Alibaba’s Profits Fall 27% as Chinese Consumers Cut Back

Alibaba’s Chinese commerce business has shrunk for the first time amid weak consumer spending.

The Chinese conglomerate released earnings Thursday (Aug. 15) showing a 27% decline in profit, which dampened the hopes of a turnaround for the company, Bloomberg News reported.

According to that report, Alibaba CEO Eddie Wu is leading an overhaul at the company, hoping to drive growth and increase innovation in the wake of China’s crackdown on Big Tech firms earlier in the decade.

The company last year embarked on a major revamp, dividing itself into six individual businesses. Wu has focused on enhancing Alibaba’s core commerce and cloud computing businesses, while also making longer-term investments in artificial intelligence (AI).

Among those investments is Moonshot, a Chinese AI company recently valued at $3.3 billion. Alibaba led a record $1 billion funding round for the startup earlier this year.

The company is also using AI in-house for tasks such as translations and negotiating refunds, with some applications — like ones helping sellers communicate in other languages — helping contribute to a 30% increase in orders for merchants.

According to Bloomberg, Alibaba executives on Thursday tried to reassure investors that profitability is still a key priority, with the company aiming to make most of Alibaba’s businesses break even within one to two years.

“Competition will remain a key issue for Alibaba,” said Shawn Yang, an analyst at Arete Research, per the report.

“Some investors may have high hopes for the increase of Alibaba’s take rate, as it began testing a new advertising tool this past quarter. But the actual numbers we are seeing in the results shows it may take longer for that effort to pay off.”

As covered here last month, consumers in China deposited less money in the bank in June, but also didn’t spend more.

That’s because people there are choosing to pay down debts and purchase wealth management products rather than engaging in spending, in spite of efforts by the government to get them to do so.

“The year-on-year decrease in excess savings growth has not yet translated into increased consumption,” Tommy Xie, head of Greater China research at OCBC Bank, said in a note, per a report by Reuters. “This may be related to households deleveraging by repaying loans early and shifting deposits to wealth management products.”