Alibaba Cloud is betting on emerging markets with massive price cuts

Alibaba’s recent move to reduce prices of several cloud services, including compute, storage, and database offerings among others, is seen by experts as a strategy to attract new customers in emerging markets as competing in China heats up.

Last month, Alibaba Cloud reduced the price of some public cloud products deployed in non-Mainland China regions by up to 59%.

The regions that underwent effective price changes include data centers in South Korea, Indonesia, Hong Kong, Singapore, Malaysia, Philippines, Thailand, Japan, the US, Germany, the UK, and the UAE.

“The price adjustment is only applicable to the official website discount price and official website catalog price based on the specific billing method and purchase time, and is limited to eligible orders initiated by you after the effective date, including new purchase, renewal, lifting, and match, etc,” the company wrote.

Alibaba’s cloud computing unit, otherwise known as Alibaba Cloud or Aliyun, could be trying to capitalize on major trends in the cloud market, such as the demand for infrastructure to run AI-based workloads and the need for optimizing cloud expenditure, said Steven Dickens, vice president at research and advisory firm The Futurum Group.

“The rapid advancements in AI and the increasing demand for IaaS (infrastructure-as-a-service) are putting pressure on cloud providers to offer more competitive pricing. Alibaba’s price reductions could be a strategic move to capture a larger share of the AI-driven cloud market by providing cost-effective options,” Dickens explained.

Enterprises’ expenditure on generative AI, which includes software, related infrastructure hardware, and IT services, is expected to reach $143 billion in 2027, globally, from $16 billion in 2023, a forecast from research and advisory firm IDC showed.

The growth in generative AI, approximately a CAGR of 73.3% over the forecast period, is more than twice the rate of growth in overall AI spending and almost 13 times greater than the CAGR for global IT spending over the same period, according to the forecast released last year in October.

Eyeing customers in emerging markets  

Alibaba’s price reduction strategy could be to target new customers in emerging markets, according to analysts.

“Alibaba could be targeting emerging markets where there is less competition from other hyperscalers and where cost is a significant factor for cloud adoption. By offering lower prices, they can capture market share in these regions,” Dickens said.

Last week, Alibaba Cloud announced that it is looking to invest to ramp up its international data center business by opening a new region in Mexico, followed by additional data centers in Malaysia, the Philippines, Thailand, and South Korea in the next three years.  

The focus on international markets comes after the cloud unit dropped plans for an initial public offering (IPO) and underwent a management overhaul to focus on selling public cloud and infrastructure services last year.

The focus to sell public cloud and infrastructure services was planned based on the global demand for generative AI-based workloads and use cases, said Charlie Dai, principal analyst at Forrester.

“As generative AI adoption in the cloud became a key priority for enterprises worldwide, the associated infrastructure cost, such as compute, networking, storage, and databases also became a key concern in the decision-making for vendor selection for enterprises,” Dai added, explaining the globalization strategy of Alibaba Cloud.

Alibaba Cloud accounts for just over 4% of the global cloud computing market, which is dominated by AWS, Microsoft Azure, and Google Cloud — jointly accounting for nearly 67% of the entire market, a report from IT Synergy Research showed.

The strategy to offer reduced pricing, according to Dickens, may not only help Alibaba undercut competition from larger hyperscalers in these emerging markets but also have a more positive effect on its image as a Chinese provider.

“As Alibaba is perceived mainly as a Chinese provider, it faces significant challenges in expanding its footprint outside China. Reducing prices can make their services more attractive to international customers who are price-sensitive, thereby broadening their market appeal,” Dickens explained.

However, the analyst also pointed out that rising geopolitical tensions between the US and China will make it difficult to compete with other hyperscalers at a global level, particularly in markets where there is apprehension about Chinese technology providers.

Further, IDC research vice president Dave McCarthy added that Alibaba Cloud reducing prices might not be enough to make enterprises switch their cloud providers in international markets.

Reminiscent of US and Chinese cloud markets?

The price cut by Alibaba is reminiscent of the cloud computing price war in the US about a decade ago.

“Alibaba Cloud’s price cuts are reminiscent of what previously transpired in the US cloud market, especially for core infrastructure services like compute and storage. As the US market matured, cloud providers engaged in a price war to gain market share,” McCarthy said.

The Chinese cloud market also underwent the same transition as the US, according to Dai.

“The price war of generative AI has already started in the domestic market in China,” Dai said, adding that ByteDance announced its large language model (LLM) on May 16 and its pricing was set at only one percent of the industry average.

This was followed by Alibaba Cloud cutting its LLM pricing by 97% on May 21, and a few hours later Baidu announced that its LLMs would be provided for free, according to the analyst. Tencent, too, slashed their LLM pricing by 50-80% last month.

The Chinese cloud computing market is dominated by Alibaba Cloud, followed by Tencent, Huawei, and others, according to data from Statista.