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Chinese spending on innovation, technology growing twice as fast as in the US, fuelled by cloud services

Of the companies interviewed by Morgan Stanley in a latest survey, 34 per cent of Chinese corporate workload is handled using the cloud

PUBLISHED : Friday, 15 September, 2017, 4:44pm
UPDATED : Friday, 15 September, 2017, 9:53pm

Corporate spending on innovation and technology has been growing twice as fast in China than in the US over the past two years, fuelled by accelerating migration to cloud services, according to industry watchers.

In a latest research report released by US investment bank Morgan Stanley, information technology (IT) spending by Chinese companies is projected to grow 11.2 per cent this year, more that double their American counterparts’ 5.3 per cent rise.

The study, led by equity analyst Grace Chen, surveyed 126 chief information officers (CIO) in China and an undisclosed number of CIOs in the States.

While the scales of IT spending in both countries were not revealed, the faster growth by Chinese is clear, and is in line with figures showing data collection levels the year before.

Chinese companies spent 10.2 per cent more on technology last year, against 4.4 per cent in the US.

The findings also show Chinese cloud and CRM (customer relationship management) software spending growing at its fastest click in three years, adding the winners of such acceleration are the “leading public cloud vendors, and select semi [conductor] suppliers”.

The group of analysts name AliCloud and Tencent as the industry leaders in public cloud, and among the foreign players, IBM outshine other competitors.

Private-sector corporate investment will accelerate this year, recovering from the low levels of 2016. Lower real interest rates will stimulate investment in productivity-enhancing technologies, such as robots and cloud-based services
Gordon Orr, senior adviser to McKinsey China

“Our survey shows more than 30 per cent of CIOs have adopted Alicloud, and that China will maintain a similar leading share over the next three years, echoing our positive view,” the Morgan Stanley analysts said.

AliCloud's parent company Alibaba owns the S outh China Morning Post.

“What surprised us most, was CIO’s optimism about Tencent and Huawei in public cloud: Tencent ranks second with a 15 per cent share predicted to rise to 23 per cent within three year,” they added.

Katy Huberts, an equity analyst at the firm, said: “Our survey shows that IBM, which is in partnership with Wanda, stands out in public cloud ahead of Amazon Web Services (AWS) and Azure.”

Morgan Stanley also noted Huawei, which trails AliCloud and Tencent in public cloud, tops its competitors in private cloud, a result of Huawei’s competitive advantage in having a hardware business.

Public clouds are typically applications and storage made available on the internet as services for all companies. In contrast, private clouds are proprietary data centres tailored specifically for one company.

In China, those companies interviewed said about 34 per cent of their workload is handled using the cloud.

The analysts said that figure will be bumped up to 53 per cent by the end of 2020, and more specifically, the percentage of workload on the public cloud is expected to rise from 20 per cent to 29 per cent, during the same timespan.

However, this still trails behind cloud adoption by US companies, however, which currently use it for 34 per cent of their workload and by the end of 2020, that’ll reach 59 per cent.

The size of the public cloud as a service market in China is expected to be valued at US$2.4 billion this year, up from US$1.8 billion in 2015, and then to grow to US$3.8 billion by 2020
Statistics platform Statista

Gordon Orr, senior adviser to McKinsey China, echoed Morgan Stanley’s finding, that companies are increasingly spending more on technology, particularly cloud.

“Private-sector corporate investment will accelerate this year, recovering from the low levels of 2016. Lower real interest rates will stimulate investment in productivity-enhancing technologies, such as robots and cloud-based services,” Orr wrote in a commentary.

A separate analysis by McKinsey partner Yougang Chen, chimes against, that Chinese firms have been increasing digital engagement in recent years.

His report says domestic mainland companies are “investing heavily in the building blocks of the internet economy: cloud computing, wireless communications, new digital platforms, big data analytics”.

According to statistics platform Statista, the size of the public cloud as a service market in China is expected to be valued at US$2.4 billion this year, up from US$1.8 billion in 2015, and then to grow to US$3.8 billion by 2020.

However, as cloud services continue to expand, companies providing more traditional IT and content delivery networks (CDNs) will face serious disruption to their business models.

“Alicloud’s success is already weighing on corporate IT vendors in China, similar to how AWS has challenged US IT suppliers,” Morgan Stanley analysts said.

“In China, margins for traditional server makers, (such as Lenovo, Inspur) began to soften in 2016.”

That shift in the industry, meanwhile, will present opportunities for a select group of semi-conductor suppliers.

“The migration to solid state drives and the increasing focus on cloud computing are going to benefit several semiconductors companies, including Silicon Motion, TSMC and Samsung Electronics,” Morgan Stanley predicts.

Its equity analyst Robert Lin wrote in June that AliCloud had 500,000 paying clients, including half of the top 35 Chinese “unicorn” internet companies – start-up firms with a US$1 billion valuation, funded either publicly or by private investment.

Philbert Shih, managing director at Canadian firm Structure Research, in June was also projecting substantial growth for AliCloud “that would already be at historical record highs for the cloud industry”.

Launched a decade ago, Amazon Web Services’ calendar year 2020 revenue is projected to hit US$75.41 billion.

Structure Research estimates AliCloud to post revenue of US$7.08 billion during parent Alibaba’s financial year to March 31, 2020.

But Morgan Stanley is even more aggressive, suggesting a US$8.72 billion revenue by 2020, which compares significantly with the US$7.88 billion posted by Amazon Web Services last year.

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