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    Business / Technology

    Cloud carrier promises rich pickings for IT firms

    By Kevin Meehan and Steven Lu (China Daily) Updated: 2015-12-16 09:29

    China's market for enterprise IT is huge, but the share that goes to cloud computing is still comparatively small. Sales of cloud computing hardware and services amounted to about $4 billion in 2014, about 5 percent of China's total IT market. That's much lower than the 11 percent of global IT spending on the cloud.

    We expect China's spending on the cloud to grow much faster than its overall IT spending, reaching as much as $20 billion by 2020-an annual growth rate of 40 to 45 percent. Several recent announcements underscore the momentum toward the cloud in China.

    Tencent announced in September that it would invest $1.57 billion in its cloud business, including in data centers in China, Hong Kong and North America. In July, Alibaba Group's cloud computing subsidiary, Aliyun, said it plans to invest $1 billion in cloud computing, including a data center it launched in Silicon Valley earlier this year and another planned on the east coast of the United States.

    But tech vendors hoping to sell cloud services in China-whether they come from China or the West-will have to overcome a few hurdles to capture the growth they're after.

    First and foremost is that the country as a whole will need more broadband infrastructure. Internet speeds in China are relatively slow, averaging about 4 Mbps in late 2014 compared with 11.1 Mbps in the US.

    More customers need access to that broadband: Only 14 percent of China's Internet subscribers have fixed-line broadband, while 21 percent have mobile broadband. That's compared with 29 percent and 98 percent in the US.

    Urban areas fare better, but China's companies in the interior parts of the country still have difficulty accessing remote applications and data at speeds comparable to those in developed markets.

    But perhaps the biggest challenges are the cultural and business attitudes that steer China's businesses away from the cloud.

    A heightened awareness of the vulnerabilities of information security has created a preference to maintain close control of workloads and data. And a bias for owning hardware and software rather than renting them as a service reinforces a reluctance to put workloads on the public cloud or otherwise outsource IT.

    For Western companies aiming to deliver public cloud services, the regulatory requirement to work with a domestic partner creates even more challenges, and that has contributed to the relatively slow development of public cloud to date. On the other hand, some tailwinds are accelerating cloud adoption.

    China's State-owned telecom operators plan to invest about $180 billion from this year through 2017 in fixed-line and wireless connectivity. The government views the cloud as a priority and included it in the nation's 12th Five-Year Plan (2011-15). It will probably reaffirm it for the 13th Five-Year Plan (2016-20), ensuring continued investment through 2020.

    China's market is also made up of many new businesses that are less encumbered by legacy IT systems than is typical in more developed markets, which means they can more easily adopt new IT models, with investments by Tencent and Alibaba sure to stir interest.

    Even so, we expect most of the investment in the cloud to remain in private cloud computing-that is, technology that taps into the economies of cloud computing, but which is privately owned and controlled, foregoing some of the savings available to customers on larger, public cloud infrastructure like Amazon Web Services.

    This preference for private cloud gives technology vendors a window of opportunity for selling private cloud hardware and services to China's IT buyers: financial institutions, telecom operators, Internet companies and well-funded government bodies.

    The authors are Kevin Meehan, a partner with Bain & Co in Singapore, and Steven Lu, a partner with Bain in Shanghai.

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