China’s tech giants are competing to increase their market share in the growing cloud market. The total expenditure on the Chinese cloud infrastructure services has increased by 55% to $6 bn during the first quarter (Q1) of 2021, according to the latest research by Canalys.
Compared with Q1 2020, total expenditure rose by $2.1 bn, while it went up by more than $200 m compared with the previous quarter. Currently, China is the second-largest cloud market in the world after the US, comprising 14% of the total global investment in Q1 2021. This is up from 12% during the same quarter in 2020.
Canalys Analyst Blake Murray explained, “Digital services, including everything from digital payments and content to the customer and social engagement and remote learning, are key drivers behind the demand for cloud infrastructure services in China.”
Cloud market shares and Huawei’s rapid growth
The Canalys report showed that more than 80% of the total Chinese cloud infrastructure expenditure is from its top cloud service providers, namely Alibaba Cloud, Huawei Cloud, Tencent Cloud, and Baidu AI Cloud.
Alibaba Cloud maintained its hold on the Chinese cloud market with a 40% share, while Huawei Cloud has grown significantly to take a 20% market share. Tencent fell to third place with a 14% share, while Baidu AI Cloud remained fourth with a 7% market share.
Data from the International Data Corporation (IDC) indicated that in Q4 2020, Alibaba had a 40.6% market share while Tencent and Huawei both followed with 11% share each. The year prior, Huawei was just in fifth place with a share of 5.2%.
Huawei’s meteoric rise to becoming the second biggest company in terms of cloud market share in China demonstrates that the company is refocusing away from smartphones toward selling services to firms, including cloud computing.
In 2020, Huawei’s enterprise group, which includes Huawei Cloud, reported a 23% increase in revenue to $15.4 bn. According to Huawei Rotating Chairman Hu Houkun, Huawei Cloud posted a 168% growth for the year.
Earlier this year, the company conducted a survey and found that 86% of company executives from various polled industries plan to increase their spending on digitalization initiatives in 2021. A quarter of those executives also noted that expenditure in this area would increase by more than 20%.
The survey results made Huawei executives focus on developing Huawei Cloud and aim to take the top spot from Alibaba Cloud before 2025.
Alibaba and Tencent’s countermeasures
In response to Huawei’s initiatives, both Alibaba and Tencent underwent a recent organizational restructuring.
In April, Alibaba created 16 regional units across different geographic sections of China and was granted wide decision-making autonomy to expand the company’s reach and reduce red tape.
Alibaba’s work collaboration tool DingTalk increased in popularity when companies shifted to work-at-home setups amid the global health crisis. The company is using the platform to allow its sales reps to directly respond to customers’ needs. Meanwhile, users are also able to subscribe to Alibaba’s SaaS services without the need to leave the platform.
“Alibaba’s massive investment in cloud infrastructure development, strong synergies with core businesses such as e-commerce and Online To Offline (O2O) should help to fuel the rapid expansion of its cloud business,” Celia Qiu, Investment Analyst at Mirae Asset Global Investments, says.
Meanwhile, Tencent announced several changes at its Cloud and Smart Industries Group (CSIG) unit in May. The unit’s president Tang Daosheng was appointed as its new chief executive officer (CEO) while Li Qiang, who previously worked at German industrial software giant SAP, was named a vice president at CSIG.
Both Alibaba and Tencent also have a significant advantage over Huawei in the software-as-a-service (SaaS) and platform-as-a-service (PaaS) markets, two major sectors of the public cloud market. On the other hand, Tencent could take advantage of WeChat, the most popular messaging app in China, to capture the growing PaaS and SaaS markets.
Geopolitics fueling Chinese cloud competition
The intensifying competition in the Chinese cloud market is fueled by geopolitical tensions that have forced the tech giants, particularly Huawei, out of the US and focus more on the local market.
While Alibaba has maintained its position at the top in Q1 2021, its revenue growth fell significantly compared to the previous year. In 2020, the firm had a 56% year-over-year increase, but it went down to 37% this year.
This was attributed to ByteDance’s decision to pull out from Alibaba Cloud and move its servers to a Singaporean data center and a US cloud service provider. This followed after US regulators claimed that using Alibaba services causes security risks to US citizens.
Former President Donald Trump’s Clean Network campaign labeled Alibaba and Tencent as “untrusted suppliers” while current President Joe Biden has continued increasing pressure on Chinese tech firms.
Last June, President Biden called on the US commerce and defense secretaries, as well as his national security adviser, to carry on with investigations into foreign software’s threats to personal data and to ban the unrestricted sale, transfer, and access of sensitive US data.