China Public Cloud Infrastructure Market Still Has Plenty of Room for Growth with Significant Inbound/Outbound Opportunities

S. Soh

Summary Bullets:

  • Public cloud services saw strong growth (over 50%) in 2020, as businesses and consumers have come to rely more heavily on digital services during the pandemic.
  • Chinese cloud vendors still dominate the domestic market, but there are significant opportunities for global cloud vendors to compete in China and for Chinese vendors to expand globally.

The Rise of Public Cloud Amid the Pandemic

China’s public cloud infrastructure services market, comprising infrastructure-as-a-service (IaaS), platform-as-a-service (PaaS), and cloud management platforms, grew over 50% year-over-year in 2020 to reach $14.8 billion.  China has managed the pandemic better than many countries, and it has weathered the economic impact relatively well.  Still, with the international travel restrictions and the government’s priority to get economic growth back on track, there has been stronger investment focus on digital technologies.  This includes digital infrastructure (e.g., 5G and data centers) and solutions around AI, big data, IoT, and smart city.  These initiatives have a direct, positive impact on public cloud services.  Domestic cloud vendors including Alibaba, Baidu, Huawei, and Tencent are also investing heavily in developing cloud-based AI technologies to drive different use cases including autonomous vehicles, voice assistants, machine vision, etc.  Moreover, the pandemic has driven greater demand for online activities such as healthcare and education, and the adoption of cloud-based solutions across all industries is expected to continue beyond the pandemic.

Besides, Chinese consumers are already big users of digital services including e-commerce, online payment, and online entertainment.  These activities grew in 2020 when travel restrictions were in place.  In particular, the demand for over-the-top (OTT) video, online gaming (including e-sports), and live commerce (with popular influencers called ‘key opinion leaders’ producing live streams to promote products) has gained traction during the pandemic.  For example, Tencent Video recorded 123 million paid subscribers by year-end 2020, growth of 16% from a year ago, and leading platforms for e-sports content Huya and Douyu reported 178.5 million and 174.4 million monthly active users in Q4 2020, respectively, with Huya growing 18.8% compared to 2019 and Douyu 5.2%.  These applications drive the need for more cloud computing resources, AI/analytics platforms, and networking solutions such as content delivery network (CDN).

Competitive Landscape

The competitive landscape of the public cloud market in China is unique.  The homegrown cloud vendors – Alibaba Cloud, Tencent Cloud, Huawei, Baidu, and China Telecom – continue to lead the market.  In particular, market leaders Alibaba Cloud and Tencent Cloud have benefited from the demand of e-commerce, web hosting, and multimedia services including CDN.  With the investment in AI, the two competitors are also building industry-specific solutions across sectors such as education, healthcare, and retail.

Source: GlobalData

This does not mean that the global cloud providers are missing out in the Chinese market.  For example, AWS has two ‘Regions’ in mainland China – in Beijing and Ningxia – but they are operated by local firms Sinnet and Ningxia Western Cloud Data Technology (NWCD), respectively.  This allows AWS to meet local regulations while offering customers globally consistent services across its portfolio.  The company continues to win local customers; for example, Huami, a wearable computing device vendor, has turned to AWS to support its operations in international markets.  The local presence is also crucial for supporting global MNCs that have business operations in China.  AWS continues to invest in China with plans to expand its Ningxia facility and add a third availability zone in Beijing.

Meanwhile, Huawei has also ramped up its cloud business in China, and the company sees a strong link between AI and cloud.  The company is rapidly catching up with competitors, launching six products recently: the CCE Turbo cloud container cluster, CloudIDE intelligent programming assistant, GuassDB database, Trusted Intelligent Computing Service (TICS), Pangu Model (NLP, computer vision, and multi-modal models), and infrastructure software for diversified computing.  The company has the financial resources, and its investment in multi-access edge computing (MEC) will further strengthen its cloud offerings.

What’s Next

The digital startups, e-commerce, and digital media companies have been key drivers for the demand for cloud services in China.  Larger enterprises and government organizations are now leveraging a range of technologies such as big data, AI, and AR/VR, which will further boost the demand for cloud services.  In particular, China has a huge manufacturing industry, and we expect more investments in technologies to accelerate the transformation to ‘Industry 4.0.’  Industry 4.0 is aimed at achieving efficiency through integrated smart systems, processes, sensors, data, analytics, and AI.  This can be applied in key business areas including production, manufacturing, business support, and engineering.  Technologies such as 5G/MEC and cloud-enabled AI, IoT, automation, and AR/VR will underpin the manufacturing transformation, allowing China to become a more sophisticated manufacturing powerhouse, instead of relying on labor cost as a key competitive advantage.

As more Chinese firms expand overseas, they are likely to leverage cloud solutions to be more agile and cost-effective in maintaining their IT assets. This will benefit Chinese cloud vendors that have taken steps to expand globally.  Alibaba Cloud already has multiple cloud regions overseas, in Asia-Pacific, the U.S., Europe, and the Middle East.  Tencent Cloud also has a healthy global presence, and it has recently launched a new data center in Indonesia with plans to open another facility in the country in a few months (for more, please see Tencent Jumps on the Indonesian Cloud Bandwagon with New Data Centers in the Country,” April 19, 2021).  There are also inbound opportunities, and Tencent recently signed a memorandum of understanding  with Premier Anti-Aging, a Japanese cosmetics company, to use Tencent Cloud’s technologies to expand the sales of its products in mainland China.

In practice, enterprise customers are likely to have different clouds for different applications and geographical regions.  This makes it more important for cloud providers to be able to help customers manage a multi-cloud environment including a private/public hybrid scenario.  Workloads will also become more distributed, and some companies will need providers that can help them manage on-premises IT as well as workloads at the edge.  Cloud providers should also expand their partnership with service providers, which play a crucial role in helping customers over the complexity in planning, migrating, and managing different cloud services.

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