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Cloud computing was invented by American tech companies. By the end of the next decade, it might be the domain of Chinese tech companies.

Like many other tech revolutions kicked off inside the U.S., cloud computing is taking China by storm as its startups mature and its big conglomerates update their tech infrastructure. The best example of that in 2018 might have come during Alibaba’s September cloud computing conference, which attracted over 120,000 people from across China and Asia, dwarfing the more than 50,000 people who poured into Las Vegas later in the year for Amazon Web Services’ re:Invent 2018 conference.

Those attendees were interested in many of the same technologies that draw people to cloud conferences: open-source software, adopting containers as part of their application deployment strategy, and learning how to apply machine-learning cloud services to their apps and businesses. But the U.S. companies that honed those technologies, accustomed to a great deal of enterprise computing power nearly everywhere else in the world, face a very different market in China.

A long-standing government policy of promoting internal champions encourages Chinese companies to work with homegrown players like Alibaba, Baidu, and Tencent. Foreign companies that want to do business in China are forced to provide their services through local partners that control the key relationships between buyers and suppliers.

Thousands attend a cloud computing conference last September organized by Chinese cloud computing leader Alibaba. (Alibaba Photo)

And there are no debates over the proper limits of technology in China, as enveloped all three major U.S. cloud providers in 2018. China is setting up an expansive technology-based surveillance system in some of its far-flung provinces to track ethnic minorities, and has started cracking down even more than usual on expressions of dissent on social networks in recent weeks.

Yet given the enormous number of people that live in China, its late but hard-charging approach to tech competition, and emerging startup scene, there’s little doubt among cloud industry watchers that China will one day be the largest market for cloud services on the planet. That will have huge implications for companies inside and outside of China.

Can U.S. cloud companies afford to miss out on that growth, balancing their insatiable search for new revenue against the realities of operating a cloud service in China? And will Chinese cloud companies be trusted with sensitive data generated by the top tech buyers in the U.S. and Europe?

“The kinds of (technology) problems (Chinese businesses) are trying to solve are literally no different than what you are seeing in the U.S., or any other part of the world,” said S. “Soma” Somasegar, managing director at Madrona Venture Group and attendee at Alibaba’s conference. Cloud computing is the modern way of solving those problems, and it is about to take off in China.

Cloudy skies ahead

China has been scrambling to catch up to the U.S. cloud computing industry since around 2011, when a report prepared for the U.S. government identified a keen interest in cloud computing from business and military leaders in China. The market for cloud services in China is now expected to reach just over $100 billion in 2020, driven by homegrown startups, multinational corporations, and government agencies.

As it does in many other areas of Chinese life, Alibaba dominates cloud computing in China. Under founder and CEO Jack Ma Alibaba made cloud computing a key corporate priority, and incoming CEO Daniel Zhang plans to make those technologies an even bigger part of Alibaba’s corporate focus over the next couple of years.

An augmented reality app is used in the new Starbucks Roastery in Shanghai, China. Photographed on Friday, December 1, 2017. (Joshua Trujillo, Starbucks)

The enormous potential of the Chinese cloud market has drawn the attention of nearly everyone with a cloud service to the country. After all, cloud computing is relatively new in established markets, at least compared to the estimated $4.8 trillion that was expected to be spent on information technology services worldwide in 2018.

China’s enterprise IT market is probably five to seven years behind the U.S. or Western European markets, according to multiple Chinese cloud executives interviewed for this article, which means there is a huge amount of opportunity to make an impact in this market before it is sewn up by incumbents the way Amazon Web Services might have cornered the U.S. market.

But the market is evolving at breakneck speed given how quickly Chinese consumers snapped up smartphones and mobile apps, which drive usage of cloud services.

“China has been really jumping in as a mobile-first, almost mobile-only type of country,” said Alain Crozier, corporate vice president, chairman and chief executive officer of Microsoft’s Greater China Region. “It means that very quickly they were building very strong applications that were all cloud based.”

China is also investing heavily in artificial intelligence research and so-called “smart cities,” which generate a lot of data that’s usually handled best with cloud services and edge computing devices. Those efforts are still new, but there are nearly 1.4 billion people in China, and that population will generate a ton of data given that only half of China’s population was using the internet as of 2016, according to the CIA’s World Factbook.

How it works

Companies like Amazon Web Services and Microsoft technically don’t sell cloud services in China, at least in the same way they have set up data centers and sales organizations in nearly every other corner of the planet. Companies that want to offer cloud services inside mainland China — which is essential for cloud performance reasons thanks to the Great Firewall of China — must register with a local partner.

Microsoft works with a company called 21Vianet, while AWS works with Beijing Sinnet. Those local partners actually own the physical infrastructure built by the cloud providers in China and are known as the “seller of record,” although the U.S. cloud companies retain the rights to their trademarks and intellectual property.

Wing-Dar Ker, president of the Microsoft Cloud Business Unit, 21Vianet. (21Vianet Photo)

In China, cloud computing is deemed a “value-added telecom service,” said Wing-Dar Ker, president of the Microsoft Cloud Business Unit at 21Vianet. That designation means cloud providers face more restrictions on how their services can be provided compared to other types of internet services intended for consumers or businesses, he said.

This has relegated American cloud companies, which otherwise dominate the world market for cloud computing services, to also-ran status in China. Alibaba was the leader in the Chinese cloud market by a huge margin during 2017, according to IDC, with Tencent in second place and no U.S. vendors making it out of the “Others” designation.

As you might have noticed, the U.S. and China have been locked in a trade war over the last year, driven by President Trump’s insistence that 17th-century economic theories are back in vogue. While both sides remain engaged in discussions, there’s no question that business relations have suffered quite a bit following the introduction of tariffs on Chinese goods by the U.S., followed of course by retaliatory tariffs from China.

It’s hard to put a tariff on cloud computing, but China can easily work to limit demand for U.S. cloud companies operating in China.

Debra Glassman, senior lecturer, University of Washington’s Foster School of Business. (UW Photo)

“The (Chinese) government can implement policy by memo,” said Debra Glassman, senior lecturer at the University of Washington’s Foster School of Business and specialist in international trade. “The banks can be told, ‘you will invest here, or you will not invest here,'” she said.

And if it wants, the government can be more subtle in directing investment toward Chinese cloud companies.

“There’s a lot of more indirect ways that the government can make its preferences felt,” Glassman said, ranging from “Buy Chinese!” advertisements similar to those you’ll find in lots of countries to the selective distribution of capital and data. “U.S. companies that are used to market competition find that baffling, at best.”

Microsoft’s Crozier sees an opportunity for U.S.-based cloud companies inside multinational corporations and government organizations that want to have global reach. Alibaba and its competitors have a strong data center presence inside China but companies like AWS and Microsoft have far stronger footprints around the world.

But despite all their technical prowess, there’s one simple reality involved with operating a cloud service in China that foreign cloud companies find almost impossible to duplicate: the tight integration between Chinese cloud companies and the Chinese government involving everything from hardware procurement to security and law enforcement standards.

“The U.S. companies do not have a chance in China, and the first reason is regulation and cybersecurity and data protection,” according to a high-level executive at a prominent Chinese cloud computing company who has worked for U.S. based providers. These deep cultural and technical links between corporate and government institutions will be almost impossible to replicate, even assuming that American companies are willing to work that closely with the Chinese government.

Falling behind?

There is growing unease within cloud computing circles that Chinese companies might be about to surpass their American counterparts in crucial research areas like artificial intelligence and the civic internet of things, given the country’s willingness to plunge billions in state money into research projects in those areas. For now the AI world is still fairly collegial, but that could change quickly as the technology matures.

Xi Jinping, the leader of China, visits Microsoft CEO Satya Nadella in Redmond in 2015. (Flickr Photo / Gov. Jay Inslee)

Another possible trouble spot is China’s willingness to experiment with its own technology standards that don’t always line up with the standards used by the rest of the world. Should cloud computing techniques used by Chinese cloud providers become an essential part of operating a cloud service in the country, cloud providers might have to make hard choices about offering two types of services to customers inside or outside of China, or whether to bet heavily on the Chinese standard they’ll have to offer if they want a piece of this huge growing market.

And, of course, the uncertainties over U.S.-China relations under the Trump administration are ever present for those working with companies on both sides of the Great Wall. If China figures out a more direct way to place tariffs on cloud computing, or if young Chinese technology workers educated by U.S. universities decide to come back home in greater numbers than they currently do, the competitive balance could shift even faster.

For now, however, cloud companies seem content to compete for the slivers of business within China that they can attain, given how large the market is expected to become. Even 5 percent of what might turn out to be the biggest market for information technology services yet seen will move the needle even for companies like AWS and Microsoft.

Here’s one way to know when the cloud market in China has truly arrived: when despite all the pushback over its search plans and despite the fact that its source code was stolen by hackers believed to be working for the Chinese government less than a decade ago, Google launches a cloud service in China.

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