Image Source: Visual China
"Chinese cloud service providers have yet to expand their presence in many overseas regions," Zhu Yonglei, Global Partner and Chief of Strategic Business in Greater China at Bain & Company, told TiPost. But Chinese cloud computing companies are poised to increase their global market shares.
For Chinese cloud computing companies, venturing into international markets is not a novel concept. It is inevitable because their clients would eventually enter overseas markets. This makes cloud services in overseas markets become an increasing demand.
Seeking growth overseas
Ctyun unveiled its overseas expansion plan in April, introducing the "9+30+X+N" cloud-network infrastructure layout for businesses. Huawei Cloud launched KooVerse, a global storage and computing network aimed at international markets, while Volcengine, a subsidiary of ByteDance, is constructing its own IaaS+PaaS infrastructure with a node already established in Singapore.
Chinese vendors are already making their mark in overseas markets, with over a dozen providers offering basic cloud services. In addition to state-owned companies like Ctyun and eCloud, private cloud service providers such as Kingsoft Cloud, UCloud, and Global Data Solutions have also devised overseas expansion strategies.
Expanding globally has become a firm and long-term strategy for Chinese cloud service providers, enabling them to enhance their market share and profitability in the global IaaS+PaaS market. Their strategies were made based partially on the distinct characteristics of the Chinese market compared to the international market.
IDC China's report on the public cloud services market in the second half of 2022 show that the overall market scale for public cloud services (IaaS/PaaS/SaaS) reached US$18.84 billion. The IaaS market experienced a year-on-year growth rate of 15.7%, while the PaaS market witnessed a growth rate of 31.8%. However, the overall growth of the IaaS+PaaS market has slowed compared to the previous two half-year periods.
Despite the slowdown, China's cloud market has seen faster growth than the rest of the world due to factors like new infrastructure investments and the acceleration of digital transformation prompted by the COVID-19 pandemic. However, the structure of the Chinese cloud market differs significantly from the international market, with a high proportion of IaaS but limited profitability, rapid PaaS development, and stagnant SaaS growth.
China's software industry has yet to establish monopolistic advantages due to talent shortages, competition, and an unsupportive environment. The cloud market continues to face challenges in terms of growth and profitability, primarily due to the absence of a robust SaaS software ecosystem.
Moreover, while investment in public clouds from internet companies has reached a bottleneck, the government and corporate sectors are embracing digital transformation. A report by Frost Sullivan indicates that the penetration rate of cloud services among internet companies reached 93.5% in 2021, while companies in other sectors in China had a penetration rate of 26.8%. This suggests significant untapped cloud demand among non-internet companies.
In recent market developments, Alibaba Cloud has reduced service prices, cutting core product prices by up to 50% to expand its user base and secure a larger market share in the public cloud sector. Tencent Cloud and eCloud have also announced price reductions for multiple cloud products. Lowering prices is a customary practice in the industry as technological innovation and economies of scale decrease cloud costs. For example, Amazon has reduced prices for its cloud services 129 times since its launch. While this long-term pricing strategy lowers barriers to cloud adoption, it has also sparked unmet demand for public cloud services among enterprise users. Consequently, concerns have been raised in the cloud market, as several companies note that core products are becoming more expensive instead of cheaper.
IDC China's report identifies Alibaba Cloud, Huawei Cloud, Ctyun, Tencent Cloud, and Amazon Web Services as the top five players in the Chinese market. Notably, Chinese cloud providers are gaining rapid traction in the government and corporate markets, causing Tencent Cloud to fall out of the top three. While Alibaba Cloud maintains its leadership in the IaaS and IaaS+PaaS sectors, its market shares decreased by 5.2% and 4.8%, respectively, compared with the second half of 2021.
Bandwagon for overseas expansion
Cloud providers face the challenge of retaining their domestic clients while expanding internationally. They must also align with the international expansion plans of their customers and cater to the needs of Chinese companies operating abroad. These companies require secure and stable computing and networking resources, compliance with local regulations, and even marketing tools.
Global infrastructure deployment is a capital-intensive endeavor for cloud providers, and the construction cycle for data center availability zones (AZs) can be lengthy. Clients need considerable time to assess the stability and cost before making the final choice of AZs in a region.
Alibaba Cloud, Huawei Cloud, Tencent Cloud, and AWS have established their presence in multiple regions and AZs worldwide. Alibaba Cloud operates in 28 regions with 86 AZs, Huawei Cloud covers 29 regions with 78 AZs, Tencent Cloud operates in 26 regions with 70 AZs, and AWS has a presence in 31 regions with 99 AZs. These leading providers continue to expand their global cloud infrastructure, enabling businesses to quickly start operations in different regions.
However, meeting customer demands requires strong support from ecosystem partners, which is currently the biggest challenge for cloud providers. When companies expand globally, they need to adapt to local market opportunities, processes, culture, and legal requirements. This necessitates operational development and upgrades aligned with local business practices, requiring the collaborative efforts of ecosystem partners.
Building a global ecosystem requires experienced technology partners, integration partners, consulting partners, and marketing partners. The quality of an enterprise's digital transformation relies on these partners' industry expertise, communication capabilities, integration capabilities, business models, and delivery capabilities.
Skeptics argue that building a cloud ecosystem is challenging and that existing ones in China are loose alliances. However, Ruan Ye, General Manager of the Cloud Computing Platform Business Unit at IBM Greater China, suggests that Chinese companies often bring their partners and software suppliers along or rely on stable, secure, and open platforms when going global. IBM Cloud's "3+3+3" product strategy focuses on its ability to provide global public cloud services support and consulting capabilities, including compliance and security solutions.
Alibaba Cloud has collaborated with international partners like SAP and Temenos and launched the "Chinese Enterprises Going Global" program with Mobvista, Wondershare Technology, and Xiamen Meiyu. Huawei Cloud has introduced a sales partner policy and the "Go Cloud, Go Global" ecosystem program in the Middle East.
Moving overseas first has become a crucial step for the cloud industry's global expansion, necessitating the participation of ecosystem partners.
“Why switch to Chinese cloud providers?”
Expanding in overseas markets poses challenges for cloud companies due to the need for continuous operation. Xiang Ziqiang, COO of Neocrm, highlighted the importance of offering something better than existing mature cloud service providers in the target market.
Gaining clients' recognition is a complex process. While product technology is crucial, effective communication and understanding clients' needs are also key factors in winning customers over.
When an instant messaging PaaS provider planned its overseas expansion, it evaluated cloud service providers based on service quality, capabilities, costs, and communication. Eventually, they chose a Chinese cloud service provider because of their strong "communication ability" and understanding of the business logic, cost reduction, and efficiency improvement.
However, the regional head of another leading Chinese cloud provider's overseas division explained that the low level of digitalization in their region necessitated hands-on personalized services. Initially, they faced customer mistrust, but trust was gradually built through communication and practical experiences.
Chinese cloud providers have secured orders from clients in overseas regions. For example, Huawei Cloud partnered with Ankabut in the UAE to establish an advanced education cloud and launched the DEEM Cloud national e-government platform in Saudi Arabia. They also provided cloud-native services to JCTOP Technology in the UAE and Ebdaa Digital Technology in Qatar.
In 2022, a joint venture cloud computing company was formed in Saudi Arabia by Saudi Telecom Company (STC), eWTP Arabia Capital, and Alibaba Cloud. Chinese communication cloud service provider RongCloud successfully landed their software in the Middle East through the China-Saudi Arabia Enterprise Association, with support from the Saudi Ministry of Communications and Information Technology and eWTP Arabia Capital.
Tencent Cloud collaborated with leading Japanese live streaming platform Mildom and Nexon, the largest game developer in South Korea. They also formed a strategic partnership with Mobily, a telecommunications service provider in Saudi Arabia.
However, Zhu Yonglei believes that Chinese cloud providers' overseas expansion is still insufficient. Companies must learn to collaborate with international cloud providers or local operators and have the flexibility to cooperate with new ecosystems.
Zhu Yonglei observed that some companies are actively preparing for international expansion, but they need to find the right pace, reevaluate based on local markets, and avoid blindly replicating their strategies.
Xiang Ziqiang emphasized that aggressively entering a major overseas market is challenging for Chinese companies unless they are wealthy enough to invest heavily and secure major clients. The cost of investment is high, and building a reputation and gradually expanding into larger markets is a long-term process.
Neocrm, a CRM company, established a localized team in Southeast Asia with industry veterans responsible for business operations. They have served multiple local clients in the region and possess the capabilities for international expansion. The favorable customer environment in Southeast Asia, with lower demands for personalization and customization, contributes to their success.
Service providers like Neocrm play a vital role, serving local customers and acting as important partners for cloud expansion.
Compliance has become a pressing concern
Chinese cloud providers strategically leverage their strengths, such as Tencent Cloud's expertise in video cloud CDN and gaming customers or Huawei Cloud's ICT infrastructure resources and government and enterprise relationships, to enter overseas markets. However, the effectiveness of these advantages relies on robust infrastructure support.
Xiang Ziqiang of Neocrm highlighted the challenges Chinese cloud providers face in expanding their customer base overseas. Data sovereignty, which requires data to be stored in designated locations and subject to legal requirements of the country, is a significant concern. Specialized data residency cloud services that comply with local regulations by integrating with software vendors are available, enabling enterprise data to be stored in the respective countries.
Dai Boyao, President of Huawei Cloud's Middle East and Central Asia Cloud Business Unit, also emphasized the issue of data sovereignty. He noted that some industries with strict regulatory requirements cannot adopt public clouds, and the larger issue of data sovereignty remains unresolved. To address this, service providers must be local companies.
Since the implementation of GDPR by the European Union in 2018, countries worldwide have followed suit in controlling cross-border data transfers. Companies expanding internationally must navigate regulatory compliance when entering sovereign countries.
Certain sectors, including IT infrastructure products for cloud computing, face heightened regulation due to their sensitivity. Bain & Company's report states that goods with specific attributes, such as new energy vehicles, photovoltaics, and the medical industry, are subject to regulation among trade blocs. High-tech products related to national security, such as semiconductors, artificial intelligence, and big data, also face strict regulation and trade restrictions.
Southeast Asia is currently the preferred market for Chinese companies' expansion due to language environment, cultural similarities, and potential for growth in areas like e-commerce, live streaming, gaming, and online education. These applications drive significant consumption of computing and networking resources.
Middle Eastern countries, influenced by geopolitical factors and China's overseas strategies, have become targets for Chinese cloud providers. Digital transformation in these countries is accelerating under government leadership, with the average contribution of the digital economy to their GDP currently around 4%. Effective digital development strategies are expected to increase this contribution in the future.
However, companies must carefully consider regional options when entering international markets. Geopolitical factors play a role, and accurate assessments, risk evaluation, and contingency plans are essential. Establishing positive relationships is crucial for resilience when facing challenges.
Chinese enterprises should be prepared for the complexities of overseas expansion, considering factors like resilient development layouts and the increasing popularity of European and American markets, as highlighted by Zhu Yonglei. Risk evaluation and building strong alliances can enhance resilience compared to peers.
