Pressure on Alibaba’s cloud computing division mounts after years of breakneck expansion as industry competition intensifies and political issues hamper the Chinese company’s ability to win overseas business and domestic government contracts.

Alibaba investors turn to cloud computing to generate significant growth as competition intensifies in the company’s main e-commerce business. In recent months, however, the cloud unit has separated from a major customer, has been taken the cold shoulder by some Chinese government customers and has revised its organizational structure, it says in the matter.

Alibaba Group Holding GmbH.

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reported last week that cloud computing revenue was up 37% for the quarter ended March 31, compared to the same period last year, the slowest quarterly growth since it went public on the New York Stock Exchange in 2014. The company said that the slowdown to the loss of international business for a large Chinese internet customer due to “non-product requirements”.

That customer was ByteDance Ltd., the owner of the TikTok social video app, which ended a contract to store their international data in Alibaba Cloud, some of the people said. When the relationship ended, ByteDance bought servers from Alibaba, they said.

The moves reflected Beijing-based company ByteDance’s desire to meet its own rapidly growing cloud computing needs, people said. Increasing pressure from the US on using Chinese-owned computer services to store Americans’ data is speeding up the process, one of the people said. In August, the Trump administration warned against the use of Chinese cloud computing services, including Alibaba’s.

Alibaba Cloud declined to comment on its relationship with Bytedance.

Bytedanz, one of the Carlyle Group Inc.

and General Atlantic to its supporters and is one of the most valuable technology startups in the world, building an in-house cloud computing function to host its services worldwide. The company has been phasing out its mainland business with Alibaba Cloud, people familiar with the matter said. Bytedance’s activities include the popular news aggregator app Jinri Toutiao, Alibaba Cloud customer.

That would deal another blow to Alibaba Cloud, which has pumped billions of dollars into the business and just turned profitable over the past two quarters based on adjusted earnings before interest, taxes, depreciation and amortization.

“We understand that Alibaba Cloud is still heavily impacted by Bytedance’s domestic cloud workload, and we fear that Bytedance risk may reappear in future quarters,” Bernstein analyst Robin Zhu said in a statement on Tuesday .

Bytedance got into mounting tensions between the US and China last year when the Trump administration tried to ban and enforce the sale of its TikTok app, citing concerns about the security of the data collected from its millions of American users. TikTok attracted more than 81 million downloads in the US last year, data from mobile analytics company Sensor Tower shows. A US court blocked the ban and the sale was postponed indefinitely as President Biden reviewed his predecessor’s policy towards the company.

In a US federal court hearing last year, a senior ByteDance executive said the company was hosting US user data from TikTok in the US through cloud services from third-party providers including Alphabet. to be provided Inc.’s

Google and Microsoft Corp.

The Chinese company kept a backup copy of TikTok’s US data in data centers in Singapore, where one of the cloud providers it used was Alibaba, said a person familiar with the matter.

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Alibaba was the first Chinese tech giant to venture into cloud computing by renting out computing power and data storage services to outside customers, taking advantage of the already massive computing needs of its e-commerce marketplace. Cloud had revenue of $ 2.6 billion for the March quarter, compared to $ 24.6 billion for Alibaba’s core business. It is now the largest cloud infrastructure service provider in China and the fourth largest in the world after Amazon.com Inc.’s

Amazon Web Services, Microsoft’s Azure and Google Cloud, according to the research company Canalys.

But Huawei Technologies Co. has cut Alibaba Cloud’s market share at home. According to Canalys, the Chinese telecommunications giant almost doubled its market share in China last year compared to 2019. Alibaba’s stake fell from 44% to 41% over the same period, Canalys data showed.

Another industry data provider, IDC, saw a smaller decline in Alibaba Cloud’s market share in China over the same period.

Last month, Alibaba Cloud revamped its organizational structure to add more geographic managers to give local teams across China more power and responsibility to grow sales and retain customers, people familiar with the company said. The move has been viewed by some in the company as a direct response to Huawei’s growing market share, people said.

China’s cloud computing industry is limited. Regulators require foreign cloud providers to form joint ventures to operate in the country. That has helped Alibaba grow, but the company faces new hurdles as Beijing cracks down on the e-commerce giant, its financial technology subsidiary Ant Group Co. and founder Jack Ma.

Regulators fined Alibaba a record $ 2.8 billion in April for abusing its dominant position over competitors and retailers on its e-commerce platform. Late last year, they stopped Ant’s $ 34 billion IPO as it neared the finish line. This year they forced the fintech giant to restructure as a financial holding with tightened regulations.

In less than six months, China’s tech giant Ant moved from planning a blockbuster IPO to restructuring in response to central bank pressure. Since the US is also targeting big tech, this makes China move faster. Photo illustration by Sharon Shi

Alibaba Cloud has struggled to win new contracts or even schedule meetings with some of its government and government corporate customers in recent months, according to those familiar with the matter, as regulators scrutinize its e-commerce business and Ant Group.

According to state news agency Xinhua, the company was the leading cloud contractor for central government departments in the first quarter of 2019.

“As seen in the past few quarters, Alibaba Cloud’s revenue was primarily driven by the continued growth of customers in the Internet, finance, retail and public sectors,” said a spokeswoman for the unit.

Alibaba Cloud is not completely ruled out – it has received some government contracts in the past few months, according to government procurement records and company releases.

Still, Alibaba’s recent regulatory issues could cast a shadow over local government decision-making and affect the company’s ability to win future contracts in the state cloud market, said Charlie Dai, a cloud industry analyst at research firm Forrester Research.

“The fierce competition in the government market and the complexities of private cloud markets are some of the biggest challenges for Alibaba Cloud’s business growth in the domestic market,” said Dai.

Jack Ma’s Ant Group and Alibaba in China

Write to Jing Yang at Jing.Yang@wsj.com, Liza Lin at Liza.Lin@wsj.com and Keith Zhai at keith.zhai@wsj.com

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