Although China is a fast-growing, important market for global cloud computing, the country presents serious challenges for U.S. cloud providers and ranks only 13th in the listing. Regulatory restrictions, some aspects of governmental decision making, and local competition make China a problematic market for even large, experienced U.S. providers. Operating in China therefore requires substantial resources, flexibility, and a long-term outlook.
Last Published: 3/16/2016
The 2015 Top Markets Report for Cloud Computing  ranked 20 export markets. China was ranked #13.

While in some keys ways China is at an earlier stage in cloud adoption than other large economies, it is clear that the market is expanding notably and poised for significant future growth. Estimates of the size and growth rate of the domestic cloud computing sector vary widely. The Ministry of Industry and Information Technology (MIIT) has reported that China’s public cloud market was worth approximately 4.8 billion RMB ($771.2 million at current exchange rates) in 2013 and expects 36 percent growth for 2014. Gartner projects the public cloud market to reach $20.7 billion by 2018, with an annual growth rate of 31.5 percent (while IDC notes sustained annual growth of over 40 percent in the Chinese public cloud market).

As for the broader market, the state-run China Software Industry Association previously predicted the overall cloud value chain would be worth at least $122 billion by 2015, although some more recent estimates have trended lower.

In addition to enterprise usage, a key driver will be the continued adoption of smartphones, the applications for which often rely on cloud services. Almost 500 million smartphones should be sold in China in 2015. These will help an expected 680 million Chinese citizens access the Internet next year and propel total 2015 ICT spending of over $465 billion in the country, according to analyst estimates.

As in other sectors, the main challenge for U.S. firms in seizing cloud-related opportunities in China is its regulatory environment. For example, foreign cloud providers are required to partner with local companies to serve customers in China, raising questions about how much control foreign providers will ultimately have over their joint ventures, given that their Chinese partners may fully manage daily operations. Moreover, certain regulatory requirements impact the hardware and software that may be used in offering cloud services, necessitate that extra care be taken to avoid hosting certain content, and create uncertainty about some industries’ ability to contract with foreign cloud providers. To deal with these challenges, U.S. companies have found it necessary to completely isolate their China cloud systems from their global ones, creating likely technical inefficiencies and other operational complications. 

Further, government policies designed to promote locally-based cloud vendors are likely to continue, especially given the focus on cloud computing in the 2011-16 Five-Year Plan. Concerns also exist about the application of China’s Anti-Monopoly Law.

Other key regulatory developments rose to prominence at the close of 2014 and in the first few months of 2015. 

The first is a planned security rating system to be used in assessing the “trustworthiness” of cloud providers vying for public contracts.  Foreign firms are expected to be able to participate in the review process, though in doing so they may be required to turn over proprietary source code. That the head of a Chinese virtualization firm described the system as a “golden opportunity” to challenge foreign providers raises further concerns.    

Secondly, reports indicate that the central government may be aiming to by 2020 have removed foreign-made software and hardware from major segments of the economy, such as the military, banks, some government bureaus, and the country’s massive state-owned enterprises. This helps explain recent changes to the list of foreign technology software and hardware permitted for purchase by China’s government agencies. 

Over the past few years, the number of approved foreign vendors for some government procurement has fallen considerably, while so many Chinese-made products have been added that the overall list grew by over 66 percent from 2012 to 2014. Policymakers have also already determined that a pilot program in which a domestically-sourced operating system and servers replaced foreign-supplied alternatives was successful. As is the case in other instances, exceptions may be made for companies that hand over proprietary information for security review. 

The same situation may exist in China’s banking sector, where foreign ICT suppliers are currently well represented. Recent government guidelines for ICT in the banking sector called for 75 percent of banks’ ICT systems to utilize “secure and controllable” technology by 2019 and required banks to provide source codes to government authorities and use indigenous Chinese IP, among other restrictive measures. In April 2015, China decided to suspend implementation of the banking guidelines and to issue new guidelines in the future. It remains to be seen whether future rules will contain similar requirements. Given the restrictive approach of the banking guidelines and the possibility that a similar approach could eventually be applied to other major sectors, there is still serious cause for concern. Further, a draft anti-terrorism law would demand the domestic storage of Chinese user data, creating an array of cost, administrative, and political challenges for U.S. cloud vendors. Here too there are indications that the law may not ultimately be enacted as initially envisioned.

Other country-specific factors complicate the provision of cloud services by U.S. firms to this growing market. For instance, although awareness of public cloud options is on the rise, the traditional focus in China has been on private cloud functionality – potentially limiting the attractiveness of some U.S. providers’ offerings.

Another challenge is a lack of trust in foreign technology and worries about data security. According to one Shanghai-based e-commerce firm, “We won’t do that [utilize foreign cloud services] now because we don’t know if it is safe to do that for our data… It is so hard to handle and control the situation if something unfair happens to us [when] working with a foreign company.” It is unclear whether U.S. cloud providers, while more experienced and innovative in their service offerings than most local competitors, will be able to overcome such concerns even after partnering with a local player.

Mainland China’s Internet download speeds also present issues. The penetration of broadband access, which is critical to the meaningful use of cloud services, is only about 14 percent. Average download speeds are only 3.14 to 4 megabits per second. The average download speed in Hong Kong, by contrast, exceeds 44 megabits per second, while the developed world standard is 17.4 megabits per second.

Chinese Internet-filtering systems contribute to this slowness and latency tests have confirmed the importance of having in-country technical infrastructure, although concerns also exist about China’s electricity infrastructure and ability to dependably supply power to large data center operations. Fortunately, the deployment of LTE networks and other infrastructural upgrades should help ameliorate the barriers to cloud computing created by slow or unreliable networks.

Despite challenges like these, several large, well-resourced U.S. cloud providers have pushed into the sizeable Chinese market through joint partnerships with local companies. For example, Microsoft has partnered with 21Vianet, a Chinese data services firm, to roll out public cloud services. Consequently, Azure launched with general availability in China in March 2014, while some 20,000 enterprise customers signed up to try Office 365 during a public preview period.

While with Azure’s shift to general availability Microsoft can claim to be “the first global company to make onshore public cloud services available to customers in China,” it is one of many U.S. firms eager to break into the market. Amazon’s new Beijing region is now in limited public release and also focuses on public cloud offerings. The firm is reportedly working with ChinaNetCenter, SINNET, and various other partners. It highlights customers such as Xiaomi and Qihoo 360. For its part, IBM is teaming with 21Vianet and Tencent. HP’s local partner is Beijing UnionRead Information Technology Ltd. and a China-based executive projected that its Helion services should be available in 2015. Oracle currently sells cloud services in China and is in talks to establish a local data center.

Whether players like Microsoft and Amazon will be able to overcome the traditional Chinese preference for private clouds, the general distrust towards foreign providers, and a complex regulatory environment remains to be seen. At least on the last point, however, the requirement to partner with established Chinese firms may facilitate smoother relations with regulators than would otherwise prevail.  

Those connections may also prove critical given the rise of domestic cloud service providers. E-commerce giant Alibaba’s Aliyun service is already a notable competitor, servicing 1.4 million customers directly and indirectly. China Mobile, China Unicom, China Telecom, Baidu, Tencent, and ZTE are among the other large, well-resourced, and technically-savvy Chinese companies offering or preparing to offer some sort of cloud service.

Although some point out that local players currently lack some of the larger U.S. firms’ key advantages (e.g., scale, technical skill, innovative services), there can be no doubt that these gaps will close, to varying degrees, over the next several years. Overall, as of May 2013, the China Cloud Computing Technology and Industry Alliance listed 15 domestic cloud platform providers, 174 offering various cloud applications, and 64 selling hosting services.

China Information and Communication Technology Export Potential