China searches for silver lining to international cloud expansion

Chinese tech giants have emerged as the world’s second biggest force for investment in cloud computing infrastructure, behind the US, as they take bold steps to increase their international footprint.

The likes of Alibaba, Huawei and Tencent are all expanding their international networks of data centres to power up their cloud computing services overseas, both to support the international expansion of existing clients at home, as well as to land new clients along the way.

Closing the gap

The success of the multibillion-dollar investment plans these tech companies have set in motion will eventually hinge on their capacity to close the technological, but also reputational, gap with their peers in the West as their connections with the Communist party come under the growing scrutiny of potential clients worldwide.

Alibaba, Huawei and Tencent have all announced major investments in overseas cloud computing infrastructure in the first nine months of 2017. They made up the bulk of the 13 outward FDI projects worth $1.2bn announced by Chinese companies in data processing, hosting and related services between January and July, according to figures from greenfield investment monitor fDi Markets. 

This is already higher than any previous full year on record, and has moved China to be the world’s second largest force in investment in data processing, hosting and related services after the US. The latter retains a comfortable lead, with 46 announced projects worth more than $6.9bn, thanks to investments from powerhouses such as Amazon, Google and Microsoft.

“Chinese cloud providers are starting to target non-Chinese markets for exactly the same reasons that the US-based hyperscale operators are targeting markets in the Asia-Pacific and Europe regions – the market is increasingly global in nature and the big players need to strive for scale that will enable them to be successful,” says John Dinsdale, chief analyst and managing director at IT and cloud market intelligence firm Cloud Synergy Research Group.

“The Chinese cloud providers will undoubtedly be primarily targeting international operations of Chinese firms first, but will be hoping to use that as a bridgehead into the broader market,” he adds.

Tencent's silicon drive

Chinese tech powerhouses are positioning themselves to capitalise on the growing international footprint of Chinese companies, many of which are already clients in the domestic market and whose total overseas investment touched a record $109.6bn in 2016, prompting Beijing to act to prevent an excessive flight of capital. At the same time, these companies are deepening their presence in a market expected to grow at an annual rate of 23% to 29% a year over the next five years, passing the $200bn milestone in 2020, according to estimates by Synergy Research Group.

After launching its first data centre outside mainland China in Hong Kong in 2014, Tencent – China's largest technology company and the developer of WeChat, the country's most popular messaging app – has raised the stakes by unveiling an assertive plan to increase the global footprint of its cloud infrastructure. Somewhat symbolically, in Silicon Valley in April it opened the first of five new data centres slated to launch in 2017 in Silicon Valley.

“The new data centres serve Chinese companies looking to go overseas, as well as international companies expanding their businesses in China or other parts of the world,” Tencent said in an April press release, adding that the other data centres would launch in Frankfurt, Mumbai, Seoul and Moscow (the first opened at the end of July).

Alibaba makes its move

E-commerce giant Alibaba has also reiterated its commitment to leveraging its booming customer base at home and abroad through the development of cloud-related services. This push mirrors the strategy of e-commerce peer Amazon, whose cloud division, Amazon Web Services, accounts for 10% of total revenues and remains by far its most profitable business, as confirmed by the company’s latest quarterly results.

Since the beginning of the year, the Chinese group headed by Jack Ma has announced four new data centres across Asia (two in Mumbai, one in Jakarta and and one in a non-specified location in Malaysia). It has also doubled the capacity of its existing facility in Hong Kong, boosting its total number of data centre locations to 17. According to Alibaba’s annual statements, in the fiscal year ending in March 2017 its cloud revenues increased by 121% from a year earlier. The cloud business made up 4% of the group’s total revenues in the year.

Despite running a very different business, in that it focuses on supplying service providers and corporates with hard and soft telecommunications infrastructure, Huawei is also strengthening its cloud division. The company unveiled a new data centre in New Zealand at the beginning of 2017, and announced the spin-off of its cloud business just a few weeks later to give it a clear dimension within the group’s overall strategy. It expects to invest $1bn in its cloud business over the next few years.

Dedicated cloud computing services providers such as Jinan-based Inspur are also following suit. In August, Inspur unveiled an overseas expansion plant aimed at opening five cloud centres across the globe to support “countries involved in the Belt and Road Initiative with computing and data” as part of a Rmb10bn ($1.52bn) investment strategy.

Chinese cloud services providers will have to deploy part of their financial firepower to close the gap with their global competitors if they want to win the heart of non-Chinese customers, however. “The Chinese firms do tend to be some way behind their US counterparts, who have had a longer runway in building networks, developing services and launching them to clients. But directionally, they are all somewhat similar,” says Mr Dinsdale.

“Credibility and security will certainly be issues as they try to make that transition [towards international clients] and a lot will ride on their track record and perceived success over the first few quarters.”

Foreign opposition

The US administration, as well as EU authorities, have become increasingly suspicious of Chinese companies’ activities in the global tech sphere. In September, US president Donald Trump vetoed the acquisition of US-based chipmaker Lattice by a Chinese private equity firm with alleged connections with the central government in Beijing, after the Committee on Foreign Investment in the United States had raised security concerns over the deal. Although Chinese tech giants are technically private companies, their vulnerability to political influence remains an issue to many international observers, and a challenge to the Chinese firms' global ambitions.

A 2015 paper by US-based professors Curtis J Milhaupt and Wentong Zheng found that “in 95 out of the top 100 [Chinese] private firms and eight out of the top 10 internet firms [including Tencent and Alibaba], the founder or de facto controller is currently or formerly a member of central or local [Communist] Party-state organisations such as people’s congresses and people’s political consultative conferences”.

But the heavy hand of political influence is not something that only affects companies from China. Amazon dropped the WikiLeaks website, which it was hosting on its servers, after heavy political pressure in 2010. And the revelations by US whistleblower Edward Snowden over the vulnerability of the cloud services of Facebook and Google, among others, prompted countries such as Brazil to consider forcing internet companies to store local data in data centres inside the country (a proposal that eventually failed).

These US businesses are still thriving, though, as they have been able to reinforce their commitment to independence and data security – at least on paper. Chinese companies will have to go the same route if they are to replicate their Western peers’ success.