The Motley Fool

China’s Cloud Computing Industry and Its Growth Potential

China holds plenty of promise.

With a population of 1.4 billion people, it’s the largest country in the world. A rising middle class leads to higher consumerism, and that bodes well for many industries in China. One of those industries set to benefit is the cloud computing sector. Let’s look at three key things to know about that sector in China.

First, what is cloud computing?

Cloud computing is the delivery of computing services — including servers, storage, databases, networking, software, analytics, and intelligence — over the Internet (hence the term “cloud”). Since cloud users usually only pay for what they use, companies can lower operating costs, run their infrastructure more efficiently, and scale up or down as their business needs vary when using cloud services.

There are three different methods to deploy cloud services: 1) on a public cloud, 2) on a private cloud; or 3) on a hybrid cloud. Public clouds are owned and operated by third-party cloud service providers, while private cloud refers to cloud services used exclusively by a single company. The hybrid method combines both the public and private clouds.

Public versus private cloud in China

According to the Chinese Ministry of Industry and Information Technology, the country wants to increase the scale of the cloud computing industry more than 2.5 times by 2019, compared to 2015 levels. That represents a great opportunity for public cloud providers to grow.

A McKinsey’s survey revealed that in 2017, out of the total IT budget by companies in China, 7.9% was spent on private cloud and 6.5% on public cloud to give a total of 14.4%. In comparison, in the US, 5.2% was spent on private cloud, while 23.9% was used on public cloud, giving 29.1% of total IT expenditure.

Analysts predict that public cloud usage rates in China could rise over 20% annually from 2018. Therefore, the major public cloud providers in the country are trying to capture growth in the cloud space.

China’s major cloud players

As of the first half of 2018, Alibaba led the public cloud market with a 43% market share by revenue, retaining the top spot for the third year running. Next in line was Tencent at 11.2%, followed by China Telecom with 7.4%.

According to a report from Synergy Research Group, Alibaba ranked second in the Asia-Pacific region, behind Amazon, and fourth worldwide. In all, China accounted for over a third of the total Asia-Pacific market.

Investors who wish to have exposure to the Chinese cloud market could invest in those companies listed in either the US or Hong Kong.

(Fun fact: Alibaba holds the record for the world’s biggest initial public offering (IPO) with its US$25 billion listing in New York five years ago. News emerged on 13 June that it is considering a second listing in Hong Kong to raise US$20 billion.)

Challenges in the Chinese cloud space

Even though the cloud services market in China is expected to reach around US$104 billion in 2020, it may not be smooth-sailing growth for cloud providers.

The McKinsey survey showed that Chinese companies’ main three concerns about migrating to the cloud, be it private or public, are:

  1. Cost or difficulty of migration (66% of respondents)
  2. Security (61%)
  3. Regulatory compliance (33%)

Difficulty in making a compelling business case ranked eighth, showing that companies are open to moving to the cloud but are hindered by cost concerns and difficulty in shifting.

The Foolish takeaway

The Chinese cloud industry undoubtedly has lots of potential for growth. There are many benefits the cloud brings to businesses such as scalability and flexibility. Alibaba, being the biggest cloud provider in China, could benefit. However, there are also major concerns that may slow down the cloud proliferation. Those concerns are something the key Chinese cloud players should address to increase cloud adoption.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Tencent and Amazon. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.