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

(By Caixin journalist Zhang Erchi)

Tencent Cloud, which has long ranked second in the Chinese market, is greatly pressured by Huawei's aggressive moves.

Kang Rong, general manager of marketing and operations of Microsoft's Greater China Region, once told Caixin that the biggest difference between the Chinese and American markets is that China's state-owned enterprises account for at least 42% of the Chinese economy. These enterprises have their own set of rules on the use of cloud services and are more wary about joining public cloud services, preferring to use hybrid and private clouds instead. This is also the reason why Huawei Cloud could catch up with and surpass Tencent Cloud just four years after the former's establishment in 2017.

To adapt to the new competition paradigm, Tencent first restructured its management team. Dowson Tong, president of Tencent's Cloud & Smart Industries Group (CSIG), has taken over as the group's CEO, while Tencent Cloud president Qiu Yuepeng will be taking on the additional role of CSIG's chief operating officer (COO). The latter will be managing the sales, quality and operations of Tencent Cloud and CSIG, and report directly to Tong.

Tong said that Tencent hopes to achieve three objectives in this round of restructuring: grow roots in the industry, deepen regional engagement, and improve efficiency.

To grow roots in the industry, Tencent has targeted a few vertical markets and has made changes to its management team overseeing Tencent's smart retail, security, smart mobility, as well as smart industry and services divisions to achieve its aim. These key divisions would also come under Tong's supervision.

The biggest highlight of Tencent's restructuring is perhaps the appointment of Li Qiang, the former CEO of Qihoo 360's Government and Enterprise Security Group as the vice-president of Tencent and the president of Tencent's smart industry and services division. Li Qiang had also worked at the German software company SAP for 18 years and is well-versed in the field of industrial manufacturing. Tencent appointed him to fill the gaps in their industrial cloud business.

Second, deepening regional engagement. Tencent's CSIG has established a regional business department to jointly build downstream channels with its partners from various regions. Taking Tencent's industrial internet platform as an example, Tencent has set up industrial cloud bases in over ten regions and cities including Yantai, Chongqing, Foshan, Dezhou, Zhangjiagang, and Xi'an. It has also built a regional industrial internet platform covering the four major regional industrial clusters of the Yangtze River Delta (Zhangjiagang, Jiangsu province), the Guangdong-Hong Kong-Macau Greater Bay Area (Foshan, Guangdong province), northwest China (Xi'an, Shaanxi province), and southwest China (Chongqing).

Third, improving efficiency. Tencent's CSIG also established a business operation management unit promoting the optimisation of internal resource allocation. As CSIG's COO, Qiu is responsible for the business collaboration of the entire business group.

But industry insiders think that Tencent Cloud's latest round of restructuring is weaker than expected. Sources familiar with Tencent Cloud told Caixin that this looks more like several executives dividing their spheres of influence. While Qiu's new appointment as COO is a promotion, it is also to allow him to assist Hong Kong-born Tong in dealing with the mainland Chinese government as the latter is unfamiliar with them.

This restructuring can only be said to be Tencent Cloud's response to its competitor's actions. Prior to this, Huawei and Alibaba Cloud also made similar adjustments.

In 2020, Huawei constantly revised its internal organisational structure. It set up the Cloud & Artificial Intelligence Business Group allowing cloud businesses to establish representative offices in various places with solutions personnel. The systems department of its Enterprise Business Group was converted into a business department to target vertical markets such as the government, energy, finance, and transport.

Lu Yongping, deputy executive president of the Global Energy Business Unit of Huawei's Enterprise Business Group told Caixin that following the adjustment, the R&D solutions teams of the 2012 Laboratories, product R&D department, and business department would be able to work together to develop products and provide solutions to cater to industrial customers under various scenarios.

Alibaba Cloud also announced that it would be restructuring its organisational structure in April 2021. In an internal letter, Alibaba Cloud Intelligence president Jeff Zhang Jianfeng said that the enterprise would be subdividing manufacturing, finance, retail, education, healthcare, and so on into 18 industries, each equipped with a general manager to provide solutions for these industries. A general manager would also be appointed in each of China's 16 geographical regions. An Alibaba Cloud employee told Caixin that this was to ensure accountability to customers and partners in each location.

Behind cloud vendors' emphasis on industry solutions, is the fact that Chinese enterprises are going into deep waters with cloud services. Microsoft China's COO Zou Zuoji explained to Caixin that each time they met with traditional businesses, the latter did not want to find out about products that cloud vendors had to offer, but how they should go about upgrading their supply chain system.

Statistics from IDC show that in the latter half of 2020, among China's industrial cloud market, Alibaba Cloud accounted for 47.8% of the market share, Huawei accounted for 26.3%, software enterprise Yonyou accounted for 4.8%, while Tencent Cloud ranked fourth with a market share of 4.5%.

Compared to the Infrastructure as a Service (IaaS) layer, Tencent is stronger in the Platform as a Service (PaaS) and Software as a Service (SaaS) layers.

In terms of PaaS, Tencent Cloud integrated CDN streaming, audio and video communications, and instant messaging in 2021, launching the unified "Tencent Real-Time Communication, TRTC" brand on 17 May. Tencent said that audio and video communications have become the basic infrastructure that various enterprises need and its brand comes with 21 years of technological experience. During the Covid-19 pandemic, it catered to tens of millions of concurrent calls and voice chats at any one time, and 300 million meetings were conducted on Tencent Meeting in 2020. The company is looking to promote its services to traditional businesses outside the pan-entertainment industry.

Tencent Cloud vice president Li Yutao told Caixin, "After the integration ["Tencent Real-Time Communication, TRTC" ], the network would have an integrated cloud-edge-end infrastructure that can better optimise the supply chain and cost structure, providing businesses with better cost incentives and feedback."

In terms of the SaaS layer, users pay more attention to Enterprise WeChat and hope to reach ordinary consumers through WeChat mini-programs. During the pandemic, numerous banks including the Industrial and Commercial Bank of China and China Construction Bank have launched various products such as cloud workshops (online financial service windows for account managers), home customer service, and home credit approvals, bringing offline businesses online. Among them, the cloud workshop is a mini-program embedded in Enterprise WeChat that allows users to search for websites and account manager contacts to engage in product sales or make transactions in a financially secure environment.

Under Huawei's aggressive attacks, can Tencent Cloud protect its second position in China's cloud market?

Aforementioned sources familiar with Tencent Cloud told Caixin that Tencent Cloud is facing two major challenges: one, its businesses are too divided; Tencent Cloud is under CSIG while Enterprise WeChat is under WeChat Business Group, unlike Alibaba Cloud and DingTalk, which belong to the same business group. Such divisions in large companies may affect coordination among various departments. Two, compared with its competitors, Tencent Cloud's current team is not aggressive enough. In particular, many of Tencent's long-serving employees are getting too comfortable. Perhaps only after its competitors have caught up with and surpassed it, or after Tencent undergoes a major personnel reshuffle can its fighting spirit be ignited.

Among Chinese cloud service vendors, Alibaba's share of the domestic market is as high as 40% but it is also under the most pressure to grow. In fact, it has resorted to parachuting senior management into its Alibaba Cloud business unit to attract new clients.

In 2020, Alibaba Cloud's annual revenue totalled 55.576 billion RMB, an increase of 56% year-on-year, slightly higher than the average annual revenue growth of 49.7% in the Chinese market. With its larger base, achieving such a growth rate is no small feat. However, in the first quarter of 2021, Alibaba Cloud's revenue growth suddenly fell to 37%. According to Maggie Wu, chief financial officer (CFO) of Alibaba, this was due to changes in its client relationship with an internet giant. The said client did more business overseas and relied on Alibaba's overseas cloud services previously. Due to certain non-product-related requirements, the client decided to terminate its dealings with Alibaba for its international operations.

Through enquiries made with various pundits of the international cloud services market, Caixin understands that the said internet giant is ByteDance. Under regulatory pressure from the US government, it decided not to continue using Alibaba Cloud for its TikTok service that targets overseas users. Instead, ByteDance turned to its data centres in Singapore and American cloud service providers.

ByteDance's impact on Alibaba Cloud's earnings is becoming clearer. Individuals familiar with Byetdance told Caixin that as the company expands into more e-commerce sectors, it intends to build data centres for its operations in China as well, further reducing its reliance on Alibaba Cloud. ByteDance also has plans to begin providing cloud services, primarily to companies within its ecosystem.

Alibaba Cloud only turned profitable recently following 11 years of support from its parent company. In February 2021, Alibaba Cloud reported a positive adjusted EBITA for the first time ever of 24 million RMB for the fourth quarter of 2020. For the first quarter of this year, its adjusted EBITA reached 308 million RMB. According to Maggie Wu, this shows that Alibaba is able to generate profits from its cloud computing business.

For Alibaba Cloud however, the main threat is that the IaaS layer is becoming increasingly homogenous. Even though Huawei Cloud is still some way behind Alibaba Cloud, so long as Huawei is willing to invest money, people and time, it will eventually catch up with Alibaba in the IaaS layer.

Jeff Zhang once lamented that "cloud computing is actually highly standardised. Hardware is shielded and a universal containerised interface provided to standardise all network and storage ports, so that the hardware inside can be entirely made up of white-box parts."

In recent years, Alibaba Cloud has started looking for a second engine of growth. In 2017, the Zhejiang provincial government made its million or so civil servants start using DingTalk in order to push through its "Internet + government services" and "One-stop-service" reforms. Realising the potential of DingTalk in the corporate market, Alibaba announced in June 2019 the integration of this business unit into its Alibaba Cloud Intelligence business group under Jeff Zhang.

During the pandemic in 2020, DingTalk unexpectedly received a number of sizeable orders from state-owned enterprises. For example, China Pacific Insurance spent 20 days to have its nearly 800,000 insurance agents and more than 40,000 internal staff stationed throughout China start using DingTalk. A DingTalk system with functions such as attendance management, livestreamed training, online collaborative document editing, corporate communication record management and video conferencing was customised for China Pacific Insurance. DingTalk also rode the online teaching wave during the pandemic into some three million classes across 14,000 schools in China, and was used by seven million teachers and 140 million students.

In September 2020, following the success DingTalk reaped during the initial phase of the pandemic, Alibaba decided to establish an overall DingTalk business unit. This was done to consolidate the previously separate components of the DingTalk unit, the Alibaba Cloud video streaming team, the Teambition office collaboration software unit, the government and enterprise cloud division, the digital governance middle platform division, part of the WuDong Technology team responsible for handing over government projects, and the Yida team that researches and develops SaaS applications and builds platforms. Ye Jun who used to be in DingTalk for the government sector was placed in charge of the DingTalk sub-business unit, with Alibaba Cloud calling this its strategy of combining cloud and DingTalk.

At the Alibaba Cloud Summit in May 2021, Jeff Zhang said 63% of global spending on cloud services was on various SaaS applications, with only 22% on IaaS, whereas in China, 62% of such spending was on IaaS, with only 26% on SaaS. This indicates that when it comes to cloud computing, Chinese companies prioritised coping with the demands of the mobile Internet on elastic cloud computing over enhancing corporate operational efficiency. He opined that low-code development platforms that have become popular worldwide over the last few years may change this situation. As developing applications becomes easier, companies would soon be able to mix and match standard modules on platforms such as DingTalk to produce simple SaaS applications they want instead of hiring vendors to do so.

"My view is that massive software will become rarer. Previously, many ERP software required a year or two each for consultation and implementation, followed by optimisation. The lengthy lead time is grossly inadequate for the blazing pace of digitalisation." Jeff Zhang predicts that cloud computing will shift from project-based and aggregation-oriented towards standardisation and subscription-based. "It would take forever for cloud service providers to understand how our clients run their businesses and we would have to pay a very heavy price to do so."

Ye Jun explained to Caixin that following the consolidation of DingTalk and Alibaba Cloud, selling cloud services became easier. In the past, the Alibaba Cloud sales team had to keep promoting its products to clients. Now, when DingTalk users face problems at work, they enquire with Alibaba Cloud directly for solutions before going online to subscribe.

According to Ye Jun, "this is the second growth engine for cloud service providers, but many of our peers have not realised it yet and continue to work on projects and business expansion, accumulate firepower and compete for clients."

Of course, there is a point that Alibaba does not wish to make clear - once DingTalk becomes the tool of choice for internal communication in a local government or company, these clients would find it very difficult to collaborate with another cloud service provider on something similar.

On 14 June, the Zhejiang Big Data Development Administration publicly disclosed its intention to purchase 468 million RMB worth of government cloud resources, with Alibaba Cloud as the sole vendor. Around 90% of the application systems in the government cloud of the Zhejiang provincial government use Alibaba's cloud architecture and proprietary components, making it impossible for them to be deployed on other cloud platforms. These include important applications such as the Zheliban government services app, the provincial government DingTalk, the provincial public data platform, provincial social security enrolment and payment, information-sharing among law enforcement agencies, one-stop consultation, complaints and reporting, online e-commerce transactions regulation, and spatial governance etc.

According to the official notice published by the Zhejiang Big Data Development Administration, "changing the main vendor of the government cloud would require an architecture overhaul for most of the operating systems, which can result in sharp increases to service costs and taking a hit on the original outlay, so this contract can only be awarded to the sole vendor."

To overcome Alibaba's first-mover advantage, its competitors have opted to compete by providing better customer service. The chief technology officer (CTO) of an education start-up told Caixin that they use both Alibaba Cloud and Tencent Cloud services. Despite spending several million RMB on Alibaba Cloud services each year, they received little to no attention from the Alibaba Cloud team, whereas representatives from Tencent Cloud would hold monthly sharing sessions on the latest products and industry trends to entice them to switch over.

In 2021, Alibaba Cloud finally realised its shortcoming in this aspect and made good customer service its priority. The company also carried out a round of organisational revamp at the end of April. However, Alibaba Cloud does not intend to hire more staff to improve its customer service. Instead, it announced in May that it would be setting aside five billion RMB in the year ahead as a special fund to encourage its partners' transformation into customer service providers to serve its clients.

In 2021, competition amongst cloud service providers in China intensified partly because Chinese cloud service providers faced resistance to their overseas expansion. The worsening of the China-US trade war in the last couple of years meant that Alibaba Cloud and all have long halted their expansion in the US, with Huawei even facing an all-out onslaught from the US government.

Biden's ascension to the US presidency in 2021 did not result in the easing of US restrictions on China in the technological sector. On 9 June, Biden issued an executive order for the Department of Commerce, Department of Defense and national security adviser, among others, to follow up on the national emergency declared by former President Trump in May 2019 with respect to the ICT supply chain, and continue investigating the threats to the US resulting from personal data security issues and foreign software applications. According to the executive order, such actions are necessary to prevent the unrestricted sale of, transfer of, or access to US persons' sensitive data, and to prevent foreign adversaries from accessing the data in large data repositories.

The position of the US government is one of the reasons why Alibaba Cloud lost ByteDance. In 2020, TikTok was nearly banned by the Trump administration in the US, with its relationship with Alibaba Cloud cited as an excuse. The administration claimed that TikTok was using Alibaba Cloud services to backup data from American users in Singapore, and that Alibaba's Chinese background posed a substantial threat to the data of TikTok users.

Interestingly, the Covid-19 pandemic accelerated the overseas expansion of Chinese game developers, short-form video service providers and e-commerce companies. These include gaming upstarts like miHoYo and Lilith Games, and potential e-commerce unicorns such as SHEIN and Chicv. Caixin understands from Google that the copious amounts of Google ads and cloud services purchased by such Chinese companies propelled the Greater China region to overtake Japan as its fifth largest market worldwide in 2020.

Turning away from the cut-throat competition in the domestic market, Chinese cloud service providers now have their sights on Asia and Europe. On 3 June, Tencent Cloud announced the opening of four new international data centres in Bangkok, Frankfurt, Tokyo and Hong Kong. Prior to this, the company's second data centre in South Korea went online at the end of 2020. Tencent's first data centre in Indonesia started operating in April this year, with the planned opening of a second set for the end of this year. In end April, Tencent Cloud also launched its third data centre in Singapore. Alibaba Cloud has not been standing still either. In 2019, it hired Selina Yuan, who used to be Huawei's president of enterprise business group marketing & solution sales to become the president of Alibaba Cloud Intelligence International. On 8 June, Alibaba Cloud announced its plans to set up new data centres in Indonesia and the Philippines. It also intends to pump six billion RMB into its overseas markets within the next three years to expand its data centres and to encourage the development of local software companies.

In Southeast Asia, both Alibaba and Tencent have invested in many companies, which are also users of their cloud services. For instance, Alibaba is a shareholder of Tokopedia, an e-commerce company in Indonesia that uses Alibaba Cloud services. Recently, Tokopedia merged with Gojek, an Indonesian ride-hailing and delivery company to form GoTo, the biggest tech company in Indonesia. On the other hand, Tencent invested in the Sea Group (NYSE: SE) that is headquartered in Singapore and the largest public company in the region. Sea Group's businesses such as Garena (gaming), Shopee (e-commerce) and SeaMoney (financial services) require substantial cloud computing resources.

Huawei has also not given up on the overseas expansion of its cloud business. The personnel for China (mentioned earlier) at a foreign cloud service provider told Caixin that even though Huawei Cloud cannot compete with international vendors in product diversity, it has a unique strength. It has cordial relationships with local telecommunication operators and can assist game developers to enhance user gaming experience at the telecommunication network level by reducing graphics lag.

In foreign markets, Chinese cloud service providers are in unfamiliar territory and face strong competition from Amazon Web Services (AWS) and Microsoft. AWS is the market leader when it comes to product diversity and technical expertise, whereas Microsoft has the upper hand in terms of its sales team and relationships with governments. When ByteDance was trying to come up with a soft landing for TikTok in the US, it sought assistance from Microsoft initially.

In attracting Chinese companies looking to expand overseas, Microsoft's main strengths are compliance and its presence in these markets. The CTO of its Omnichannel Business Unit, Dr Xu Mingqiang, told Caixin that his company offers Chinese businesses a comprehensive solution for their overseas expansion that allows the sharing of patents and protection against claims from patent trolls. In addition, Microsoft can also connect these companies with local clients. For example, it partnered Envision Energy, a Chinese wind power company, to carry out sales and marketing in the UK, France, Germany, Singapore, and the UAE etc., and also put them in touch with local government departments. "These governments and companies are our clients, so we have ties with them. This is something that other cloud service providers are unable to provide," said Dr Xu.

Microsoft and Amazon are also building up their presence in China. On 18 March, Microsoft announced its intention to double the capacity of its Azure China service, with new data centres to be launched in the spring of 2022. A week later, Elaine Chang, the managing director of AWS Greater China, announced that following the Phase 2 expansion of its Ningxia region, its capacity there would be 1.3 times that of Phase 1. At the same time, she also announced that a third availability zone in the company's Beijing region will be made known in 2021.

Other Chinese cloud service providers also have considerable war chests. Since January 2020, companies such as UCloud, Kingsoft Cloud and Qing Cloud have entered capital markets, while UniCloud and Inspur plan to be listed on the Shanghai Stock Exchange Science and Technology Innovation Board. While they may not be able to carve up the cloud services market, they can still find niches to thrive in.

A domestic PaaS company told Caixin Global that greater stability in the Chinese IaaS market is not a bad thing. The presence of too many platforms currently means that it is costly and painstaking for PaaS companies to ensure compatibility, and this has also stifled the development of the software layer on top.

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

This article was first published in Chinese by Caixin Global as "中国云全面战争". Caixin Global is one of the most respected sources for macroeconomic, financial and business news and information about China.

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