Corporate China

Amazon adds new stratum to China cloud

PUBLISHED : Thursday, 19 December, 2013, 11:07am
UPDATED : Thursday, 19 December, 2013, 11:07am

I don't write too much about cloud services in China, mostly because I think the market is too immature despite Beijing's strong promotion of the industry. Still, the latest announcement by e-commerce giant Amazon (Nasdaq: AMZN) that it's formally launching cloud computing services in China seems like a good opportunity to re-examine the cloud phenomenon, including how the industry is likely to develop and who is best positioned to emerge as sector leaders.

I'll start by giving my own personal view that the cloud computing market in China is probably miniscule right now, perhaps worth a few billion dollars in annual revenue. I personally don't know many people who use cloud services, which reduce clutter on PCs and smartphones by storing data and software on remote servers. But the same was true of e-commerce just 5 or 6 years ago, and now that industry has boomed and is set to overtake the US to become the world's largest market.

Against that backdrop let's take a look at Amazon, which has announced it is preparing a China launch for its Amazon Web Services (AWS). The company has already signed up a number of partners the initiative, including smartphones maker Xiaomi and TCL (HKEx: 1069) and security software specialist Qihoo 360 (NYSE: QIHU).

China is just the fourth region in Asia and 10th worldwide for AWS so far, reflecting Amazon's recent big push into the market. The global e-commerce leader formally rebranded its underperforming China e-commerce site with its own Amazon name 2 years ago, and has spent massively to build up the service since then. It launched its Kindle store service in China late last year, and followed that with a launch of its Kindle readers and tablet PCs this past summer.

Amazon said its AWS service is still available only on a preview basis, and will be commercially available in early 2014. It is teaming with Chinese data centre operators and Internet service providers (ISPs) on the initiative, since foreign ownership of such facilities and services is still largely forbidden in the sensitive telecoms sector. Amazon makes it clear that it will initially focus on big corporate customers that can save big money by using cloud services to avoid building their own IT infrastructure.

Amazon joins an increasingly crowded field of companies that have piled into cloud services over the last 2 years, as part of Beijing's target to aggressively develop the industry. I've commented previously that investment in such focus areas often tends to follow this pattern, since everyone wants to please Beijing and also collect generous government incentives. Domestic heavyweights in the space include e-commerce leader Alibaba and telecoms equipment giant Huawei, and foreign giants including Microsoft (Nasdaq: MSFT) and IBM (NYSE: IBM) also have initiatives in the space.

Of course, the big question now is whether there is room for so many companies in a sector that is relatively small at this point. My guess is the answer is "yes", for several reasons. Most of these companies are probably looking at the e-commerce example and thinking that cloud services could see similar growth. Furthermore, many of these companies are engaged in different aspects of cloud services, which has a wide range of components from infrastructure to product development and management requirements.

I do think domestic players like Alibaba and Huawei may have a slight advantage, since they face less limitations than foreign rivals who must often form many partnerships for their initiatives. As for whether cloud services will actually explode like e-commerce did, I also do think the answer is probably "yes", as Chinese companies and consumers quickly learn the many benefits of using the cloud to store their rapidly growing volume of data and software.

Bottom line: China's cloud services sector is likely to experience strong growth in the next decade driven initially by corporate customers, with domestic firms having a slight edge over foreign rivals.

To read more commentaries from Doug Young, visit youngchinabiz.com