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China is aiming to rely on its new infrastructure initiative to offset negative impact from the COVID-19 epidemic and explore new growth engine for its economy in the medium to long term, boding well for cloud computing industry, which is not only an important constituent of the new infrastructure, but also an enabler for the development of other industries under this initiative.

New infrastructure refers to those led by new development concepts, driven by technological innovation and based on information networks. It includes three main areas, namely information-based infrastructure, converged infrastructure and innovative infrastructure, according to the National Development and Reform Commission (NDRC).

Morgan Stanleys China Urbanization 2.0 report expects the annual average investment in new infrastructure to reach US$180bn in 2020-30, almost double the average over the past three years, led by sectors such as Artificial Intelligence (AI), data centers and 5G base stations. The average share of private capex in new infrastructure could also pick up to 38% in the next decade (vs. 28% in 2017-19).

Cloud computing, which is one of the fastest-growing sectors of the Information Technology (IT) industry, means the delivery of computing services, including servers, storage, databases, networking, software, analytics and intelligence, over the Internet, or the cloud, to offer faster innovation, flexible resources and economies of scale.

China is still in the early stages to develop its cloud computing market, but is catching up quickly with developed markets thanks to continued government supports in the past years as well as strong demand from enterprises for cloud services in todays data-rich society.

The Chinese government has identified cloud technology as a strategic priority it was a prominent feature in both its 12th and 13th Five-Year Plans. Thus, it is expected to see favourable policies from the government continually to promote or subsidise cloud technology adoption.

Chinese Internet companies have also been expanding rapidly in the public cloud market by investing heavily in technology and building out the infrastructure. Service providers could cut price through economics of scale and thus trigger price elasticity which leads to more user adoption and more consumption per user.

During the COVID-19 epidemic, some cloud companies opened up their platforms to allow customers to use their resources for free and thus helped them maintain operations. The awareness of cloud technology has been increasing among Chinese companies which begin to adopt cloud technologies more frequently as they restart operations and hire new employees.

Demand from enterprises

Companies at the forefront of technology today may find their products and services becoming rapidly obsolete if they dont continually evolve. Software errors, bugs and vulnerabilities can also rapidly decimate consumer confidence in a product.

Having a big-data strategy is increasingly seen as essential for all corporate management activities. The ability to identify and respond to consumers requirements is now a key factor in measuring enterprise competitiveness. Cloud tools can offer the best and most cost-effective means of leveraging the vast amounts of data that companies generate.

Switching from on-site data management to cloud services can also save up to 30% of a companys Information Technology (IT) costs. Once a companys IT resources have been moved to the cloud, there is a growing universe of big-data and artificial intelligence tools that can help enterprises develop their commercial strategies. In addition, cloud computing generates recurring revenue, making it a more predictable and service-oriented business model.

Cloud companies, especially first movers, already benefit from economies of scale and network effects, and there is no sign of those advantages being eroded.

Growth potential

Within the cloud market ecosystem, infrastructure-as-a-service (IAAS) provides the most fundamental basic services, including server/storage, networking and Information Data Centre (IDC) / Content Delivery Networks (CDN) services for users. IAAS accounts for the majority share of the public cloud market at roughly 62% in 2018 or RMB 27bn.

This service business model is pay-as-you-go which offers users/consumers the benefit to reduce capex and to operate more efficiently and with more flexibility. IAAS service providers can both build and self-operate data centers or lease from third party vendors.

A shift from private cloud to public cloud and digitization of enterprises and government entities are key drivers supporting cloud computing market growth in China.

Chinas IT service spending is a mere 3.9% of global IT spending in 2018 while the countrys gross domestic product (GDP) share in global GDP is as much as 15.7%. The big gap means theres huge growth potential for China to accelerate its IT spending in the coming years.

Bain expects Chinas spending on the cloud to grow as 40-45% a year, reaching USD20 billion in 2020, far outpacing the broader IT industry.

Chinas Ministry of Industrial and Information Technology (MIIT) expects the countrys cloud market to grow at a 2018-2022E Compound Annual Growth Rate (CAGR) of +32%, reaching RMB 290bn (US$41bn) in 2022. Public cloud is estimated to reach a 60% share of the total cloud market by 2022 from 40% in 2018.

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Global X ETFs Product Specialist at Mirae Asset Global Investments (Hong Kong) Limited

Read more from the original source:
China new infrastructure initiative to boost cloud computing EJINSIGHT - EJ Insight