Alibaba (this week unveiled plans to break into six parts, paving the way for other local conglomerates to follow.

Investors are cheering, but champagne jeroboams are probably popping in Cupertino, Mountain View and Seattle too.

At its peak, the combined market value of the eight most popular Chinese tech index constituents - Alibaba, Tencent, Meituan, PDD, JD.com , NetEase, Baidu and Xiaomi – crossed $2.5 trillion in February 2021.

Access to cheap capital helped founders like Alibaba’s Jack Ma quickly diversify and build sprawling empires with global ambitions.

But President Xi Jinping, nervous about monomaniacal executives, monopolistic behaviour, misused user data and murky financial risk, moved to rein in the industry

Investors are cheering, but champagne jeroboams are probably popping in Cupertino, Mountain View and Seattle too.

Ensuing crackdowns helped more than halve the Chinese octet’s combined market capitalisation.

Meanwhile, the top eight U.S. tech names, led by Apple, Microsoft and Alphabet, are worth $8 trillion today.

Breaking up conglomerates like Alibaba should boost valuations and help ringfence regulatory risk: Bernstein analysts estimate the sum of Alibaba’s parts could be worth an aggregate $392 billion, compared to $228 billion before the deal was announced.

The cost, though, will be economies of scale.

The American tech giants already generate three times more revenue and nearly five times more free cash flow than their aspirant Chinese challengers, Refinitiv Eikon data shows.

Sitting on massive cash piles, Alphabet and Meta Platforms are moving into Southeast Asia – Facebook’s fastest growing market - where Chinese rivals once hoped they would gain share to offset slowing growth at home.

Scale can also support innovation.

Much hard science comes out of corporate labs because conglomerates can easily skim profit from stable businesses and put it into expensive long shots on artificial intelligence, nano-computers and batmobiles. 

Alphabet’s R&D budget, for example, was $40 billion in 2022, 11 times higher than China’s search monopoly Baidu, which is also trying to turn itself into an AI powerhouse.

Shareholders in Alibaba’s cash-cow e-commerce unit may not want to fund risky bets in the cloud computing affiliate.

Xi may be pleased to cut his country’s dotcom empires down to size. Their American rivals will enjoy watching him.

Above | Sundar Pichai, Chief Executive Officer of Alphabet.

Original Story By | Pete Sweeney