Internet & Tech

Gathering clouds

Is China about to create a state-owned cloud services heavyweight?


State firms are being told to switch away from Alibaba Cloud

“It is a capital mistake to theorise before one has data,” warns Sherlock Holmes, the super sleuth of Arthur Conan Doyle’s novels.

‘Data’ – that precious commodity that Holmes was earlier than most to put a premium value on – is at the forefront of the Chinese government’s latest drive to bring the nation’s internet titans to heel. This follows months of recrimination and rebuke about their behaviour from Beijing. Now some major pieces of legislation surrounding the use of data are set to take hold over the next few months.

On November 1, a sweeping privacy law comes into effect, curbing the collection of information on individuals by technology firms. And as of Wednesday this week, companies were also subjected to new standards of data protection involving information about “key national security and economic lifelines”, including its transfer overseas.

This follows moves last week when officials from internet watchdog the Cyberspace Administration of China published draft proposals for taking more control of the algorithms used by technology firms to personalise and recommend content ­– the latest initiative in a raft of regulatory action across the internet sector.

And next up for focus is a series of restrictions on cloud computing businesses. The talk is that state firms will be steered away from the ‘public’ cloud to contracts with government-controlled providers instead.

Such are the reports after the Tianjin bureau of Sasac – the agency that manages 100 or so of the largest state-owned enterprises (SOEs) – told companies under its control to stop doing business with the public platforms run by the likes of Alibaba. Citing instructions from the State Council, the Sasac branch of the large northern municipality ordered a switch to state-run services called guoziyun, or “state asset cloud”, within two months of the end of existing contracts. There should be no dealings at all with non-government providers by the end of September next year, it confirmed.

It’s tempting to headline the story as yet another mashing for China’s embattled internet majors, who have been peppered with financial penalties and policy changes for much of the last six months. Yet the embargo seems likely to extend to those cloud service providers under state control as well, including units of China Mobile, China Telecom and China Unicom. They too will have to cede SOE business to a new breed of state-controlled cloud services firms.

Quite how the guoziyun will handle the new business is largely left unsaid, although a few newspapers made the point that the newer state cloud firms lack the expertise of their more established and now very large peers. Some suspect the new arrangement will initially see the guoziyun sign up SOE clients but still contract out to companies like Huawei, Tencent and Alibaba for their expertise and equipment.

The government’s determination to set the direction on data security shouldn’t come as a massive surprise. “The flow of information guides the flow of technology, capital and talent,” Chinese leader Xi Jinping warned as far back as 2014. On Monday there was another reminder of the political imperatives in the campaign, when Ou Li, the chairman and Party secretary of state-owned electronics maker China Hualu, authored a much-discussed article about data and what he termed the “gun” and the “pen”. In it he argued that mastery of the country’s data is now as important for maintaining the Communist Party’s control as the military (the “gun”) and the media (the “pen”).

All the same, the intensity of this year’s efforts to shackle larger tech firms has shocked investors in the sector, with many foreign fund managers having assumed a much cosier relationship between the leading players and the central authorities in Beijing.

Cloud computing services have grown fastest in sectors like e-commerce, gaming and digital media but usage has been spreading to other industries, fuelled by the diversification efforts of Alibaba, Tencent and Huawei, which account for about three-quarters of cloud deployments.

Beijing has woken up to how entrenched the biggest internet firms have become. Policymakers are especially focused on areas where a few winners stake out an unassailable market presence (the marginal costs of winning new business falls steeply as cloud networks reach scale, for instance).

Alibaba Cloud, the leader, already has a 40% market share, according to IDC, and another concern for policymakers is how the cloud providers are pivoting from networking and storage (or infrastructure-as-a-service in industry speak) into sales of a wider range of products.

The bigger, more lucrative goal is to sell the cloud first and then promote a group of cloud-based technologies in areas like artificial intelligence, the Internet of Things and Big Data, to name but a few. But that’s a potential problem for the Chinese government, which will shudder at the prospect of the internet majors getting a new vantage point over some of the economy’s cherished higher ground – industries like smart manufacturing and chipmaking – where Beijing plans to maintain more of a guiding hand.

In the meantime the rule changes shouldn’t prohibit the established cloud firms from doing business with non-state owned clients, although they will increasingly restrict some of China’s largest companies (i.e. SOEs) from directly using Tencent and Alibaba.

Huawei Cloud, which had made the biggest gains in recent months, could be one of the worst affected because more of its growth has come from government contracts.

The change in circumstances could also force the big Chinese providers to look for growth in overseas markets such as Southeast Asia, where they had locked up 22% of the region’s fast-growing cloud business by the end of 2020, says Gartner, an advisory firm. Alibaba and Tencent have opened data centres in Malaysia, Indonesia and Thailand (and soon the Philippines) as part of the push, grabbing customers from American competitors like Amazon Web Services. Huawei has made similar inroads in Latin America, signing contracts with government partners and IT providers in Brazil, Argentina, Chile and Mexico.

The irony is that competitors have complained that the Chinese firms wouldn’t be winning as much business abroad without their government’s political and financial support. But their situation now seems different in their domestic market, where such ‘support’ is suddenly looking a lot less favourable.

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