Chinese Cloud Service Providers Expand Overseas As Foreign Counterparts Explore Policy Possibilities in China

10 Aug 2015

Beijing, August 10, 2015 – During a press conference on strategic cooperation with Yonyou Network Technology Co., Ltd. in Beijing on July 29, the Alibaba Group announced that it will make an additional investment of USD 1 billion into Aliyun, its cloud computing unit. The capital will be used to expand Aliyun’s international presence and support infrastructures, in addition to R&D in cloud computing, big data, and the building of a business ecosystem. This move has once again confirmed Alibaba’s determination to expand and develop its cloud computing operations globally.

Aliyun’s global operations have just begun. In this year, Aliyun announced plans to set up data centers in Western United States and the Middle East, and later on, the Eastern United States, Europe, Singapore and Japan. These plans are designed to serve both the internationalization of Chinese companies on the one hand, and local customers in those markets on the other. At the same time, other major Chinese cloud service providers are also deploying active data centers in overseas markets to expand their cloud operations globally, including UCLOUD, QingCloud and Tencent Cloud which have announced plans to establish data centers in Hong Kong and North America.

Chinese cloud service providers face local regulations and other issues related to cross-border data flow in oversea markets, but regulations on cloud services in overseas markets such as the U.S. market are less strict. While there are restrictions on mobile service operator licenses, the Internet market is more open.

While they are growing very quickly, emerging Chinese cloud service providers are yet to pose a serious threat for well-established global cloud service providers. According to IDC’s statistics, China’s public cloud service market reached USD 902.8 million in 2014, up 61.9% from 2013. However, they only accounted for less than 3% of the U.S. public cloud market in 2014.

While Chinese cloud service providers push for overseas expansion, their foreign counterparts are grappling with China’s policy barriers to offer their solutions in the Chinese market. In the face of quickly growing market demand, foreign IT companies are increasingly keen to enter China’s cloud service market, but first they have to address the Chinese government’s cloud computing and data security concerns and related policy issues. So far, only a small number of global players have made their cloud service available in China, including Microsoft’s Windows Azure and Amazon’s AWS.

The main challenge facing foreign cloud service providers is the difficulty in obtaining value-added mobile service licenses such as IDC. These licenses are generally held by Chinese data center service operators and their issuance was suspended for a time before resuming in 2012, after which major domestic Internet and IT vendors such as Alibaba, Huawei and Inspur obtained their licenses one after another. In contrast, foreign vendors face strict regulatory requirements regarding the administration and issuance of the licenses. According to the Provisions on the Administration of Foreign-funded Telecommunications Enterprises, foreign-funded enterprises engaged in value-added mobile services have to be no less than 50% owned by the Chinese side. This means that foreign companies have to first set up joint-venture companies in China to apply for the licenses. The fact is that even Sino-foreign joint ventures find it difficult to obtain the licenses, with only a very limited number of them having been granted relevant licenses.

The common objection from foreign companies is whether or not the public cloud service provided via the Internet should be under the purview of telecommunications regulators. In the US, they are not. Secondly, China’s IDC license focuses on underlying services based on Internet data centers, IT equipment, and broadband resources, i.e. platform as a service (PaaS), without clear provisions on software as a service (SaaS). Therefore, another major concern of foreign companies is whether cloud computing services that involve multiple tiers should be subject to a single license. Foreign companies are also working to leverage other channels such as the WTO and the China-U.S. bilateral investment treaty to urge Chinese regulators to open the cloud service market.

To conclude, foreign companies face diverse challenges in providing public cloud services in China such as telecommunications regulation and license restriction and data security. However, the policy framework is not entirely clear for now. Foreign companies expect to work with Chinese regulators on related policies and regulatory mechanisms and the establishment of a multi-tier market administration system through multilateral discussions by sharing their global experience and perspective and shedding light on the overseas expansion of Chinese cloud service providers, in order to secure more opportunities and development potential in the Chinese market.