The focus of the probe is on how the
company stores US clients' data, including personal information, and
intellectual property, and whether the Chinese government could gain access to
it, the people said. The potential for Beijing to disrupt access by US users to
their information stored on Alibaba cloud is also a concern, one of the people
said.
US regulators could ultimately choose to
force the company to take measures to reduce the risks posed by the cloud
business or prohibit Americans at home and abroad from using the service
altogether. The US-listed shares of Alibaba fell nearly 3 percent before the
market open Tuesday and were last trading down just over 1 percent.
Former President Donald Trump's Commerce
Department was concerned about Alibaba's cloud business, but the Biden
administration launched the formal review after he took office in January,
according to one of the three people and a former Trump administration
official.
Alibaba's US cloud business is small, with
annual revenue of less than an estimated $50 million, according to research
firm Gartner. But if regulators ultimately decide to block transactions between
American firms and Alibaba Cloud, it would damage the bottom line one of the
company's most promising businesses and deal a blow to reputation of the
company as a whole.
A Commerce Department spokesperson said the
agency does not comment on the "existence or non-existence of transaction
reviews." The Chinese Embassy in Washington did not respond to a request for
comment.
Alibaba declined to comment. It did flag
similar concerns about operating in the US in its most recent annual report,
saying US companies that have contracts with Alibaba "may be prohibited
from continuing to do business with us, including performing their obligations
under agreements involving our...cloud services."
The probe into Alibaba's cloud business is
being led by a small office within the Commerce Department known as the Office
of Intelligence and Security. It was created by the Trump administration to
wield broad new powers to ban or restrict transactions between US firms and
internet, telecom and tech companies from "foreign adversary" nations
like China, Russia, Cuba, Iran, North Korea, and Venezuela.
The office has been particularly focused on
Chinese cloud providers, one of the sources said, amid growing concern over the
potential for data theft and access disruption by Beijing.
The Trump administration issued a warning
in August, 2020 against Chinese cloud providers including Alibaba, "to
prevent US citizens' most sensitive personal information and our businesses'
most valuable intellectual property...from being stored and processed on
cloud-based systems accessible to our foreign adversaries."
Cloud servers are also seen as ripe for
hackers to launch cyber attacks because they can conceal the origin of the
attack and offer access to a vast array of client networks.
While there are scant public cases of the
Chinese government compelling a tech company to turn over sensitive customer
data, indictments of Chinese hackers reveal their use of cloud servers to gain
access to private information.
For example, hackers connected to the
Chinese Ministry of State Security penetrated HPE's cloud computing service and
used it as a launch pad to attack customers, plundering reams of corporate and
government secrets for years in what US prosecutors say was an effort to boost
Chinese economic interests.
"PILLAR OF GROWTH" Alibaba, the
world's fourth largest cloud provider according to research firm Canalys, has
about 4 million customers and describes its cloud business as its "second
pillar of growth." It saw a 50 percent rise in revenue to $9.2 billion in
2020, though the division accounts for just 8 percent of overall sales.
It has boasted business relationships with
units of top US companies including Ford Motor, IBM's Red Hat, and Hewlett
Packard Enterprise, according to press releases.
While the sweeping Trump era powers don't
cover foreign subsidiaries of US companies, US regulators have previously found
ways to link them to their US parent companies, which can in turn be subject to
restrictions.
Before tech tensions between the United
States and China started to boil, Alibaba had big ambitions for its US cloud
business. In 2015, it launched a cloud computing hub in Silicon Valley, its
first outside of China, with plans to compete with Amazon, Microsoft, and
Alphabet 's Google.
It later added additional data centers
there and in Virginia. A person familiar with the matter says the company
scaled back its US gambit during Trump's presidency as tensions with China
escalated.
In 2018, US authorities blocked a bid by
Alibaba affiliate Ant Financial, now Ant Group, to acquire US money transfer
company MoneyGram International Inc over national security concerns. But a move
to put Ant Group on a trade blacklist failed and an executive order banning its
mobile payment app Alipay was revoked by Biden.
Biden, like Trump, has placed more and more
restrictions on Chinese companies. Last month, the US government put investment
and export curbs on dozens of Chinese firms, including top drone maker DJI,
accusing them of complicity in the oppression of China's Uyghur minority or
helping the military.