Alibaba Cloud plans to use fewer Western chips, to boost its already huge AI margins

Alibaba Cloud is set to utilize fewer Western chips in their AI infrastructure, aiming to accelerate the return on investment for new hardware within a shorter timeframe. CFO Toby Xu explained that their servers typically run for five years, with AI servers generating enough revenue to cover costs in just three years. The fourth and fifth years of a server's life then yield free cash flow.

CEO Eddie Wu revealed that certain servers maintain full capacity for customers even after five years. Wu anticipates shortening the initial payback period for AI hardware to 2.5 years due to the rising margins of AI services. One strategy to achieve this involves increasing the use of their own self-developed chips. Wu stated that as the production capacity of their self-developed chips expands, the proportion of these chips in their data centers will grow, gradually replacing more commercially purchased chips.

Wu highlighted that commercially available chips have exceptionally high gross margins, and a significant increase in self-developed chips will greatly enhance their product competitiveness and gross profit margin. Notably, 650 external customers have chosen to use Alibaba Cloud resources running on their own chips, compared to AWS's 120,000 customers utilizing its Graviton chips.

Alibaba plans to potentially achieve a two-year payback period for servers, but this would require reducing investments in new infrastructure. The company has already spent $10 billion on AI infrastructure in its first quarter, a 75 percent increase compared to the same quarter last year, attributed to fluctuations in procurement cycles, increasing CPU-compute capacity driven by anticipated growing customer adoption of AI agents, and higher pricing of chip components.

Alibaba remains committed to spending on AI infrastructure, considering AI as Alibaba's "most certain growth engine," despite the company's e-commerce revenues growing by only four percent year over year to $30.34 billion. With a 45 percent growth, Alibaba Cloud's AI offerings outperformed its e-commerce revenues, but it still lags behind AWS, Microsoft, and Google in quarterly revenue, which stands at $7.14 billion.

Alibaba Cloud is unlikely to provide Beijing with a significant export boost, as several Western governments have either banned public sector agencies or discouraged the use of the Chinese cloud. However, Alibaba Cloud boasts a strong international presence. The company has managed to reduce delivery time for hyperscale AI data centers to 100 days, positioning itself as a world-leading pace that will expedite their global compute infrastructure buildup.