Alibaba's Strategic Pivot: Embracing Domestic AI Chips Amid US Restrictions

Alibaba becomes lead customer for Huawei's Ascend AI processor, signaling China's push for semiconductor self-reliance, despite sharp profit declines and cash flow pressures.

Faced with stringent US export controls, China's technology giants are undertaking a fundamental realignment of their artificial intelligence infrastructure plans. In a significant move, Alibaba Group has emerged as a lead customer for Huawei's latest Ascend 950PR AI processor. This procurement shift underscores the deepening urgency within China's tech sector to reduce reliance on foreign semiconductor suppliers, particularly Nvidia.

Financial Strain Amid Ambitious Cloud Growth

Alibaba's strategic investments are unfolding against a backdrop of mixed financial results. The company's Cloud Intelligence Group reported a robust 36% year-over-year revenue increase to RMB 43.3 billion for the third quarter. Its AI-related products have now achieved triple-digit growth rates for ten consecutive quarters. Management has set an ambitious target: generating over $100 billion in annual revenue from cloud and AI businesses within five years.

However, the cost of this expansion is substantial. Alibaba's overall quarterly revenue saw modest growth of just 2%, reaching RMB 284.8 billion. More notably, operational cash flow contracted by 49%, while free cash flow plummeted 71% to RMB 1.1 billion. Adjusted net income fell sharply by 67% to RMB 16.71 billion, a figure that significantly missed analyst estimates of RMB 29.6 billion.

Huawei's Chip Gains Traction with Key Improvements

The adoption of Huawei's Ascend 950PR marks a turning point. Previous generations of these chips saw limited uptake in the commercial sector. The new model has reportedly addressed critical shortcomings, demonstrating improved compatibility with Nvidia's industry-standard CUDA software architecture and delivering faster response times in customer evaluations.

While the 950PR offers only marginal raw computing power gains over its 910C predecessor, its strength lies in inference workloads. This capability—executing trained AI models to handle live queries and tasks—is vital for scalable cloud environments. Priced at approximately $6,900 per unit, with planned annual shipments of around 750,000 units by 2026, Huawei is positioning itself as a viable domestic alternative.

According to five individuals with direct knowledge of the transactions, Alibaba, along with peers ByteDance and Tencent, has already placed bulk orders for hundreds of thousands of these processors.

Share Performance and Analyst Sentiment Diverge

Alibaba's equity has faced considerable pressure, declining roughly 10% over the past month and down more than 21% since the start of the year. Despite this weakness, analyst consensus remains overwhelmingly positive. Of 38 market experts surveyed, 37 maintain a buy recommendation on the stock.

The company is scheduled to release its next quarterly report before market open on May 14, 2026. The substantial Huawei chip orders will by then serve as a tangible indicator of Alibaba's commitment to building a resilient, domestic AI infrastructure. This move highlights a broader structural imperative: for China's leading technology firms, decoupling from US hardware is no longer merely an option but a strategic necessity.