Alibaba expects higher gross margin and profitability by swapping purchased chips for its own

Alibaba is betting that the fastest way to fatten margins in AI cloud computing is to stop buying someone else’s chips and start using your own. The company’s internal semiconductor arm, T-Head, is now deeply embedded in the infrastructure powering its data centers, and management expects the swap to meaningfully boost gross margins and overall profitability.

The chip math

T-Head has reached cumulative shipments of 470,000 AI chips. Over 60% of those chips are allocated to external customers across sectors including internet services, finance, and autonomous vehicles.

Management’s commentary for Q4 of fiscal year 2026 pointed to T-Head deployment as a lever that could improve gross margins, which recently sat at 34.5%.

The latest hardware backs up the ambition. Alibaba’s Zhenwu M890 chip delivers roughly triple the performance of its predecessor while targeting cost-effectiveness.

Building at scale with China Telecom

Alibaba recently partnered with China Telecom to establish a joint AI data center. The initial deployment: 10,000 Zhenwu processors, with architecture designed to scale up to 100,000 units.

Cloud revenue is already moving

Alibaba Cloud Intelligence Group posted 38% year-over-year external revenue growth in the latest quarter. AI-related products now account for roughly 30% of that external revenue, and the AI segment has delivered triple-digit growth for 11 consecutive quarters.

Alibaba is also shifting its cloud business model toward what it calls model-as-a-service, or MaaS, selling access to pre-trained AI models rather than just raw compute.

The geopolitical backdrop

US restrictions on GPU exports to China have made it progressively harder and more expensive for Chinese tech companies to acquire cutting-edge chips from Nvidia and other American manufacturers. Alibaba’s T-Head chips are a direct response. The Zhenwu M890’s tripled performance over its predecessor suggests significant R&D investment in developing competitive domestic alternatives.

Alibaba has already acknowledged that building chip fabrication capacity and deploying data centers requires capital that shows up as expense before it shows up as margin improvement, with recent infrastructure investments exerting pressure on overall group profits.