BIG TECH: What do next-generation AI chips and the restructuring of Ant Financial have in common? Alibaba of course

If you weren’t aware already, Chinese commerce is very digital already and far outpacing the US in both nominal and percentage terms. Since surpassing the US in e-commerce sales in 2013, the respective margin has only widened between the two nations. China now sees an estimated $1.5 trillion in e-commerce sales for 2019 – just shy of three times that of the US who trails behind with $600 billion. On its own, China represents more than half (54.7%) of worldwide internet sales. Further, unlike in the West, the vector of payments intersects much more closely with social identity and networking in China, which is the platform globally for developing artificial intelligence. Just check your Facebook Newsfeed.

It should be of no surprise that the company contributing the most towards China’s retail e-commerce sales is Alibaba -- with a massive 55.9%. More notably, the e-commerce and cloud services giant recently closed the acquisition of a 33% stake in the $150 Billion Fintech company Ant Financial – known for its digital payment platform Alipay -- which processes payments for Alibaba's Chinese marketplaces and is one of the two top mobile payment platforms (with a market share of 53.2%) in China alongside rival Tencent's WeChat Pay. As noted by a post in “the increased stake will have negligible P&L impact, there will likely be a cash flow impact as 37.5% of Ant’s pre-tax profit will now no longer be paid out quarterly in cash to Alibaba, which used to be the norm.”

Ant Financial seems to be rapidly growing into the consumer finance field with around 120 asset management partners – Ant Fortune and YU’E Bao, 100 banking partners – Zhima Credit and MY Bank, and 100 insurance partners – Xianghubao. Such penetration into the consumer finance market will prove instrumental to their dominance by helping direct traffic to e-commerce and on-demand services such as food delivery for Alibaba – who seeks to meet a 2023 goal of 1 billion annual active users contributing $1.4 trillion in transactions. In return, Alibaba gives Ant insights into consumer credit and loan demand. Although the recent restructuring of Ant brings them closer to a potential IPO, jitters in the current public markets may impede a listing for Ant this year. David Dai, an Internet analyst at Bernstein, said that for a company “as sizeable as Ant”, the “entire IPO process is going to be pretty long”. Ant has plans to expand its reach throughout China’s economy, including moves deeper into wealth management and other financial products. This could make it relatively robust against any weakness in online and offline commerce should a macroeconomic slowdown continue.

Additionally, Alibaba aims to consolidate its core e-commerce business with physical retail and location-based services, while enabling both merchants and brands to digitize their operations using its data and cloud technology. This is such a focus for the e-commerce giant that last month it announced its first self-developed artificial intelligence chip for data centers called Hanguang 800. This new AI chip is twelve times faster than graphics processing units (GPUs) at processing product images for Alibaba’s online marketplace, Having its own chips for its cloud services could also make economic sense given the rapid deployment of its data centers across China and other markets. Alibaba would be building chips suited to its needs and to save costs on such high-tech products by having in-house capabilities. It can pass on the savings to customers, attracting more to come on board or retaining existing ones.