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June 18, 2021updated 30 Jun 2022 9:16am

China’s cloud providers eye emerging markets for next phase of growth

Despite big investment and domestic dominance, China's leading cloud providers have had limited global impact. Emerging markets present an opportunity to change that.

By Matthew Gooding

Last month Chinese tech giant Alibaba’s cloud computing division, known as Aliyun, posted quarterly revenue of $2.57bn, 37% up year-on-year. For many businesses, such growth would be cause for celebration, but for Alibaba it represented a slowdown in what has been a rapid upward trajectory for its cloud business over the past two years. The surprise news, which came in a quarter that also saw the company post a rare overall loss, saw Alibaba’s share price plummet to its lowest level for more than a year.

Future of Chinese cloud providers

Alibaba Cloud’s rapid growth slowed in the last quarter. (Photo by Tada Images/Shutterstock)

The departure of a key customer, thought to be TikTok owner ByteDance, was a major factor in lower than expected revenue, Alibaba said. Pressure from the US government around where data from American TikTok users is stored apparently prompted the move, according to a report in the Wall Street Journal, with authorities in the US unhappy about such data being stored on Chinese servers, citing security concerns.

Alibaba and other Chinese tech giants such as Tencent and Huawei have invested heavily in their cloud divisions in recent years, but increasing regulatory pressure on Chinese companies from abroad means the trio are putting their focus on winning contracts in China, where competition is fierce but potential rewards are sizeable. While the battle for supremacy rages at home, some analysts believe emerging markets could represent their best opportunity for international expansion.

How big are Chinese cloud providers?

Though Alibaba (e-commerce), Tencent (video games) and Huawei (telecoms) all started in different sectors, all have identified cloud services as a key revenue stream. “Cloud is very important to these companies,” says Rui Ma, an angel investor and Chinese tech expert who hosts the Tech Buzz China podcast. “Enterprise software is a massive and obvious opportunity, and most of that opportunity will be in the cloud.”

Despite their global ambitions, Chinese companies have yet to challenge the US trio that dominates the global public cloud market: AWS, Azure and Google Cloud Platform. Alibaba, China’s biggest cloud provider globally, had a 6% share of the market at the end of last year, while Tencent took 2% – ahead of both Oracle and SAP.

Nick McQuire, head of enterprise research at CCS Insights, says Chinese cloud providers face a tough task to break the stranglehold of AWS, Azure and GCP. "These [Chinese] providers have very low penetration in Western markets, and though they've made moves to break into these markets, I think they're going to struggle," he says. "They get the headlines because they're growing as fast or even faster than many Western clouds, but they're mainly growing in China itself."

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Lack of trust is a barrier when it comes to persuading customers in the US and Europe to sign up to a Chinese cloud provider, McQuire says. This is likely to be influenced by the wider geopolitical situation, with the close links between companies such as Huawei and the Chinese authorities often being highlighted by foreign governments, such as in the decision to ban Huawei from 5G networks in the US and UK on security grounds. "We run surveys of large enterprises in the US and Europe, and these consistently show the Chinese cloud providers receive low scores on things like safe handling of data," says McQuire. "Companies don't trust that they're investing in things like security and compliance."

Though their worldwide market share is small, Chinese cloud providers play a vital role in the cloud ecosystem, particularly for Chinese companies making international expansions, McQuire explains. "They've got such a big footprint in China it means they appeal to Chinese companies looking to expand into other parts of Asia, or other parts of the world like Western Europe or Latin America," he says. "And for Western businesses needing back-up or local provisioning in China itself, companies like Alibaba can step in."

The home front is key for Chinese cloud providers

Inside China, the picture is radically different, with near-total domination from domestic cloud providers. Data from Canalys shows Alibaba Cloud, also known as Aliyun, leads the way with a 40% market share.

The market itself is a sizeable one and is predicted to grow rapidly over the coming years. The latest iResearch report on infrastructure as a service (IaaS) and platform as a service (PaaS) suggests these markets will grow to a value of $86bn and $21bn respectively. Over the same period, public cloud spending is expected to soar to about $125bn.

This $100bn opportunity will be underpinned by investment from the Chinese state as it undergoes rapid digitisation. Last year Chinese president Xi Jinping announced Beijing would be spending $1.4trn on an array of digital projects over the next five years, including cloud investment. "One factor making the Chinese market unique right now is the government’s investment in technology and innovation, including cloud technologies," says Blake Murray, research analyst at Canalys. "The top Chinese cloud service providers certainly lean into their strong positions in the domestic market, but [they] also are using their rapid growth to innovate technologies, train and grow developer communities and expand their infrastructure."

Indeed, this week it was reported that Alibaba, Huawei and Tencent have all been intensifying their contact with regional governments across China, holding a series of meetings in a bid to secure potentially lucrative cloud contracts. "The government is really accelerating digitisation and the three big cloud players are all building up heavy salesforces in anticipation of the opportunity, expecting some big contracts," says Ma. "Aliyun just won the state power grid as a client, and it's considered very well, maybe best, positioned for government contracts."

The [Chinese] government is really accelerating digitisation and the three big cloud players are all building up heavy salesforces in anticipation of the opportunity.
Rui Ma, Tech Buzz China

However, it may not all be plain sailing for Alibaba, which earlier this year was hit with an antitrust fine worth $2.8bn as part of a crackdown by Chinese authorities on the power of the country's biggest tech firms. Indeed, this contributed heavily to the company's first-quarter losses.

Founder Jack Ma has also been critical of the Chinese financial regulator after it blocked the IPO of Ant Group, Alibaba's finance arm, in November last year. It is thought Alibaba's size and Ma's influence have led to him falling out of favour with the Chinese government, something which could hurt Alibaba's chances of profiting from the country's digital transformation. "This goes much deeper than cloud, however, the anti-monopoly fine issued to Alibaba is significant," Murray says. "China’s state administration of market regulation issued this, and it will be important for Alibaba to stay within regulations to limit the impact on its cloud business."

The future of Chinese cloud providers? Emerging markets

With AWS et al having significant first-mover advantage in the US and Europe, McQuire says the biggest opportunity for the Chinese cloud providers to make an impact globally is in emerging markets, where there are currently no dominant players. "Emerging markets and expanding beyond China and APAC (Asia Pacific) will be big opportunities for these companies," he says. "Cloud is increasingly going global, it will take different shapes in different economies, and many of these emerging geographies are complete white space for the cloud providers."

Cloud is increasingly going global ... and many of these emerging geographies are complete white space.
Nick McQuire, CCS Insights

Chinese cloud providers are making in-roads in emerging markets, with modest results so far. Huawei Cloud launched services in Africa in 2019, and now has a presence in South Africa, Nigeria and Kenya, working with customers across 12 countries. It says it brought in $5m in revenue last year. Earlier this month Tencent announced it was opening three new data centres in Asia as part of an expansion into the wider APAC region and the middle east.

McQuire says we can expect this to ramp up in the coming years. "All eyes are on how the various cloud providers, from the East and the West, will invest in these markets," he adds. "All the companies will want to capitalise on this, but I think the Chinese clouds have an opportunity to get out in front."

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