainiao Station has 7 core hubs with a storage area of more than 30 million square meters;

The proportion of external customers has exceeded 72%;

Cainiao's overseas sorting centers reached 15;

The peak number of door-to-door delivery orders reached 18 million in a single day;

It became the pillar sector of Alibaba, and the proportion of revenue increased to 6.68%.

These five data, Cainiao has achieved first-class in the industry, especially the proportion of external customers highlights Cainiao's ability to operate independently, indicating that it has become the main artery connecting Alibaba's business domestic and international markets, and then proving the value of Cainiao to the digital construction of logistics in Alibaba and even China. 

The above are the connotative value that can be quantified by the rookie, and its more important connotation value is the part that is difficult to quantify: the 10 years of rookie from scratch to the weak and strong, from not being optimistic to the value blooming, from the headwind to the 10 years of striving to soar, the spiritual power of which allows us to see that the most precious core of Ali's spirit is still there. 

03 Cloud Computing: Surprisingly Righteous 

If e-commerce is stabilizing and rookies are striving to soar, then the key word of cloud computing, another core sector in Alibaba's territory, is: to be honest and surprisingly. 

As the world's second largest cloud computing vendor and Asia's largest cloud computing vendor, Alibaba Cloud officially entered the moment of integrity in 2023. 

With the birth of ChatGPT, the current global science and technology race has turned into a "computing power arms race" tense. The meaning of this tense was foreshadowed in our tracking and analysis report "Computing Wars" on Alibaba Cloud in June 2022. 

According to the research report "AI and Compute" by ChatGPT development company OpenAI, the computing power required for AIGC model training doubles every 3-4 months, showing an overall exponential upward trend. In the six years from 2012 to 2018, the computing power spent training the AIGC model increased by about 300,000 times. 

The current generative AI market is divided into three tiers: application layer, model layer, and infrastructure layer. A16z (a well-known venture capital company in Silicon Valley) estimates that 20%-40% of profits will flow to infrastructure providers, of which 10%-20% will go to cloud computing service providers. 

Source: a16z Who Owns the Generative AI Platform? 

Source: a16z Who Owns the Generative AI Platform? 

For Alibaba Cloud, the cake that can be shared may not only flow to 10%-20% of the cloud vendor, but also has potential huge revenue space at three levels: 

The following figure is the smile curve of the generative AI industry chain, with the horizontal axis representing the upstream and downstream of the industry chain and the vertical axis representing the industrial value. 

Photo: Ali Product Layout AIG C Industry Smile Curve, Source: Damask Research Institute 

In the traditional cloud computing period, upstream chip suppliers and downstream applications can take most of the profits, while traditional server integrators have a very low level of profits. Many people think that domestic cloud vendors can only grab profits at the bottom of the smile curve, but for Alibaba Cloud, it is not applicable: it has realized the layout of high-value zones in the upstream and downstream of the industry. 

1. Computing power layer (infrastructure layer): master the computing power "seven inches".

Computing power is Alibaba Cloud's core advantage, and core resources are in hand: it has built two super intelligent computing centers in Zhangbei and Ulanqab, with a construction scale of 12 EFLOPS (120 billion billion floating point operations per second) and 3 EFLOPS (30 billion billion floating point operations per second) AI computing power, respectively, larger than Google and Tesla. 

The intelligent computing center can provide congestion-free, high-performance cluster communication capabilities for Wanka scale AI clusters, increasing the utilization rate of computing resources by more than 3 times, AI training efficiency by 11 times, and inference efficiency by 6 times. 

Alibaba Cloud's advantages in the computing power layer do not stop there: 

At the Alibaba Cloud Conference in November 2022, Zhang Jianfeng said that Alibaba Cloud has advanced layout for the three major changes in cloud computing. Among them, cloud hardware reconstruction (Alibaba's self-developed CPU) and computing power to the cloud (Panjiu ultra-high-performance network) directly hit the "seven inches" of computing power. 

Let's first take a look at the technical features of these two products of Alibaba: 

Self-developed CPU Yitian 710: AI inference performance increased by 70%, computing power cost performance increased by more than 30%, and unit computing power consumption decreased by 60%.

Long-term ultra-high-performance network: Long-tail latency has been significantly reduced by 90%, down to 2 microseconds, and Alibaba Cloud has doubled the access bandwidth of cloud servers to 1.6Tbps, doubling communication efficiency in AI scenarios. 

These two changes of Alibaba Cloud address two pain points in the current development of generative AI: performance and energy consumption. And this is the first dimension of its abstinence. 2. Model layer: fast layout and key comparative advantages According to public information, in 2021, Alibaba successively released the first domestic multimodal large model M6 with more than 10 billion parameters, as well as the language large model PLUG, known as the "Chinese version GPT-3", and trained and realized the world's first 10 trillion parameter AI model. To be fair, the rapid advance layout of large models is only the beginning, and it is far from being considered the core capability of Alibaba Cloud. However, some of these core facts indicate that Alibaba Cloud's larger model has key comparative advantages: Alibaba's 34 years is the 34 years of global business trade digitalization, and it has the most complete full-link data reserve and knowledge graph in the trade field - even in OpenAI's view, in the field of generative AI large models, the most critical production factors in addition to computing power are high-quality data and knowledge graphs. 3. Application layer: natural e-commerce ecological interface advantages. In the previous ChatGPT related analysis report, we have revealed: the core value of the Internet is connection, and the core value of generative AI represented by ChatGPT is embedding. The embedded nature makes it possible to apply it at low cost and in a wide range of industrial sectors. E-commerce (or commercial trade) is the most natural and most compatible application scenario of generative AI large models - e-commerce trade has two underlying attributes for the core: 

1. Technical advantages - solve the turnover rate problem; 

2. Information advantage - solve the problem of poor information; 

Compared with the traditional trade model, the Internet and mobile Internet do this better, and the generative AI large model will be able to achieve another iteration: Imagine that once Ali successfully achieves a breakthrough in the e-commerce big model, the shopping experience will be concentrated into a "solution" - after entering the "decoration, price, style" parameter indicators, a more optimized shopping solution that is no longer polluted by poor information will be directly generated, click "confirm", and then wait for check-in. 

The combination of computing power, data, models and scenarios means that Alibaba will be an important force among all players in the global layout of generative AI models. This also means that Alibaba Cloud, the world's second largest cloud computing vendor, after years of deep cultivation, will usher in a surprising moment in 2023. 

04 The cycle always swings, and the most important thing is concentration 

In the final part of this report, we try to reveal the Force of Ali's traversal cycle at a lower level. In our view, the following dual logic, and the implications therein, deserve more thought and sharing: 

(1) Two-way innovation

Schumpeter proposed in his innovation theory that the innovation ability of enterprises is closely related to their market performance. In this theory, innovation includes product innovation, organizational innovation and other aspects. We can see from Alibaba's financial year third quarter report that Alibaba's product innovation and organizational innovation have their own dark lines. 

R&D investment is the main path to drive product innovation. On this path, Ali has been a leader from beginning to end. A picture is worth a thousand words: 

Figure: Internet head R&D investment of enterprises, source: Finance and Economics Eleven 

At the level of organizational innovation, Schumpeter refers to the realization of a new industrial organization through the recombination of factors of production. Applied to modern business, it is through the organizational system to achieve the unity of labor goals, strengthen efficiency, and the profit performance of the cost side is directly reflected. 

The evolution of expense levels and revenue per capita is a financial window into organizational innovation. From this, we can see that after the rapid response in the past three years, Alibaba's overall expense ratio level has decreased significantly. Since the peak of the expense ratio in 2020, the overall rate has decreased by 11.69pct. In terms of per capita utility, the input-output ratio has been significantly optimized, and Alibaba's per capita revenue in a single financial report year is 3.4109 million, higher than the industry average. 

Figure: Alibaba's fee rate, source: Choice Financial Client 

Figure: Per capita revenue of top e-commerce, source: Choice financial client 

There are both R&D and organizational innovations, and two-way innovation ensures that Alibaba can maintain strategic focus in the face of cyclical changes - it is not difficult to understand that the basis of Alibaba's strategy formulation is the decision made under the joint effect of innovation and R&D guarantee and strong organizational management. It is based on such decisions that companies can stay calm and focused. 

(2) Multi-engine collaboration across cycles

In addition to innovation, the synergy driven by multiple engines is also the source of power for Alibaba's cross-cycle power for more than 20 years. Every industry has peaks and troughs, but according to physicist Haken's theory of synergy, collective and holistic synergy can reduce most instability. 

The monofilament does not form a thread. Alibaba's excellent business field synergy has nurtured the synergy of a large number of downstream businesses, and Taobao Tmall, Cainiao, and cloud computing have supported the digitalization process of all walks of life. 

This multi-engine synergy feeds each other to improve the marginal revenue of each business. In particular, Alibaba's local life business is also worth mentioning: the gross profit margin increased significantly in a single quarter, increasing by 23pct compared with the same period last year. According to the conference call information, Ele.me's year-on-year order growth turned positive in December. 

Chart: Gross profit margin of local life in a single quarter, source: corporate financial reports 

The synergy effect has formed a main vein, which has driven Alibaba's positive revenue growth since its listing. 

Chart: Alibaba's post-IPO operating income, Source: Choice Financial Client 

The basic market is stable and upward, the new incremental pattern is gradually formed, the "spirit of spirit" is inherited in an orderly manner, and the innovative business is surprisingly correct - the biggest inspiration that Alibaba can give us in 2023 is: the cycle always swings, and the most important thing is concentration.