What’s Darkening the Skies for China’s Cloud Kingpins?

In the first quarter of the year, Alibaba Cloud’s revenue growth dipped precipitously.

Last year the domestic leader, part of the group that includes e-commerce giant Alibaba and an affiliate of financial services titan Ant Group Co. Ltd., made about 55.58 billion yuan ($8.6 billion). That was up 56% year-on-year — above the average for Chinese cloud firms of some 50%. In the first quarter of this year, income growth dropped to 37%.

Alibaba Group Holding Ltd. CFO Wu Wei disclosed the reason behind the slump: a changing relationship with a top client. That client, she said, had been using Alibaba’s overseas cloud services, but had opted to drop the firm for international operations due for reasons unrelated to the product.

The client was ByteDance Ltd. According to sources familiar with the matter, as the firm came under sustained attack from the U.S. government and regulators last year amid claims that its use of services from China’s Alibaba posed a grave risk to American citizens, it jettisoned them. ByteDance’s wildly popular short video app TikTok decided to move its servers from Alibaba Cloud to a Singaporean data center and an American cloud service provider.

Sources familiar with ByteDance’s operations told Caixin that as the firm pivots into the lucrative field of e-commerce, it plans to build its own data center for domestic operations, which will further reduce its dependence on Alibaba Cloud. In future it plans to provide its own cloud services for companies within its walled-off ecosystem.

The revving up of competition at home is driven in part by the walls that Chinese cloud firms operated by the technology majors — Alibaba, Tencent, and increasingly Huawei Technologies Co. Ltd. — are running into in some overseas markets.

As U.S.-China relations have deteriorated, the American government’s use of technology blacklists has reshaped the fortunes of the firms both at home and abroad. Alibaba Cloud has suspended its expansion in the U.S.

Since Joe Biden took the U.S. presidency in January, his administration has continued to ratchet up pressure on China’s tech sector. Former President Donald Trump’s “Clean Network” campaign, which singled out Chinese firms like Alibaba and Tencent Holdings Ltd. as “untrusted vendors” whose services pose a threat to the data of American citizens, has become a bipartisan effort.

On June 9, Biden ordered the U.S. secretaries of commerce and defense, as well as his national security advisor to continue investigating threats to personal data posed by foreign software and prevent the unrestricted sale, transfer and access of the sensitive data of U.S. citizens, as well as prevent foreign adversaries from accessing data from large databases.

Pandemic tailwinds

During the global pandemic, Chinese gaming, short video and e-commerce firms have accelerated their overseas push, including new game stars miHoyo Co. Ltd. and Lilith Games, as well as “hidden unicorn” e-commerce companies like Shein. Such firms rely heavily on cloud services.

A Google employee who asked not to be named told Caixin that Chinese firms have been increasingly enlisting the firm’s advertising and cloud services as they expand overseas. Greater China overtook Japan as Google’s fifth-largest global market in 2020.

Meanwhile other players like China Telecommunications Group (China Telecom) and China Mobile Communications Corp. (China Mobile) mostly rely on state-owned enterprises and nationwide data centers, servicing demand from government and enterprise customers for underlying infrastructure cloud services.

Other markets

In the face of the fierce competition in China, Chinese cloud service providers have turned to Asia and Europe. On June 3, Tencent Cloud announced four new international data centers in Bangkok, Frankfurt, Tokyo and Hong Kong, which started providing services that day. Tencent Cloud’s second data center in South Korea came online last year. In April 2020, Tencent Cloud launched its first data center in Indonesia. It plans to have a second one up and running by the end of the year. Tencent Cloud launched its third global data center, in Singapore, at the end of April.

In 2019, Alibaba Cloud poached Yuan Qian, former president of Huawei’s BG Marketing & Solution Sales Department, and named her president of Alibaba Cloud Intelligence International. On June 8, 2021, Alibaba Cloud announced the launch of data centers in Indonesia and the Philippines, with a plan to invest more than 6 billion yuan ($928.3 million) in overseas markets within three years to expand such centers and develop local software ecosystems.

In Southeast Asia, Alibaba and Tencent have invested in many of the tech scene’s household names, which are also clients of their cloud services. Tokopedia PT of Indonesia was using Alibaba Cloud. The firm recently merged with Indonesian ride-hailing and takeout company Gojek to form Indonesia’s largest technology company, GoTo.

Meanwhile Tencent is counting on investments in Singapore’s Sea Ltd., which is Southeast Asia’s biggest internet company. Sea’s gaming business Garena, its e-commerce business Shopee and its financial services business SeaMoney all have huge demand for cloud services.

Huawei Cloud has big overseas plans too, and despite starting from behind it may have an advantage. According to staff at foreign cloud service providers in China, Huawei stands to gain from its good relationships with local telecoms operators.

China’s cloud service providers are away players in the international market and face tough competitors: Amazon Web Services Inc. (AWS) and Microsoft Corp. AWS is by far the leader among cloud service providers when it comes to market share and technological prowess, while Microsoft has an edge in its sales force and in government relations — which some say is why ByteDance considered tapping it when it faced a U.S. ban.

That’s certainly how the firm is selling itself. Xu Mingqiang, chief technical officer of Microsoft’s Omnichannel division, said the firm has a full set of guarantee plans for Chinese enterprises going international. This plan allows its partners to share patents and helps them avoid being challenged by “rogue patent companies.” The service also helps Chinese companies find local customers. Microsoft carries out joint sales and marketing in the United Kingdom, France, Germany, Singapore, the United Arab Emirates and other countries for these enterprises and introduces them to local government departments.

“These governments and enterprises are our clients. With such relationships, we have an advantage that other cloud service providers do not have,” Xu told Caixin.

Microsoft and Amazon are also stepping up their efforts to enter the Chinese market. On March 18, Microsoft announced that it would double its cloud service capacity in China, and its new data center will officially come into service in the spring of 2022.

A week later, Zhang Wenyi, executive director for AWS’s Greater China Region, announced the company would add capacity in Beijing and the Ningxia Hui autonomous region.

Smaller Chinese firms are emerging too. In January 2020, domestic cloud service providers like UniCloud and Inspur Cloud are preparing for STAR Market debuts, while others like UCloud, Kingsoft Cloud and QingCloud are attracting investment. While they may find it difficult to take a leading role, they could gain a foothold in smaller market segments.

Author: Zhang Erchi, Flynn Murphy, Caixin Global