Alibaba leverages cloud business to become a leading AI investor in China

Alibaba leverages cloud business to become a leading AI investor in China

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 They have all been developing local versions of US applications such as OpenAI’s ChatGPT and’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.