Storm on the horizon

Traditionally, the Chinese authorities have taken pride in ridding themselves of clouds. Missiles are fired into the heavens, “seeding” them with rain and clearing the skies before military parades and international summits.

But a few clouds now seem more welcome in Beijing, at least, with the arrival of Amazon’s cloud computing service, AWS.

Cloud computing allows companies to store and transfer their data through the internet in a cost-effective manner. Traditional server systems force firms to buy, house and maintain their own hardware. Cloud computing is more scalable, as server space is purchased when it is needed. That’s one of the reasons why cloud computing is so popular among start-ups.

According to The Economist, nearly two-thirds of Amazon Web Service’s (AWS) clients are young firms, amounting to 660,000 customers. This client base makes AWS the largest cloud service provider in the United States, with about a third of the market. Consulting firm Gartner says that AWS has 10 times the capacity of the next fourteen largest providers combined.

But China’s cloud computing market is at an earlier stage of development, says Bain, another consultancy. All the same, it is growing fast. Worth $1.5 billion in 2013, it is expected to reach $20 billion by 2020.

Amazon first tried to expand AWS into this fertile market in 2014. But because of its status as a foreign enterprise, it was only able to operate in a limited capacity. Announcing the arrival of its cloud in Beijing that year, Amazon referred to its local service as a “limited preview phase” and only a select group of customers were invited to trial it.

According to Time Weekly, this preview period is coming to an end. AWS has teamed up with SINNET, a local internet data centre (IDC) to provide the fuller range of its cloud services. IDCs house the physical servers from which a cloud is supported. As China requires companies to store their data on servers within its borders, a partnership of this kind was inevitable. Time Weekly says that SINNET is the best-known IDC in China but the deal it has struck with AWS still only allows for services to Beijing and neighbouring Hebei.

AWS now seems likely to look for other deals to expand its cloud coverage. That means that Amazon is going to run into competition, especially from the mighty triumvirate of Baidu, Alibaba and Tencent (BAT).

PE Daily wagered in a recent article that Alibaba’s cloud service, Aliyun, is already AWS’s greatest rival – not just in China, but worldwide.

Although its forecast market capitalisation pales in comparison to the estimates for AWS ($42 billion against $178 billion) its fast pace of growth and its home advantages could see Aliyun snatch market share away from AWS in China.

Baird Equity Research is optimistic on Aliyun too: “In our view, many investors currently undervalue Aliyun’s long-term market opportunity, and we believe Alibaba is well-positioned to be the cloud computing leader in China due to preferential government policy, regional focus, domain expertise from operating the core Alibaba marketplace sites, and an inherent advantage among small and medium-sized enterprises (SMEs) due to Taobao and Tmall.”

Of course, these smaller companies are the mainstay of AWS’s American business. In China Alibaba is chasing the same kind of customer, and it has slashed prices to win their interest.

In the second quarter Aliyun’s revenues soared 140% year-on-year. But its profit margin dropped to -35%.

No problem. Alibaba CFO Maggie Wu has said that Alibaba is comfortable with Aliyun staying in the red until its customer base exceeds a million companies at which point she believes that “profitability will start to show”.

Not to be left out, Tencent has committed to investing Rmb2 billion each year in its own cloud services for the next five years. According to CBN, Tencent is choosing to focus its network on support for gaming, video streaming and mobile apps, where it already offers a range of products itself. It will also pitch to banking and government clients (it is already the network provider for 20 local governments, including tech hubs Shenzhen, Hangzhou and Shanghai, for instance).

AWS will find it harder to pick up the same kind of public sector contracts, not least because of the Chinese government’s wariness of American firms getting access to local data.

Demonstrating this paranoia the Ministry of Industry and Information Technology recently nixed a contract that AWS had signed in 2015 with the Autonomous Region of Ningxia, claiming that the venture’s credentials weren’t satisfactory.

And now even Baidu’s Robin Li – who once derided cloud computing services as “old liquor in a new bottle” – is hyping the sector’s potential.

“Our service isn’t simply storage capacity and it isn’t simply technological,” he explains. “Rather, it’s large scale data processing, accurate customer profiling, mapping, artificial intelligence and many other areas of innovation.”

Baidu trails Alibaba and Tencent in market value and Li has been trying to diversify its services beyond its core search engine function.

Fortunately, PE Daily thinks Baidu’s experience as a search engine should help it expand into cloud computing, because of its experience in handling huge amounts of data in the search engine’s backend.

Baidu’s ability to tailor advertisements based on search behaviour and trends has also improved its big data skills, for instance. It can then sell these skills to customers as part of its cloud computing offer.

Like Tencent, Baidu is trying to segment the market into key groups. It recently announced three new platforms offering big data services; video and image processing services; and ‘Internet of Things’ services for customers in industries such as energy and logistics.

All three of the Chinese firms will pose significant competition for AWS. Meanwhile other local tech companies, including giants like Huawei, have been investing in cloud computing as well.

With its well-capitalised rivals exploiting their local advantages in a sector that the government already sees as a sensitive one, Amazon could struggle to repeat the successes it has had in the US.

In fact, if its experience in Chinese online retailing is representative – where Amazon massively trails Taobao and JD.com – its market share could end up being rather small indeed.

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