UK cloud companies need a China connection

The Chi­nese may have been late to join the cloud-com­put­ing rev­o­lu­tion, but they are mak­ing up for lost time as the sec­tor expe­ri­ences fero­cious­ly fast growth.

It is being dri­ven by the rapid uptake of the inter­net among con­sumers and the dri­ve towards digi­ti­sa­tion by busi­ness and indus­try.

The num­ber of inter­net users in Chi­na last year topped 731 mil­lion peo­ple, the largest in the world and almost three times that of the Unit­ed States, accord­ing to the Chi­na Inter­net Infor­ma­tion Cen­tre.

If that sounds impres­sive, it should be not­ed that only about half of the pop­u­la­tion is online, way behind the 80 to 90 per cent pen­e­tra­tion typ­i­cal in the West and high­light­ing the poten­tial for future growth.

Chinese market

Just like their west­ern coun­ter­parts, Chi­nese busi­ness­es and pub­lic sec­tor bod­ies are turn­ing to cloud com­put­ing because of the flex­i­bil­i­ty, effi­cien­cy and cost-sav­ings it offers.

How­ev­er, the rest of the world has not stood still either. In the Asia Cloud Com­put­ing Association’s Cloud Readi­ness Index 2016, which assess­es fac­tors such as broad­band qual­i­ty, phys­i­cal infra­struc­ture and inter­na­tion­al con­nec­tiv­i­ty, Chi­na has slipped from 11th to 13th place.

The need to keep up is not lost on Bei­jing which made cloud com­put­ing a key part of its five-year plan for 2016–2020 and two years ago launched its Inter­net Plus pol­i­cy to accel­er­ate the adop­tion of the cloud, mobile inter­net and the inter­net of things to boost eco­nom­ic growth and glob­al com­pet­i­tive­ness.

Man­age­ment con­sul­tants Bain & Com­pa­ny have esti­mat­ed that China’s cloud mar­ket will be worth $20 bil­lion by the end of the decade, up from $1.5 bil­lion four years ago, and equiv­a­lent to a com­pound growth rate of about 40 per cent.

Challenges and opportunities

It is hard­ly sur­pris­ing that West­ern tech­nol­o­gy and soft­ware com­pa­nies are drool­ing at the prospects of break­ing into or expand­ing in the Chi­nese cloud sec­tor. They only need look at cars or fash­ion brands to see how lucra­tive Chi­na can be.

Pro­fes­sor Feng Li, chair of infor­ma­tion man­age­ment at Cass Busi­ness School in Lon­don, pre­dicts growth will be “astro­nom­i­cal” and says: “Chi­na only began using the cloud a few years ago and the size of the mar­ket is tiny com­pared to Amer­i­ca at the moment, but it is devel­op­ing extreme­ly fast and is like­ly to catch up very quick­ly.

“In the last few years for­eign com­pa­nies have been try­ing to get into the Chi­nese mar­ket. Their mar­ket share is still rel­a­tive­ly small, but the poten­tial is def­i­nite­ly there because of their tech­no­log­i­cal capa­bil­i­ties, their rep­u­ta­tion and their expe­ri­ence in this space.”

The country’s largest cloud provider is Aliba­ba Cloud, part of Chi­nese e‑commerce giant Aliba­ba, and among its many domes­tic rivals are search engine Baidu, social net­work­ing group Ten­cent and tele­coms equip­ment sup­pli­er Huawei.

West­ern com­pa­nies are grad­u­al­ly muscling in, includ­ing Ama­zon Web Ser­vices, Microsoft’s Azure, IBM and Ora­cle, but Chi­na is not an easy mar­ket to crack, as Google and Face­book have dis­cov­ered, and there are big chal­lenges to over­come for any new entrant.

The lack of inter­net pen­e­tra­tion and poor broad­band net­works out­side the big cities are major hur­dles, but there is also a bat­tery of com­plex reg­u­la­tions and legal issues to be tack­led, as well as con­cerns about the pro­tec­tion of intel­lec­tu­al prop­er­ty and cen­sor­ship of web con­tent.

The dig­i­tal are­na has spe­cif­ic chal­lenges sprout­ing from new nation­al cyber-secu­ri­ty laws announced last year which threat­en tough pun­ish­ments for com­pa­nies that breach reg­u­la­tions.

Com­pa­nies also face strict rules on the trans­fer of data in and out of Chi­na, and the use of for­eign soft­ware and hard­ware by gov­ern­ment bod­ies and state-owned enter­pris­es.

For the UK’s fast-grow­ing and ener­getic cloud sec­tor there are oppor­tu­ni­ties to pig­gy-back on the likes of Ama­zon Web Ser­vices, Microsoft and Aliba­ba

Lil­lian Pang, vice pres­i­dent and asso­ciate gen­er­al coun­sel for Rack­space, a US-based man­aged cloud provider with data cen­tres in Hong Kong, says the scope of leg­is­la­tion is a clear indi­ca­tion that main­land Chi­na recog­nis­es the val­ue and poten­tial of its cloud mar­ket.

She warns that laws in the region are “vast and con­stant­ly chang­ing” and adds: “Cloud providers and oth­er organ­i­sa­tions will need to ensure they have suit­able pro­to­cols in place to com­ply with the var­i­ous leg­is­la­tions.”

Anoth­er poten­tial obsta­cle is that cloud providers must have a local part­ner, while cus­tomers who want to use their ser­vices must have a Chi­nese account sep­a­rate from their inter­na­tion­al accounts.

As a result, Ama­zon has teamed up with Bei­jing Sin­net, Microsoft and IBM with 21Vianet, and Ora­cle with Ten­cent.

Hav­ing a local part­ner poten­tial­ly rais­es con­cerns about how much influ­ence the Chi­nese will have, but Pro­fes­sor Li advis­es for­eign com­pa­nies to forge close local con­nec­tions, say­ing it is impor­tant not to under­es­ti­mate cul­tur­al dif­fer­ences between the West and Chi­na and also with­in dif­fer­ent regions of Chi­na.

Chi­na too recog­nis­es the val­ue of inter­na­tion­al exper­tise and Aliba­ba Cloud last August unveiled is AliLaunch pro­gramme to encour­age for­eign com­pa­nies to use its ser­vices in Chi­na and devel­op a cloud-com­put­ing ecosys­tem. Ear­ly part­ners include SAP, Here, Hitachi Data Sys­tems and Check Point.

Now ranked fifth largest cloud infra­struc­ture provider in the world, accord­ing to research firm Canalys, China’s glob­al ambi­tions recent­ly saw it announce plans for new data cen­tres in the Mid­dle East, Europe and Japan.

For the UK’s fast-grow­ing and ener­getic cloud sec­tor there are oppor­tu­ni­ties to pig­gy-back on the likes of Ama­zon Web Ser­vices, Microsoft and Aliba­ba, and although the short-term prize might be secur­ing busi­ness in Chi­na, the longer-term gain could be more inter­na­tion­al as Chi­nese com­pa­nies broad­en their hori­zons.

Alex Hilton, chief exec­u­tive at the UK’s Cloud Indus­try Forum, says the issues fac­ing Chi­na are sim­i­lar to those that face the UK such as band­width, secu­ri­ty, migra­tion from lega­cy sys­tems, reg­u­la­tion and data sov­er­eign­ty.

There are poten­tial­ly huge oppor­tu­ni­ties for those that can help pri­vate and pub­lic sec­tor clients over­come those prob­lems and har­ness the pow­er of the cloud to trans­form their oper­a­tions.

Mr Hilton adds: “When we talked about cloud tech­nol­o­gy a few years ago, it was all about infra­struc­ture and com­put­ing pow­er, now it’s about the appli­ca­tions and soft­ware ele­ment of it that organ­i­sa­tions can utilise. Soft­ware is king, absolute­ly.”

The advan­tage many UK com­pa­nies have is they have built up exper­tise and expe­ri­ence in spe­cial­ist areas, such as dis­as­ter recov­ery, the inter­net of things and uni­fied com­mu­ni­ca­tions that will be of immense inter­est to the Chi­nese.