# Alibaba Cloud plans to use fewer Western chips, to boost its already huge AI margins > Source: > Published: 2026-08-21 04:38:53+00:00 # Alibaba Cloud plans to use fewer Western chips, to boost its already huge AI margins Source: [The Register](https://www.theregister.com)Cloudy AI is Chinese giant’s ‘most certain’ path to growth as e-commerce slows Alibaba has revealed margins from its cloudy AI operation are rising so quickly it will be able to achieve return on investment for new hardware purchases faster than previously planned. Speaking on the company’s earnings call yesterday, CFO Toby Xu said the company runs its servers for five years, and that AI servers produce enough revenue to cover their costs in three years. In the fourth and fifth years of a server’s life, the machines therefore generate free cash flow. CEO Eddie Wu said some servers deliver cash for longer, and said machines acquired in 2018 and 2020 – and packing the [Nvidia](/glossary/nvidia)V100 and A100 accelerators – “are still being used by customers at near full capacity.” Alibaba thinks it can shorten the initial payback period for AI hardware to 2.5 years, because margins for AI services are increasing. One way the company makes that possible is by using more of its own chips. “Self-developed chips are a long-term and important direction for us,” Wu said. “As the production capacity of our self-developed chips continues to increase, the proportion of self-developed chips in our data centers will continue to rise, replacing more commercially purchased chips.” “We know that in this era of scarce computing power, commercial chips already have very high gross margins, so a significant increase in the proportion of self-developed chips will greatly enhance our product competitiveness and our gross profit margin.” Interestingly the company announced that over 650 external customers chose to use cloudy resources running Alibaba’s own chips. By way of comparison, AWS has said over 120,000 customers use its Graviton chips. Wu said Alibaba could possibly achieve a two-year payback period for its servers, but only if it spent less on new infrastructure builds. The potential upside of AI means Alibaba will continue to spend on AI infrastructure, after sending $10 billion out the door in its first quarter – 75 percent higher than its spend for the same quarter last year. The company attributed the increase to “fluctuations in procurement cycles, increase in CPU-[compute](/glossary/compute)capacity driven by anticipated growing customer adoption of AI agents, and higher pricing of a broad range of chip components.” Alibaba will keep spending because Wu thinks AI has become Alibaba’s “most certain growth engine.” That’s a fascinating remark because Alibaba started as an e-commerce company, and Beijing sees it as a key vehicle for selling Chinese exports to the world. Yet e-commerce revenues grew just four percent year over year, to $30.34 billion. With its 45 percent growth, Alibaba Cloud’s AI offerings did far better, but its quarterly revenue of $7.14 billion is well behind AWS, Microsoft, and Google. Note, also, that Alibaba counts itself as a customer of its cloud. Execs predicted Alibaba Cloud revenue will reach around $10 billion next quarter. Alibaba Cloud looks unlikely to deliver Beijing an export bonanza more customers outside China. The business unit already has a strong international presence, but several Western governments have either banned public sector agencies from using the Chinese cloud or recommended against its use. Europe’s push for sovereign clouds is also likely to deter many from considering Alibaba Cloud. Whatever happens in the AI market, Wu is confident Alibaba can build infrastructure fast enough to meet demand because it has cut its delivery time for hyperscale AI data centers to 100 days. The CEO described that as “a world-leading pace that will significantly speed up our global compute infrastructure buildup.”Get AI news in your inbox Daily digest of what matters in AI.