China's cloud war: Huawei leading the three-cornered fight? [Part 1]

(By Caixin journalist Zhang Erchi)

Shanghai business owner Ms Zhou has been receiving many sales calls from Alibaba Cloud recently, so much so that when she sees a Hangzhou number, she hesitates to pick up. As a longtime user of Alibaba Cloud, she used to be contacted by them online. She wondered why they were suddenly so proactive. That is, until 13 May, when Alibaba announced its first-quarter results - earnings for cloud services grew 37% year-on-year, the lowest ever quarterly growth. Everything finally made sense.

Alibaba Cloud is not the only one that is anxious. In March, a source familiar with Tencent told Caixin that Tencent Cloud did not meet its earnings target for 2020, and was planning a restructuring and personnel change. On 14 May 2021, Dowson Tong, Tencent's senior executive vice president and president of the company's Cloud & Smart Industries Group (CSIG), called a general meeting where he spoke of Tencent Cloud's many flaws, and that it was preparing to make changes by giving management more authority and bringing in new people. After the meeting, Tencent quickly announced a round of restructuring, which it called a "strategic upgrade".

In 2020, the global pandemic brought a surprising opportunity for cloud service providers, with companies surging to get on the cloud as live streaming and online meetings and classes became the new norm. Figures by market research company IDC show that the global public cloud services market in 2020 amounted to US$312.42 billion, a growth of 24.1% year-on-year; the size of China's public cloud services market reached US$19.38 billion, a growth of 49.7% year-on-year, the fastest growth rate in the world. IDC forecast that China's share of the global public cloud services market will go up from 6.5% in 2020 to at least 10.5% by 2024.

But in the thriving China market, not all cloud service providers are reaping the same market dividends. Unlike Alibaba Cloud and Tencent Cloud, which are stuck in a growth bottleneck, Huawei Cloud - now in its second or third year - has seen brilliant results, with a surge in year-on-year earnings of 168%, despite US sanctions.

Last year, Huawei Cloud took 11% of China's IaaS (Infrastructure as a Service) market, catching up with Tencent Cloud to share the second spot on IDC's 2020 rankings. Another research company Gartner reported that Huawei Cloud accounted for 4.2% of the global IaaS market, more than Tencent Cloud, to claim fifth spot globally. And yet, three years ago, when Huawei first said it wanted to be among the global top five, most views in the sector were not optimistic.

This year, Huawei found through various studies that over 86% of the management of major companies forecast that after the pandemic, companies will invest more in digitisation, with a quarter of the respondents predicting an increase of more than 20%. Huawei is hopeful that with the company's combined effort, it will catch up with Alibaba Cloud at the top spot within three years.

One person with the China branch of a foreign cloud service provider told Caixin that since the start of this year, Huawei Cloud has clearly ramped up its efforts to grab customers, and not just in China. "Huawei has a data centre in Singapore, and our colleagues in Southeast Asia are now asking the China branch how to compete with Huawei Cloud," they lamented.

In Huawei founder Ren Zhengfei's philosophy of "commercial war", once Huawei locks on a target, it will put in hundreds of millions of US dollars a year in research funds as "ammunition", and get its tens of thousands of staff to figuratively charge and attack the same opening in the city wall. This year, the opening that Ren has identified is software, focusing on creating a HarmonyOS for consumers and Huawei Cloud for businesses.

Huawei's all-out offensive has set off a cloud computing war in China, in which everybody is playing their trump cards. Huawei's greatest advantage is its network built up over 30 years of serving China's government and commercial enterprises, and its capabilities in local production gained in the China-US technology competition.

Alibaba Cloud's advantage is online office software DingTalk, which opened up the market during the pandemic as millions of civil servants and hundreds of millions of students started using it for work and learning. Tencent's strength is its audio and video capabilities gained during the QQ era, which is especially suitable for companies to use for online training and meetings; its WeChat-integrated communication platform for enterprises Enterprise WeChat, allows for direct contact with hundreds of millions of consumers, which is also an important reason why many companies choose Tencent Cloud.

These three companies have all undergone restructuring in the past year, and their competitive strategies are the same: one, to build vertical industry clouds for traditional sectors such as finance, manufacturing, and energy; and two, to go deep into sinking markets (i.e. that of small Chinese cities) and set up offices or branches in various regions to serve local customers and partners.

The latest cloud war between these three Chinese tech giants has also put enormous pressure on other cloud providers, most of which choose to focus on their own advantage and seek a space to survive even if they are not in a good position. For example, foreign companies in China, as well as Chinese companies overseas, are Amazon and Microsoft's turf; while China Telecom and China Mobile depend on their branding as state-owned companies and having data centres all over the country to meet the cloud services infrastructure needs of their government and commercial clients.

Many industry players forecast that this war might see a result within three to five years, and that it will determine the long-term blueprint for China's cloud computing industry.

On 13 April, at the Huawei Global Analyst Summit in Shenzhen, Huawei's Enterprise Business Group vice president Chen Banghua (Bob Chen) revealed for the first time that the sales target for Huawei Enterprise in 2021 was to exceed US$20 billion, and to hit US$50 billion by 2025. Notably, the figures for Huawei Enterprise includes Huawei Cloud.

The business of Huawei Enterprise is mainly with government and commercial clients (2G and 2B) - its earnings between 2011 when it was set up and 2020 was just US$14.7 billion. Huawei's target is clearly more aggressive, to hit a figure within five years that it could not reach in the past ten years.

In 2020, over two-thirds of Huawei Enterprise's earnings came from the China market. Bob Chen told Caixin that in the next few years, the China market will remain its main source of revenue, while reasonable growth will be maintained for its overseas operations.

Huawei has been presented with two major opportunities. First, with pandemic control becoming normalised, the government, as well as businesses, realise that it is an irreversible trend for operations to go online.

PaaS (Platform as a Service) company Kyligence, set up in 2016 under SH Data, has helped major banks in China build big data analysis platforms and data storage facilities in the private cloud. After supporting the cloud services of Microsoft and Amazon in 2020, this year it has brought its products to Huawei's public cloud.

Kyligence co-founder and CEO Luke Han told Caixin that given the high demands on stability and security of operations, the financial sector has always been careful about cloud usage, and generally only uses the most mature technology. However, since the pandemic, the financial sector clearly feels that traditional IT structures cannot easily handle sudden situations, and is moving towards a more rapid shift towards cloud usage, as well as exploring how to use data assets.

On 2 March, Guo Shuqing, chairman of the China Banking and Insurance Regulatory Commission, said at a press conference at the State Council Information Office that China's banks and insurance companies invested 207.8 billion RMB and 35.1 billion RMB into IT in 2020, an increase of 20% and 27% year-on-year respectively.

Second, since the China-US trade war, the Chinese government and businesses want to shift towards locally producing software and hardware such as chips, operating systems, and end products for key sectors. This move is expected to drive a market worth hundreds of billions, with a peak in development between 2020 and 2022.

Over the past couple of years, many new players have surged into the IT innovative applications sector - Digital China, New H3C Technologies, and others have released the first of their own brand of computers, and in September 2020 even Alibaba Cloud released its cloud computer Wuying, targeted at government and corporate clients, with computing and storage moved to the cloud.

In these two senses, Huawei seems to have an advantage over internet providers. While Alibaba Cloud and Tencent Cloud are fighting for internet clients, Huawei is already selling ICT hardware to traditional companies and building connections with purchasers, and establishing local partners.

One internet cloud provider told Caixin of his experience: when he bid for a tender at a local bank in western China, Alibaba Cloud and other internet providers made impromptu visits to "say hello". Only Huawei had a long-term purchasing relationship with this bank and knew the various people in charge, and had built up business and personal connections.

Since 2019, the US government has imposed three rounds of sanctions on Huawei, resulting in two consecutive quarters of lower revenue for Huawei. However, many government agencies and state-owned enterprises expressed support and said they were more willing to buy Huawei products. At the same time, the US sanctions forced Huawei to bring forward their plans to source local alternatives. A Huawei partner told Caixin that as China's IT application innovation sector takes off, Huawei's senior management has conducted closed-door sharing sessions with many state-owned enterprises about local alternatives.

However, Huawei also faces many challenges in its cloud efforts. First, many workers at Huawei Cloud were moved from hardware departments, and had no knowledge or experience in the cloud. At least one partner familiar with Huawei Cloud told Caixin that selling the cloud is different from selling hardware; selling the cloud requires sales staff who can build good client relations, and presales engineers with cloud and AI knowledge to conduct proof of concept (POC) testing and help build systems. In the cloud computing sector, the ratio of presales engineers to sales staff is usually 7:3 - previously, Huawei did not build up their presales staff, and it will take time for it to hire aggressively and make up ground.

Furthermore, Huawei's business arms are inherently complementary and self-obstructing at the same time. Unlike internet companies like Amazon and Alibaba, Huawei produces hardware such as servers, storage, and online devices, while its software is generally tied to its hardware, meaning it lacks independence. The Huawei partner cited above revealed that neither Huawei's senior management nor ground sales staff would willingly let go of its profitable hardware operations. From a sales perspective, hardware orders are worth a lot, and generate profits immediately; in contrast, the cloud is a subscribed service and profits are not seen in the short term, and it needs to be constantly upgraded - a lot of work for not a lot of money. This person said that in the past year, a lot of Huawei's cloud services were sold through hardware, which can rapidly build the scale of Huawei Cloud, but does not help to strengthen it.

To sort out the interests and relationships between the company's internal departments, Huawei Cloud underwent four management reshuffles over the past six months. CEO of Huawei's Consumer Business Group Yu Chengdong (Richard Yu) concurrently assumed the positions of president of the Cloud & Artificial Intelligence Business Group and president of the Cloud Business Unit on 27 January before quickly stepping down again on 18 May.

Huawei is about to run out of the chip supply stockpile it had amassed before the third round of US sanctions and the launch of its flagship P50 series has been stalled since the first half of the year. Yu needs to build and sell cars to save the consumer business he has built up, and does not have enough energy to additionally manage the cloud business. During this period, Huawei Cloud was handed over from Zheng Yelai to Zhang Ping'an, Yu's subordinate and president of Consumer Cloud Service, Huawei Consumer Business Group.

After Zhang Ping'an assumed his role, Huawei integrated its Cloud Business Unit with its consumer cloud service to allow internet companies that use Huawei's AppGallery to access Huawei Cloud's cloud storage, cloud hosting, cloud database, and other services with the same account. For example, Zhang Ping'an said that in future, internet companies would be able to create audio and video productions on Huawei Cloud and share them via Huawei Video and Huawei Music.

To better coordinate enterprise business and cloud business, president of Enterprise Business Group Peng Zhongyang was made deputy director of the Cloud Business Unit's administrative team. Bob Chen told Caixin that Peng's appointment would better promote Huawei's cloud services to government and enterprise customers. Zhang Ping'an also told Caixin that Huawei's Quality, Business Process & IT Management Department once guided major corporate clients in their digital transformation processes. In future, their products will be made into PaaS products and be placed on the infrastructure layer of Huawei Cloud for other companies to use.

Apart from building the IaaS and PaaS layers, Huawei is also actively expanding the SaaS (Software as a Service) ecosystem. Since the beginning of 2021, various Chinese SaaS companies have received Huawei's invitation to visit Shenzhen and see how both parties can cooperate with each other.

On 17 May, the Huawei China Ecological Conference was held in Shenzhen. Together with 50 SaaS companies, Huawei Cloud launched the Starlight Project (星光计划) which aims to expand the market in eight major regions (Beijing, Shanghai, Guangzhou, Shenzhen, Sichuan, Jiangsu, Zhejiang, and Shandong) and six major industries (finance, manufacturing, automobile, retail, logistics, and real estate).

Chinese software industry leader Kingdee is a member of the project and has also joined Huawei's "Partners in the Same Boat Plan" (同舟共济计划) in 2021. Zhu Qiangfeng, director of Kingdee's strategic partnership department, told Caixin that over the past two years of cooperation between Kingdee and Huawei, numerous import substitution projects have been implemented. For example, Huawei's submarine cable subsidiary Huawei Marine had utilised Kingdee's Enterprise Resource Planning (ERP) system in place of products from overseas manufacturers.

Zhu mentioned that under the "Partners in the Same Boat Plan", both parties are planning to launch a series of joint solutions for sales through both channels. He also mentioned that their collaboration went beyond the aim of building an ecosystem - both parties have set a clear market goal in 2021 to help each other win markets in the industry.

Continue to China's cloud war: Tencent and Alibaba up their game as cloud giants eye world markets [Part 2]

Related: What the Chinese government wants to tell Alibaba and China's tech giants [Part II] | Blindspots in the financial regulation of China's tech 'platform companies' | China's going full speed ahead on technology innovation. Will it work? | Not just a tech war: What China can do to better compete with the US and create a better world