A view on the China Data Center Market – part 1

Published 3rd March 2016

This will be the first post on a series of posts by me and a colleague on the China Data Center market. To be precise, China here refers to mainland China.

 

  1. Overall

As the opening post of this series on the China Data Center Market (“China DC Market”), we’ll provide an overview and key attributes of the China Data Center market. We’ll also discuss a pertinent issue which is the “IDC” license that confuses or causes concern to a would-be data center player considering to entering the China DC Market.

  1. Purpose

This series of posts is meant to help a foreign data center stakeholder who is looking beyond the material of a research report of market size, statistics and such. It is not meant to be comprehensive; it is meant to be sharing of experience.

  1. China Data Center landscape

Just like when the term Asia Pacific Data Center Market is used, it is used as a generalization to a certain extent but there are key markets within the Asia Pacific Data Center Market that are unique and different from each other. The same is with China.

In China, all of big Chinese companies classify China into at least three and sometimes up to seven regions for ease of managing their business operations, among them you will find that they center around major cities such as Beijing, Shanghai, GuangDong, Nanjing, ChongQing and ChengDu. Each region/city is unique and different from one another. There are local practices in the different cities that one will need to find out and follow given that the people and dominant players there are different.

A lot has been said about China, which itself is a sign of the growing importance of China. It has the most number of Internet users. The 2014 statistics shows that it has more than combined number 2 to 4 (US, India and Japan). 2015 total shows it has 688 million users. 71% of those Chinese users are mobile Internet users.

Foreign data center service providers have been looking at the China DC market for a long time. Google is quietly picking up where it left off 5 years ago and heading back into China mainland.

The imbalance of the critical network resources and utility power supply means that data centers will need to be close to major network hubs while also it need be in an area where utility power capacity is available.

However, in another report, US leads China 4:1 in terms of major cloud and Internet data center sites, where China is number 2. I see things in positives, so I think China will have more room and therefore there is a lot of opportunities to be involved while China grows faster than the rest of the world.

  1. Definition

Just to be clear on what categories of data center are we talking about.

For the purpose of this series, we define the data center market to be layered (the foremost being the lowest stack):

categories-of-data-centers

The simpler three layers suffice for the purpose of this first post.

  1. Growth Drivers

We need to understand what is driving the growth of data center in China and how is it different from other markets.

As highlighted above, a large number of China’s Internet users are mobile users. They consume content, order goods and services (taxis, train tickets, airline tickets, hotels, fast food delivery, groceries, movie tickets) which is basically everything a person needs through mobile app and mobile payment. They work using the mobile chat app Wechat (including Wechat group), and they socialize using mobile app like Wechat, QQ, MoMo, MeiTu, etc.

Internet and Mobile Video content is very big in China. People watch videos on the train, bus, in office. Second is mobile games.

The banking industry is relatively slower than their counterparts in tying in more financial and personal services onto the mobile platform. Wechat does the equivalent for the China’s Internet users with their Wechat pay.

For China, it is the mobile users that are driving the big Internet data growth, as they work, consume, pay, and play through their mobile apps.

The popular acronym BAT refers to Baidu, Alibaba, and Tencent. BAT is a big factor for taking up a lot of the data center space in the last 5 years in China, fueled by the growth in volume of work/consume/pay/play of mobile users.

  1. Key Government Entities for Data Center

Central tax authority (federal tax)

Ministry of Industry and Information Technology (IDC licensing)

Local government (for land lease, local tax, business registration)

Power authority (for utility power)

Telcos (for carrier access)
More will be elaborated in subsequent posts during this series. Interesting to note is that there is no concept of free hold land in China. You lease the land from the State for certain x number of years to build your data center facility.

Another important piece of information is that the power supply company and the grid is usually one and the same, but they may or may not “listen” to the local government. So make sure you secure BOTH the land and the required utility power capacity and power lines before you commit to any significant investment.

  1. China Data Center Players

The well known data center companies are the dominant telcos: China Telecom (“CT”), China Unicom (“CU”), and China Mobile (“CM”) controls between 75-80% of the market. CT and CU are the big boys in the China DC Market with CM a distant and trying very hard to catch up third place.

The carrier neutral players that this author knows are are 21vianet (listed on Nasdaq), GDS, DrPeng (Shanghai stock exchange), Inspur, Centrin, Shanghai Data Solutions.

There are lots of data center buildings sprinkled throughout China. For Tier-2 or Tier-3 cities (i.e. at municipality or county level, which is one or two rungs below a provincial capital),  Quite a fair number are owned by the municipality or county directly or through investment company controlled by the municipality or county.

For tier-1 cities, i.e. the big cities and provincial capitals, there are good data centers owned and managed by local government controlled investment companies usually as part of a bigger technological or high tech industrial park (like 25 sq km or bigger scale type of industrial park) that serves the companies in them. For example, the Suzhou International Park Data Center is a Uptime Institute Tier-4 certified data center.

For tier-1 cities, and for some tier-2 cities, a sizable proportion of data center facilities are owned and operated by individual companies with the following characteristics:

  • data center is not their main business, it is either in response to demand from their managed IT/ISP/ICP business or because they are owned a complex with 6-20 buildings and they decided to build/convert one of the building to a data center facility
  • data center is one of their main business and they do well locally where they are, but they don’t intend to grow beyond their industrial park/district/county/city

So there are probably hundreds of data center service providers running one or two data center facilities in China’s many cities. For example, Shanghai city issued 26+ IDC licenses. However, well known data center service providers in Shanghai is only a handful – GDS, Shanghai Data Solutions.

It has been rumored that Tencent sublease some of their data center space but this author cannot confirms it.

  1. Data Center Outsourcing is low, but will likely pick up pace

Most large Chinese companies be it state owned or private, despite IT infrastructure not being their core business, will want to build their own data center facility.

However, there is good potential for subsidiaries or branch companies of large Chinese companies, and medium Chinese companies which are still substantial in size to outsource their data center colocation requirements.

Another reason is the spillover, which is also substantial.

Baidu, Alibaba, and Tencent will on first instinct build their data centers, it normally couldn’t build them fast enough and don’t have the right land in the right place to meet those demands. They will turn to the dominant telcos first to lease the data center space.

Large Chinese enterprises has been and continues to build their own data centers. Wanda Group, owned by the richest man in China in 2015 – Mr Wang Jianlin, builds a O2O cloud data center complex in a county of ChengDu city that will house more than 3,000 IT racks of medium power density.

Last but not least, cloud technology has made outsourcing of IT infrastructure service more acceptable and it is fueling a strong growth in the data center colocation business. AWS has entered the China market in 2013, and Aliyun lead a pack of 30+ public and private cloud service providers in a hot expansion pace in China (Aliyun is the cloud product name of Alibaba).

  1. Internet Data Center (“IDC”) license

Caveat: this is not a lawyer speak nor can you rely on for your critical business decision making.

IDC is under a subcategory called value added services of the telecommunications act which is controlled by the Ministry of Industry and Information Technology. Foreign company, cannot owns more than 50% of a company that operates under the IDC license. While Pacnet had announced back in 2013 (http://www.marketwired.com/press-release/pacnet-awarded-idc-license-miit-provide-data-center-network-services-chongqing-china-1843849.htm) that they are the first and only foreign invested company to obtain an IDC license, but dig deeper you will find the name Pacnet Business Solutions which is a 50-50 joint venture with a Chinese state-owned enterprise. This is the only way and the maximum is 50% exact.

But, wait a minute, a lot of wholesale colocation data center service provider do not provide, or do not from day 1 need to, provide the Internet connectivity service.  Then, you have two choices, waive and not provide and thus go it through a 100% owned local China subsidiary, or still partner will someone locally to help with the sales pipeline and the retail colocation agreement and provide that last mile connectivity. The choice is yours. Clear and simple, right?

It was not so clear mainly because the China Data Center market do not have anyone that only do wholesale colocation data center service! Why? Everyone wants to owns the value chain and provides everything all the way from basic rack up to servers and up to managed IT services.

So when government officials hear a foreign data center service provider wants to come in, they are usually cool to the idea until you explain at length with each and everyone you meet (and you will meet a lot of Chinese officials) that you are only interested in the non-Internet-connectivity part of the IDC business.

The advice here is this, get a local Chinese partner who does the ISP/IDC portion, explain to the key people in the partner until they are all clear, then you proceed with this partner down this “IDC” route. Or you can lease the powered space to this partner and let him be the “IDC” licensee, then you can stay at arms-length from this “IDC” license issue altogether. It is one of the way what some of the foreign data center service provider that are already in China are doing.

If you still want to part owned the “IDC” license through a joint venture, remember you are limited up to 50%. There is another issue. IDC license can be issued nationwide, or at each city. But, the nationwide one still has to be registered locally in each city you intend to own a data center facility. Complicated? There is no choice but to comply. That attracts a fees and the local department of MIIT will random pick a local data center for audit. So it saves some communications and liaison difficulty if you get a local partner that is familiar with the IDC/ISP business.

What’s to come in the series on the China Data Center Market

The rest of the series, not necessarily in the order shown, will look at the following topics:

  1. Part two of the view of the overall China data center market
  2. Current China Data Center Market players
  3. Beijing Data Center market
  4. Shanghai Data Center market
  5. GuangZhou and ShenZhen Data Center market
  6. ChongQing+ChengDu Data Center market
  7. and other China cities that is considered promising growth markets
  8. Technical Advancement in China Data Center Market

 

Reference (some of these links are in Chinese):

  1. https://www.zhihu.com/question/20062534
  2. http://www.most.gov.cn/tztg/201206/W020120621537448430735.pdf
  3. https://www.cnnic.net.cn/hlwfzyj/hlwxzbg/201601/P020160122469130059846.pdf
  4. http://www.internetlivestats.com/internet-users-by-country/
  5. http://time.com/4023367/google-china/
  6. http://www2.itif.org/2014-china-ict.pdf
  7. http://www.datacenterdynamics.com/colo-cloud-/colocations-eastern-front/94890.article
  8. http://www.datacenterdynamics.com/design-build/dcd-as-a-service-theres-no-data-center-market-like-china/95115.article
  9. https://blog.equinix.com/2012/05/the-data-center-industry-in-hong-kong-and-greater-china/
  10. http://www.360doc.cn/article/15115512_381221644.html
  11. https://qiaodahai.com/internet-backbone-provider-ibp.html
  12. http://www.equinix.sg/company/news-and-events/press-releases/equinix-completes-acquisition-of-asia-tone-expands-data-center-footprint-in-asia-pacific/

…to be continued in part 2

 

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A view on the China Data Center Market – part 1

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