Foreign IT Giants Rush to Tap China’s Cloud Computing Market

Cloud computing, commonly called “the third wave of information technology”, has substantially facilitated the way people live and do business. Generally speaking, cloud computing can be defined as the practice of storing data and running software over the Internet. Commercially, it allows enterprises to avoid upfront infrastructure costs and focus on their core business.
 
China accounts for only two percent of the global cloud computing market, but this is fast evolving. China’s domestic cloud computing market expanded dramatically in 2014, thanks to government support and a fast-growing number of Internet users in the country. Cloud computing in China reached a market size of RMB 117.41 billion last year, nearly doubling compared to the previous year. A survey by S&P Consulting found out that about 60 percent of Chinese small and medium-sized companies were using cloud services in 2014. It is estimated that China’s cloud computing market will grow by at least 60 percent over the next few years and exceed RMB 354 billion by the end of 2016.
 
Government Support
 
The development of the cloud computing industry was one of the main goals for China as set out in the “12th Five-Year Development Plan” issued by the State Council in 2012. Five cities (Beijing, Shanghai, Hangzhou, Shenzhen and Wuxi) were selected to be the key drivers of the industry. In 2010, Shanghai set up a cloud computing innovation and exhibition center, providing exhibition services for both domestic and foreign cloud computing enterprises. In the next year, an International Offshore Cloud Computing Zone was established in Chongqing in southwest China. The zone is the nation’s largest cloud computing center and is expected to be China’s biggest online data processing base. Meanwhile, the government is making efforts to build up new cloud platforms and increase inflow of venture capital funds for the industry.
 
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China announced earlier this year that foreign investors are now allowed to set up wholly foreign-owned e-commerce company in the Shanghai Free Trade Zone to provide online data processing and transaction processing services. This includes cloud computing. Previously, most foreign cloud computing enterprises chose to set up their China operations in Hong Kong. The liberalization in the Shanghai FTZ is intended to attract more foreign investors to set up their businesses directly in China.
 
Foreign Players
 
Foreign cloud services companies including Amazon, Microsoft and IBM are scrambling to capture part of this fast-growing market. Most of these foreign players provide “infrastructure as a service,” or computing infrastructure, one of three service models in cloud computing.
 
The year 2013 was a crucial year for cloud computing in China. Microsoft became the first foreign company to offer such services in China, together with its domestic partner 21Vianet, in February of that year. Microsoft licenses its Windows Azure and Office 365 technologies to 21Vianet, China’s largest carrier-neutral Internet Data Center service provider, which is also the local partner for IBM. Microsoft’s Azure platform recently was awarded a tender from the state-owned China Network Television for this year’s webcast of the Spring Festival Gala (an annual TV special for Chinese New Year watched by some 700 million viewers). But Microsoft is not the only foreign player in China’s cloud market.
 
In December 2013, IBM introduced its SmartCloud Enterprise+ system to China, also with 21Vianet, following a public cloud cooperation agreement signed with another local company, capitalonline. Also in 2013, Amazon officially announced that it would bring its cloud computing services – Amazon Web Services (AWS) to China with as part of a limited preview. With this move, China became the fourth Asia-Pacific nation to get access to Amazon’s cloud-computing service. In fact, many Chinese companies, including smartphone companies Xiaomi, Qihoo 360 and TCL have long used Amazon’s cloud computing service for their global business.
 
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Local Competitors
 
As the Chinese government continues to maintain restrictions on foreigners investing in the online services industry, Chinese local cloud computing companies may pose the biggest threat to foreign players rushing into this lucrative market.
 
Major Chinese companies offering cloud computing services include Aliyun, Tencent, Baidu, China Telecom and Huawei. Aliyun, owned by Chinese e-commerce giant Alibaba Group, is the largest cloud computing platform in China. It provides services to both the private sector and the Chinese government. China’s Railway Customer Service Center of China (12306.com), the official website for booking rail tickets, recently began to use Aliyun to improve its service provision.
 
For reasons of national security, government agencies and many state-owned enterprises are often unwilling to contract their cloud computing out to companies with foreign ties.
 
Special Requirements
 
In China, foreign parties seeking to provide cloud computing services are required to enter into partnerships with Chinese companies to obtain all relevant certificates. Though this regulation has been relaxed in the Shanghai FTZ, foreign investors are still recommended to involve a Chinese partner and tailor their products carefully to meet domestic requirements. Apart from the regular company setup procedures, companies seeking to provide value-added telecom services, which includes cloud computing, need to apply for a special permit. More details on this permit can be found in our article on telecom services in the Shanghai FTZ. Lastly, joint ventures looking to offer value-added services are required to have a minimum registered capital of RMB 1 million if servicing one province, or RMB 10 million for cross-provincial services.
 
Conclusion
 
China has the highest number of Internet users in the world as well as the world’s largest smartphone market. Within the spectrum of the burgeoning Chinese IT industry, cloud computing has become a promising new sub-sector. While full of potential, legal barriers to entry remain a major issue for foreign investors looking to enter this market.
 
This article was first published on http://www.china-briefing.com/
 
Dezan Shira & Associates is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.
 
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