China may be home to the most Internet users in the world and increasingly sophisticated Internet companies, but when it comes to unleashing the potential of cloud computing, China lags behind. Industry analysts estimate that China currently accounts for only 3 percent of the global cloud computing market.1 In the 2013 Global Cloud Computing Report, China placed 19th out of 24 countries in terms of the conduciveness of its policy environment for cloud computing.2 Realizing the importance of this emergent technology and not wishing to be left behind, China is in the midst of an aggressive push to expand its cloud computing infrastructure and services. This initiative involves a mixture of government and private efforts. All of these efforts, however, are constrained by political and economic considerations that will likely result in Chinese “clouds” being unique, rather than fully integrated with the rest of world.
The importance of cloud computing to the Chinese government is reflected by its listing as one of seven priority areas in the government’s Twelfth Five-Year Plan (2011-15). In November 2011, the National Development and Reform Commission (NDRC), along with the Ministry of Industry and Information Technology (MIIT) and the Ministry of Finance, agreed to earmark Rmb 1.5 billion ($245 million) to projects in cloud computing.3 These projects are being aided by significant government investments in the development of data centers around the country and are being overseen by an NDRC expert committee tasked with guiding the development of the Chinese cloud computing industry.4
The central government is developing cloud computing pilot programs in several cities with varied areas of focus. For example, the Beijing Harmony Cloud Project (北京祥云计划) focuses on developing infrastructure-as-a-service, as well as cloud applications in storage and search; the Shanghai Cloud Sea Project (上海云海计划) targets small business, financial services, healthcare, and media services.5 In other areas, from Guangzhou to Chongqing, local governments are offering their own incentives—ranging from land grants to special tax benefits—to attract cloud computing industry investment.
Beyond serving as a policy coordinator, the government itself is an active user of cloud technology. Its rapid adoption of cloud services is driven by its dual interests in increasing workplace efficiency and providing a jump-start to the industry. In addition to e-government initiatives, the state is likely to promote the adoption of cloud-based solutions in health care and education, as well as possible cloud initiatives in several industries dominated by state-owned enterprises such as petrochemical, telecommunications, and electricity.6
Despite these many domestic initiatives, foreign companies hoping to tap into China’s burgeoning market face a number of regulatory restrictions. This includes limitations on foreign investment in telecommunications and value-added services that effectively require multinationals to engage in joint ventures with Chinese partners. Furthermore, foreign companies must comply with Chinese regulations on content controls, encryption, and state secrets.7
Leading foreign cloud providers are taking different approaches to Chinese restrictions. IBM opened a cloud computing center in Beijing as early as 2008 and has engaged in multiple joint venture projects, including collaborating with China’s Range Technology in the development of Asia’s largest cloud computing center in Langfang, Hebei, near Beijing.8 Intel Capital has invested in a number of Chinese cloud computing projects and start-ups.9 And, in March 2012, IT service provider Internet Initiative Japan agreed to a joint venture with China Telecom to build and operate a cloud-computing platform in conjunction with the country’s dominant fixed-line provider.10
Meanwhile, major Chinese Internet companies are engaged in an aggressive push to expand their own cloud-related offerings. The earliest mover and a widely-acknowledged industry leader is Ali Cloud (also known by its Chinese moniker, Aliyun). Ali Cloud was spun off from the Alibaba Group, China’s largest B2B Internet company. It focuses on providing a broad-range of cloud-based services, including email, storage, CRM, sales force management, inventory management, and financial management. Several other leading Chinese Internet companies, including Tencent and Shanda, are also actively engaged in pursuing cloud-oriented initiatives.11
Huawei, China’s global telecommunications equipment giant, also recently developed Huawei Telco Cloud Solutions and is offering private and public cloud solutions, as well as partnering with several multinationals to offer enterprise-to-enterprise vertical IT solutions. Huawei reports that its cloud solutions are being used by several top telecommunications carriers including China Mobile, China Telecom, Vodafone, and STC. It operates more than 20 cloud data centers globally including the world’s largest for China Mobile.12
Until recently, two large US public cloud service providers—Amazon and Microsoft—have stood on the sidelines of the Chinese market. But that too is beginning to change as Chinese competitors rapidly attract new users for public cloud services. Microsoft became the first multinational to receive the necessary qualifications to offer public cloud computing services in China.13 In June 2013, Microsoft began offering its Windows Azure platform in conjunction with 21Vianet, a Chinese data center service provider. Amazon, meanwhile, has made no announcements of any plans to enter the Chinese market.
While multinationals are only beginning to offer public cloud services in China, the country’s leading search provider, Baidu, has built up its own public cloud offering at an astonishing speed. Baidu Cloud provides online storage of photos, contacts, and notes. Like Google, Baidu is hoping that its leadership in search, as well as a comprehensive range of other offerings, from music streaming to word processing, will drive everyday users to its cloud. Baidu Cloud is growing at a rate of 200,000 new users per day, expanding from 20 million users in late 2012 to over 70 million by mid-2013.14
Despite the recent aggressive push, cloud computing in China faces four major challenges. These include gaps in the Chinese cloud computing ecosystem, user adoption concerns, lagging tools for cloud management, and regulatory limitations. Developments in each of these fronts are worth monitoring for anyone concerned with the future of cloud computing in China.
In terms of a comprehensive ecosystem to support cloud computing, recent Chinese government initiatives are serving to alleviate hardware infrastructure problems. But hardware alone is insufficient. A robust cloud computing offering also requires a multitude of software to cover interfaces with different consumer segments as well as middleware. Chinese government policies have emphasized open source solutions, but some companies are also developing proprietary tools. In addition, the success of IBM and others outside of China has been due, in part, to robust systems integration (SI) services that assist in the creation of cloud-based solutions for users. SI providers with a deep understanding of cloud-based tools are only just starting to emerge in China. Lastly, while China has wide broadband penetration, download speeds in many parts of the country remain slow. These elements of the ecosystem require further development to avoid creating bottlenecks in the cloud industry’s evolution.
Adoption of cloud computing may also be hampered by lagging user knowledge and adoption willingness. A survey by Accenture of senior Chinese IT executives in 2010 found them to be well behind their American counterparts in terms of their knowledge and actual use of cloud-based services.15 Chinese executives expressed deep skepticism of public cloud services, particularly in terms of data security and access by foreign governments.16 Even those enterprises that have moved to the cloud have preferred to use private, rather than public, cloud solutions.17 Moreover, Chinese executives appear to be primarily focused on taking advantage of the cloud for process improvement and cost savings, and less interested in cloud-based innovation.18 Unless these user-related limitations are overcome, they will stifle the development of Chinese players into genuine world-class innovators, particularly with respect to public cloud services.
Consumer confidence in cloud-based solutions also depends on the availability of robust cloud management tools. Users need to be assured of the reliability of providers’ capabilities in terms of managing data across data centers, ensuring disaster recovery, protecting privacy, tailoring intelligent services, etc. On these fronts, China’s domestic players still appear to lag behind the more experienced multinationals.19 Multinationals, however, may be reluctant to share their latest and most sophisticated tools with Chinese joint venture partners in the face of negative past episodes of IP theft and perceptions of inconsistent enforcement. The pace and quality at which Chinese cloud management tools evolve, based on either homegrown solutions or foreign technology transfer, will also impact the growth of the industry.
Finally, regulatory controls present a huge barrier not only to the ability of foreign multinationals to operate in China. They also indirectly hamper the ability of China’s domestic players to develop the capacity to expand their homegrown solutions overseas. The Great Firewall and other Chinese governmental controls ensure that much of the world’s public cloud solutions will not be easily accessible within China.20 Meanwhile, China’s indigenous cloud solutions will be tailored to Chinese regulatory demands and are likely to be different than those offered elsewhere. This means that despite rapid growth projections, in the medium term, only the few Chinese multinationals with deep resources and extensive experience overseas, such as Huawei, have any potential to develop solutions that can meet Chinese demands and compete internationally with solutions offered by global industry leaders.
Like the rest of the Internet, the cloud will become increasingly Chinese in the coming years. Large investments by the government and private companies are paving the way for faster growth of cloud computing in China and creating significant opportunities for both domestic and international technology firms. Much remains uncertain, however, about how the unique obstacles to Internet innovation in China can be overcome. Until these obstacles are dealt with, the greatest likelihood is that China will remain a fast follower, albeit a critically important one, rather than a genuine global leader in cloud computing.
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