On May 20, China Customs General awarded a RMB 85 million (about $14 million USD) cloud and Big Data contract to AliCloud owned by Alibaba Group, the first one of its kind. It signaled the government’s broader acceptance and support of public cloud services. AliCloud, initially built for Alibaba’s extensive eCommerce platform, was developed by Alibaba internally. It can process about 100PB of data in 6 hours. The first stage of the project, building a cloud platform for China Customs, is expected to be completed in a month. In China, the potential speed of change is often hard to gauge, where government is often the key driver for large initiatives.

The market potentials for cloud computing in China are apparent, especially with the direct value proposition of Big Data processing. With its huge mobile population, the data growth rate is unprecedented. By 2014, Chinese population already produced about 0.5 zettabyte (ZB) of data (One zettabyte is equivalent to about 250 billion DVDs) and it is predicted to reach about 40ZB by 2020. Thanks to the readily available open-source technologies on cloud and Big Data, many Chinese entrepreneurs are jumping onto the cloud market. UCloud, an Shanghai-based IaaS provider founded in 2012, just closed another round of $100 million funding from global investors. Here is a brief summary of the current challenges and opportunities on cloud development in this market:

1. Cloud computing is still a protected market in China. A commercial ICP (Internet Content Provider) license is required for all internet providers and it’s not open to foreign companies. This law itself could prevent many foreign cloud providers to directly enter China. (See a recent legal blog on ICP). Although internet laws often change quickly in China, the latest data sovereignty rulings worldwide triggered by the Snowden event have made Chinese government more cautious about opening up its market in this area. However TriStrategist thinks that global data sharing is unstoppable over a longer term.

2. China’s cloud market is still at the very basic stage. The estimate is about 3-year lag behind the US market on the adoption of new cloud and data technologies. Lacking of local technical talents is a major deterrent, but that can be improved by the active global recruiting efforts that many Chinese companies are engaging in these days.

3. IaaS is a highly competitive and decentralized market in China. Internet hosting services have long been a scattered market in China with data centers and colos all over China which are often not organized for large-scale cloud computing although things are improving. There is no dominant large IaaS provider, but there are monopolies in broadband services. The laws changed in March 2015 to level the broadband market to small players may help promote IaaS market directly. IaaS providers in China have to consider specific local realities to accommodate low IT level in general public and the needs for high customization and support. The speed and reliability of the services are often more important than the cost differentiation at the moment. Successful IaaS providers need to find their niche, bundle other value services and seriously protect themselves from the uneven competitions.

4. PaaS is growing at a slow rate in China due to the unwillingness to get locked in on technologies. Technology market in China is very diverse. However SaaS is growing rapidly in China, starting from gaming, banking, and financial industries. Niche providers with industry-specific Big Data solutions are often preferred.

Looking back, the internet market in China truly started booming with innovations only after Year 2000, when the Trans-Pacific Fiber Optic Cable Network was built and put into service (See TriStrategist’s 2013 blog on China’s Internet and Mobile Market). Before that, the networks and servers there were so slow to the outsiders that few from the West ever heard of any internet startup from China. Among the early innovators, Alibaba was founded in 1999 and Baidu was founded in 2000. Good timing seemed to have definitely played some roles in the success of these Chinese internet companies. Since then, the internet and mobile infrastructure in China have leapfrogged many of the western countries and enabled many more innovative startup companies, such as TenCent (the developer of WeChat) and Xiaomi (today’s largest smartphone maker in China), to mushroom and blossom onto the global stage of internet and mobile competitions in a few short years. As we know today Alibaba is now a $150 billion company and Xiaomi valued at $45 billion.

Looking at the remaining continents in the global village, Africa has long been neglected as the poor and unstable backcountry. Yet things are quietly changing. With 16% of its one billion population online, it already has the fastest growth of new mobile subscribers in 2014, surpassing even China and India. Companies like Huawei have long been working there to build telecommunication infrastructure and sell low-cost mobile phones. In recent years, Google has made huge investments with Google Blimps, satellites and fiber optic cable network to link Africa to its global internet expansion plan (Also see earlier blog on Google’s Disruptive Innovations). Late 2014, Google announced another $60 million investment for a new undersea fiber optic cable network from U.S. to Brazil, allowing data transfer speed up to 64 terabits per second. By its completion in 2016, it will ensure Google’s internet services to run smoothly all the way to the southern end of the African continent. Its Brazilian partner plans to directly connect Brazil to Africa via undersea fiber cable network at the same timeframe. With these factors and the attentions nowadays from big global companies and investors to the untapped markets, Africa is definitely posing as the next exciting frontier for many internet innovations in the coming years.

Although the current internet-enabled GDP is still very low in most of the African countries, timing seems to start favoring Africa. Following China’s internet growth model, African continent will benefit from the leapfrog in infrastructure building with even newer technologies and faster networks. Its huge young populations and growing middle-class are ripe for mobile innovations which can bypass the earlier web-based internet models. The disruptions have already been happening in finance, education, health, agriculture and many other areas. The economies are growing more rapidly with internet and mobile services in many countries there. The stability of the political situations is also improving with the information access getting more easily and freely, and the education level edging up.

The speed of changes in worldwide mobile market, both in handsets and mobile apps can surely cause dizziness. This is an industry that tolerates no mistakes. Competitions are hard-charging on talents, innovations, strategies, speed of executions and boldness.

Xiaomi hired Google Android executive Hugo Barra last year to help expand its global markets and it is moving fast. Xiaomi understands the Chinese buyers of mobile phones very well. It often uses ARM-based fast gaming processors from partners such as Nvidia or Qualcomm, and adopted Google’s free Android platform for quick development. Its newer models got great reviews and sold out online (their low-cost selling channel) within minutes. Their price is often less than half of those sold by Samsung or Apple.

Samsung may have made a strategic error in China as they failed to shift their position. For an expensive smartphone offering similar features and speed, fewer people are willing to pay double, especially with an average replacement rate only around 2 years. On the other hand, Chinese typically buy unlocked phones at full handset prices instead of locking into a long contract with a designated carrier, unlike the practice in the US market. Thus Xiaomi’s pricing strategy certainly gained an upper hand.

Apple at the moment is still enjoying its first entry advantage on many smartphone innovations and its premium brand recognition built up during Steve Jobs’ time. Apple owns its popular technology platform, a significant advantage that Samsung is lacking. It also tries to keep up with constant innovations and strategies. For example, its latest Apple Pay is trying to compete on another value chain – making an iPhone an indispensable daily tool instead of just a high-tech toy or communication device.

On the mobile app side, the number of new mobile apps created every day is staggering. The Finnish company Rovio Entertainment Ltd, once made the stellar mobile game Angry Bird, is now facing the trouble of coming up with another killer app to maintain the revenue growth. This year it had to trim its staff and change a CEO. No single company is likely to dominate the mobile app market because the next killer-app developer or startup could pop up from almost any open garage in the world. In addition, majority of the mobile apps are free today (or have to) despite the development cost. In fact the total app revenue only occupies a small share of the total mobile market capital. Sustained growth for a mobile app company is hard as it constantly requires new striking apps and ingenious money-making ideas.

The internet and mobile markets are fairly global and universal in many ways, but in China, “Chinese-characteristic”, as many Chinese leaders describe their economic development models, indeed applies to their internet and mobile market evolution. Compared to the western progress, Chinese market has been through more of a leapfrog mode and bypassed many middle stages.
 
It all comes with the cultural. More and more Chinese business people and entrepreneurs have realized the distinction. Once they combine the technological innovations from other parts of the world to their own characteristics, a unique Chinese market is born. They hope that one day these unique offerings will be accepted by the west and other parts of the global- to the realization of a full circle of technology innovations and influences.
 
Evolution Stage One: Mass Internet and the information sharing age

Internet entered China rather late. The national infrastructure that supported the mass internet access has come into scale only in a little over one decade, thanks to the trans-Pacific fiber optic cables(first put into service in 2000), western investment and technology support, as well as Chinese government’s open market policies. Quickly the penetration flourished within such a large population who are so eager and curious to know everything outside after being labeled as “closed and backward” for centuries. The dominating scenes of the earlier age of this stage were those overnight internet cafés on street corners filled with smoke and younger people. Then high speed cables, desktops and laptops quickly entered common households at affordable prices, including remote cities and areas, and for all generations.
 
Evolution Stage Two:  Social media and Ecommerce

Chinese like to stay in touch and chat.  In the old days, everyone sat by street corners or in someone’s yard, now they have moved online. Local chat tool QQ enters household vocabulary. Text messaging runs everything. Sina, Sohu, Wangyi(163.com), Baidu, Alibaba, …, one after another internet startups became the symbols of a golden age of Chinese entrepreneurship. Weibo, WeChat (or Weixin, from Tencent), etc, offering similar functions to US Twitter, Facebook, etc but tailored to local Chinese, all flourished quickly in China, reaching millions of Chinese users in a short time window.     

Most Chinese love to shop for deals too. With the modernization of the banking and credit card industries, online shopping which was way lagged behind the US or Europe, all of sudden is catching up in lightning speed.  Transactions over one Single’s Day on 11/11, a fairly new thing from Alibaba, immediately eclipsed the entire US Black Friday sales. This year in 2013, Alibaba processed $5.75 billion total sales on one Single’s Day while American spent a total of $1.9 billion on Black Friday and Thanksgiving online combined.  China is easily on the way to become the world’s largest e-Commerce market. Remember this is only with 40% of the internet penetration in China at this time,  where still mostly the young, educated, and those living in cities, know how to shop on line doing e-Commerce transactions.

Evolution Stage Three: Mobile internet and new mobile devices with special chips or sensors.

This is the stage that’s been currently forming. Wasting no time, Chinese are catching up fast on what are available and advanced in the US and other places. Well, more and more, they start to value what they have locally and what could be truly “Made-in-China” too.  China is quickly becoming the world’s largest mobile user market as well. It’s the fastest revenue growth region for Apple (IPhone and IPad), faster than Starbucks coffee and all fast food chains, and it is the key contending market for almost all device makers.  Nokia used to lead here, but now Apple, Samsung, Google, HTC, LG, etc, nearly everybody, A local mobile phone producer and startup Xiaomi (named from a very Chinese-characteristic idiom in WWII) in August this year was valued at $10 billion USD just after three years in business. News just came out that on November 28, 2013 (the US Thanksgiving Day), it sold 150,000 smartphones under 10 minutes just through WeChat media alone.

Many of the young entrepreneurs in China today have finally realized the uniqueness of the China market in internet and in mobile. Robin Li, the CEO from Baidu and a Peking University graduate, mentioned about it in a recent Bloomberg interview and many talked about it in high-tech conferences with Chinese entrepreneurs. For Mobile Internet, it’s an entirely different platform than traditional internet. Mobile search is different than desktop search; many applications are going to be designed especially for mobile internet. This is a space everyone can compete on even ground nowadays. 

High-tech industry evolves around the synergy of software and hardware. China is where many new devices are going to be made and new ideas are coming from. Even for many US companies, thinking about trying and implementing new ideas for mobiles, China is the first stop.  Years of activities as the “world’s leading factory” have left enormous experiences, expertise and experimenting spirits in China for “making everything possible”.  With the increasing demands for more smart sensing devices and customized applications, agility in China’s manufacture capability will play a key part in leading the innovations on providing new chips (China is also the major silicon manufacture destination), new sensors and new applications for smart mobile usages. This unique Chinese-characteristic advantage has already been realized by the local entrepreneurs and they just need to organize their ideas.  

Evolution Stage Four and onwards:

What’s next? A truly innovative indigenous high-tech industry for China, or the world’s largest software, internet and mobile market? It could all happen in coming decades if not sooner. To become so, China needs invest in foundation software and technologies.  Open Source provides a golden opportunity for the young and ambitious Chinese entrepreneurs to start on an even platform with the world and invent new without being labelled as “copy-cats”. A leading industry needs a well-formed self-evolving system. China hasn’t done much about forming their own sustainable high-tech management or innovation systems. They need that journey, with a lot more dedication, patience and longer-term planning than the current market and society have been displaying. Playing catch-up can only go so far as to stand side-by-side by your peers, but to lead forward, it needs the vision, the boldness and a good support system. Fortunately money and investment is no longer a thorny issue for many existing or becoming entrepreneurs in China. A new dawn is reckoning.

Reference news articles:

• A Single Chinese Company Dwarfed All Of America’s Black Friday And Thanksgiving Online Sales In One Day:

http://www.businessinsider.com/alibaba-dwarfs-americas-black-friday-2013-12

• China’s Xiaomi sold 150,000 smartphones in under 10 minutes… using a chat app:   

            http://thenextweb.com/asia/2013/11/28/chinas-xiaomi-sold-150000-smartphones-10-minutes-using-chat-app/

Tesco, top British grocery chain(about 30% of the UK market share), is not doing well with its US business after the openings of its Fresh & Easy stores from 2007. Daily grocery is a sensitive area of every common folk’s life and some local taste and habits may not easily be changed over. Part of the reason of this globalization story is that US folks’ stickiness to their daily grocery habits were underestimated by Tesco. Although US market is best known for its cutting-edge innovations in many areas, US consumers can be very stubborn and traditional, esp. on living styles and daily habits, just like French folks can’t live without their daily baguettes, cheese and wine.

The other part of the reason is also the timing and location. When they first opened Fresh & Easy stores in 2007, they chose California, Arizona and Navada. These were the hardest hit housing markets which started melting down terribly from 2007.