China’s cloud market is set to become the largest in the world by 2023, according to research firm IDC. But right now, it remains nascent and insubstantial compared with its respective sectors in mature economies. The Chinese market is roughly one-tenth the size of the US equivalent.
The market is expanding but remains fragmented, which means that much of it is up for grabs. Domestic tech heavyweights Alibaba and Tencent, along with international players like Amazon and Microsoft, all want a piece of what will eventually become a very large pie.
Among Chinese tech players, the excitement surrounding cloud computing’s potential as a growth driver is real. The aforementioned Alibaba is set to run its entire business on its public cloud within two years, while Tencent aims to quadruple overseas revenue at its related unit this year.
For foreign cloud firms, the local ecosystem features several peculiarities that have so far restricted them from securing significant market share on a global level. In addition to standard regulations that prohibit foreign cloud providers, they also face a market unready for widespread public cloud adoption.
Unlike more mature cloud markets, firms still prefer private cloud solutions, which allow them to maintain full ownership and control of physical resources.
The winds may be turning for public cloud adoption, but exactly when and how these roadblocks will be overcome remains to be seen.
Experts say many Chinese businesses opt for private cloud solutions in part because of an accounting quirk. Building their own internal cloud setup means spending money upfront and can be considered capital spending, said Kevin Ji, senior research director at research and advisory firm Gartner.
Private cloud’s one-off purchase model fulfills the desire of Chinese businesses to own hardware and software rather than outsourcing a service. Some businesses are reluctant to rent IT services from public cloud providers because they prefer to keep close control over their workloads and data for security reasons.
Public cloud, on the other hand, follows a pay-as-you-go fee structure, which can be counted as an operational expense. A company essentially rents cloud services from an industry mainstay like Amazon, Microsoft, or Alibaba. The cloud operator owns and maintains the hardware and software, charging clients relative to their usage, and the service becomes a recurring operational expense.
China ‘s fledgling cloud market tilts heavily towards public cloud solutions. (Image credit: TechNode/Eliza Gkritsi)
The private cloud market is dominated by companies like Huawei and H3C, which offer comprehensive infrastructure including the server, the network, and the storage, Ji said.
However, according to Ji, a pattern of public cloud adoption started to emerge in 2019. Following a trend observed in more mature cloud markets such as the US and Australia, many businesses in China have shifted from on-premise solutions to public cloud.
The public cloud market is “waking up now, and it is a little bit behind,” Augusto Marietti, CEO of cloud provider Kong, told TechNode. Founded in 2009 in a garage in Italy, Kong uprooted operations to the US the following year. Outside of the US, the company’s largest client base is in China. The culture of the private cloud still reigns supreme due primarily to security concerns, Marietti added.
Some firms think that if they own and operate their cloud infrastructure themselves, they can better ensure its security. However, this is not entirely correct since legal requirements for both types of solutions are more or less the same, said Chen Xu, technology strategy director at Alibaba Cloud Intelligence.
Domestic public cloud providers like Alibaba Cloud and Tencent Cloud also offer private solutions, though their market share is small.
Alibaba holds a 43% share of the public cloud market, according to data from the IDC, and continues to bet on it, Chen said. “We believe the public cloud will continue to be the focus of development in the future but it is important that we also provide comprehensive private cloud solutions,” he added.
The IaaS market is dominated by Alibaba. (Image credit: TechNode/Eliza Gkritsi)
According to Chen’s analysis, private cloud systems serve as a platform for enterprises to transition away from traditional IT to the modern cloud paradigm. But it is the public model that provides the full iteration of such a paradigm—that is, unconstrained elastic computing power on a flexible fee structure. Experts agree that the advantage of private cloud is that it allows firms to retain greater control over their resources.
The hybrid cloud—a computing model that combines public cloud and a private cloud for different purposes—will likely become mainstream in China as more businesses choose both solutions for different ends.
The battle for giants
Even though public cloud services have made some headway, the market is not ready for widespread adoption, Ji told TechNode.
In China, the early adopters of cloud services have been small- and medium-sized enterprises and internet companies. The large enterprise market segment is largely untapped. Even though some cloud providers in China have a large customer base, the revenue that each customer contributes is in fact quite small, said Christopher Thomas, a partner at McKinsey & Company.
The abundance of large enterprises outside the internet industry which have not adopted cloud solutions altogether presents a big growth opportunity. These are the types of clients typically targeted by large public cloud operators, such as Microsoft and Amazon Web Services (AWS). Enterprise cloud solutions drive growth for most foreign cloud providers, said Ji.
At the moment, these large enterprises “are not fascinated by private cloud services. This year we are seeing a pattern towards public cloud, but the trend needs time to grow,” Ji said.
Foreign tech companies like Microsoft, Amazon, and Oracle have poured millions of dollars into setting up cloud services in China, but they have seen little bang for their buck. Amazon accounts for around 6% of public cloud, specifically in the Infrastructure as a Service (IaaS) market, according to the IDC.
Despite the hurdles in China, many international players are committing resources to gain a firm foothold in the market.
Amazon’s cloud arm, which appointed a new executive director for the China market this week, decided earlier in 2019 to shrink its online retail offerings to sharpen its focus on cloud computing and cross-border e-commerce.
US multinational IT firm Oracle is shuttering its research center in China—which has led to job cuts of more than 900 employees—as it repositions itself and expands further into cloud computing.
Tough road ahead
Experts agree that in the next three to five years, public cloud operators will gain significant market share as companies will move towards the hybrid cloud model.
Thomas noted that it is hard to peel back the rosy growth forecasts and look at what is going on in China’s cloud market. “I think there are a lot of challenges to overcome before China’s cloud market really takes off.”
A lack of technical know-how coupled with regulatory constraints means that the road ahead will be tough for public cloud providers, especially foreign ones.
“Many companies still don’t realize the value brought by cloud computing, or have not found the right application scenario,” said Brian Lu, product lead at California-based software and services provider Pivotal Software. The US-listed company entered China in 2013 and its open-source Platform as a Service (PaaS) has a well-established user base in the country.
Because Chinese firms are not used to spending a lot of money in IT, convincing them to invest in public cloud operations is a hard sell, said Thomas. “You need to have a significant value proposition, and a lens on digital transformation,” he added. In short, public cloud operators have to convince brick-and-mortar businesses that moving to the cloud will save them a lot of money.
One of the major inhibitors to public cloud adoption among large enterprises is technical issues. Services like Alibaba Cloud offer agility but are complicated to deploy. “Most enterprises do not have the skills,” Ji said.
Chen from Alibaba Cloud said cost and cloud security are the top two factors that potential public cloud users in China will consider, but he believes that the adoption of the cloud is expected to become more immersive in traditional sectors across China and Asia.
Increasingly, businesses in China are coming around to the potential of cloud computing and consider it as part of the core business strategy, according to Lu. However, many still have not realized the value of the technology or the appropriate use cases for it. “At the same time, we also need to realize that the technical and management aspects of cloud services can still be improved,” Lu said. Previous cases of system crashing and security problems, in China and abroad, affect users’ confidence in such solutions, he added.
Chinese and foreign public cloud operators bring different things to the table, but foreign players have to consider a different regulatory environment.
The landmark 2017 cybersecurity law mandates that personal data that can identify Chinese citizens must be stored within China’s borders, meaning that foreign cloud operators must restrict the transfer of data to overseas data centers.
In addition to the data localization requirements, as of today, foreign public cloud operators in China must also form joint ventures with Chinese companies in the industry. For example, Apple’s iCloud data is stored by a company in the southern province of Guizhou.
This joint venture requirement could potentially be overturned in a trade deal with the US. Back in March, Chinese Premier Li Keqiang floated a proposal to form a free-trade zone for foreign cloud enterprises. However, the trade talks fell through; the proposal which would allow foreign public cloud enterprises to operate data storage and management independently is still up in the air.
Lu noted that the government’s proposal to open up and allow more foreign-funded firms into the market is no doubt a powerful booster for the company’s operations in China.
Even so, the issue of market-readiness has to be solved. Ji said that despite regulatory limitations, China’s market simply isn’t mature enough to deploy public cloud. Unlike laws, this challenge can only be resolved with time.
Although China’s market is still largely dominated by Alibaba Cloud, it is not impossible for foreign players to challenge its entrenched leading position in the cloud market, say experts.
Ji believes that it is too early to say who will get the upper hand in the large enterprise segment. AWS, which offers cloud services similar to Alibaba, has a stronger product portfolio, but the latter has a larger network base. In areas like PaaS, which provides IoT and machine learning solutions, Alibaba has some catching up to do, said Ji.
Additional reporting by Eliza Gritsi