China holds enormous potential for global cloud providers seeking to expand their footprint, but entering a closeted market like China is a challenge for foreign players due in part to cost sensitivities, a vibrant local cloud scene and government restrictions, said panelists at RSA Conference 2014 held in San Francisco.
China’s domestic cloud landscape is an active and burgeoning one, said Terry Graham, a research affiliate at Hong Kong University.
Key players in China include Alibaba, a local e-commerce giant that offers cloud services for domestic banks and security firms, and China Telecom, which launched its own public services cloud platform of and is in the midst of building one of the world’s largest cloud campuses in Inner Mongolia. Meanwhile, web giants Baidu and Tencent also offer consumer cloud services and PaaS aimed at third party mobile app developers.
The county’s cloud market has plenty of room for more players, and the likes of Amazon Web Services, IBM and SAP have announced their intention of deploying their cloud platforms in China in tandem with local partners.
Graham listed mobility, big data and social networking as the main drivers behind the cloud computing demand in China. He added major cities in the country have also invested heavily in smart city projects, which require local cloud deployments in the areas of healthcare, education and transport.
“The Chinese government has also stepped up its game by injecting more transparency and administration into the cloud market,” said Graham. A China Cloud Computing Planning and Policy forum was formed last fall, headed by the country’s Minister for Industry and Information Technology (MIIT), which is in charge of issuing trusted cloud certificates.
Foreign cloud service providers (CSP) hoping to penetrate China’s cloud market face a slew of challenges, chief of which is licensing said Graham, adding licenses are usually given out in favor of local partners.
Technical challenges also abound in the form of poor broadband access speeds and poor interconnection between the country’s main carriers. Negotiating border gateway protocol service deals to guarantee your service has the best local network performance is tough, said Graham. Due to competition, carriers might refuse to provide CSPs with the service even if the former is willing to pay for it.
The concept of business agility also does not figure very prominently when Chinese companies are calculating ROI, said Graham. Companies in China would also be fairly price sensitive and unwilling to adopt the products of foreign CSPs if local, cheaper alternatives were available.
CEO for the Cloud Security Alliance (CSA) Jim Reavis pointed out a potential problem with cloud security standards in the country. “Governments and various IT and cloud providers in China will be working along their own standards,” said Reavis. “Alibaba, however, was one of the first three companies worldwide to receive CSA star certification, and that shows a definite desire from the government to ensure cloud computing is secure and accountable.”
Graham added to Reavis’s point, highlighting China’s checkered history with regard to developing standards. He listed the country’s unique Wifi encryption, web filtering and mobile networking standards, all of which differ from the rest of the world.
There is also the problem of royalty payment in China, said Graham, adding Chinese carriers dislike paying royalties to foreign IT firms. Carriers might instead be inclined to source for Chinese start-ups capable of emulating a foreign product. The Chinese government does not want the local market to be dominated by foreign players, so national standards have been set up to act as barriers for foreign players entering the local market. “It’s almost hardwired into the Chinese government to develop their own standards whenever any new technology comes into play,” said Graham. “They’ve grown better over the years but it still happens.”
Despite the challenges, Graham said now is a good time for foreign players to enter China’s cloud market, as time will be needed to build trust with local government officials and players such as China Telecom.
“Players who enter China now will be in the best position to take advantage of the opportunities presented to them, when the Chinese market is more ready for the cloud in two to three years,” said Graham.
Microsoft’s principal security architect, Yale Li, said foreign companies wishing to do business in China would do well to understand the country’s political structure and gain government support. According to Li, the three organizations to take note of are the central Communist Party (ruling political party), People’s Congress (lawmaker) and State Council (manages different ministries and commissions). Foreign companies should also be aware that China’s National Development and Reform Commission (NDRC) is one of the most powerful ministries in the country, said Li, adding the MIIT approves industry standards in the country.
Also of importance is finding a good local company as partner, said James Lewis, a program director at the center for strategic and international studies.
“Chinese companies are interested in making money just like everyone else and they can be good partners,” said Lewis. “The difference here is the rule sets these companies operate by and the challenge lies in negotiating with these companies in ways that won’t tie either party into knots. The government wants reform, but not everyone is clear what that means.”
According to Graham, China’s government feels that both national and international cloud players can co-exist in China, and does not see any conflict of interest between the two.
“Local players like Alibaba have been loaning money to companies without credit,” added Li, highlighting the challenges faced by foreign players from the local scene.
Graham added that while players such as Cisco will have a tough time competing with local grown players Huawei and ZTE, firms such as IBM and Microsoft, who have been in China for a long time and established good relationships with municipal governments and Chinese enterprises would be well positioned to embark on cloud projects in the country.
“There are still a lot of building blocks to be installed in order for cloud to succeed in China,” said Graham. “It’s still uncertain as to how cloud is going to development and some may be a bit fearful of unintended consequences so we’ll need to wait two to three years to see what the verdict is.”