China Data Center Market – Foreign Data Center Player – Part 1 of 2

Published 27 August 2016

This is the sixth post in the series of posts on the China Data Center market by me and a colleague. You can find the earlier post to this series on linkedin under my posts or via https://newwitblog.wordpress.com/

  1. Background

China has a growing data center market that has seen double digit growth since 2008.

Foreign Data Center companies are in the China Data Center market, but there are some misconceptions of how these data center players can get into the market such as do they have exceptional privilege through some special relationships.

The apparently handful of foreign data center players that are in the China Data Center market appears to support the above impression. We hear about names such as NTT, Equinix (establish presence in China in 2014 through buying AsiaTone), and PacNet. The absence of Digital Realty and foreign third party wholesale co-location service provider seem to further enhance the impression that only some special ones get to participate in the China Data Center market. This is largely not true.

We tend to look for foreign data center giants like DRT, Equinix and then have an impression that China do not have a presence or are not welcoming foreign data center players. This post will hopefully help to dispel some myths and provide some insights to you.

2. Truths or myths

There are some long held beliefs regarding whether foreign data center player can participate in the China Data Center market. While some are true, and there are some that are purely outdated or misinterpretation. Some of the often talked about points about foreign data center participation in the data center market are:

  1. China do not welcome foreign data center player
  2. China allow foreign data center player, subject to 50% foreign ownership
  3. If a foreign data center player is in China or is talking about building data center in China, they must have special relationship with the government officials (it implies that they either somehow have an IDC license that is normally not allowed)
  4. There is not much presence of foreign data center player, only PacNet and Equinix are there
  5. Owning and operating a data center in China is very risky for a foreign data center company, because you are violating the rules
  6. The local police (Public Security Bureau – 公安) will enter your premises and take away data (hard drive) without any warning

Let us get point 1, 2, and 3 out of the way with reference to the picture below.

China do allow foreign company that build data center building with mechanical and electrical infrastructure, or more generally those Data Center REIT player or third party wholesale colocation service provider that do not provide ISP connectivity or IT hardware (note: from 2015 onwards, co-location service provider that provide IT hardware or cloud service to customer are required to apply for an IDC license).

China also allow a joint venture company, with Hong Kong or Macau based company holding up to 50% of the shareholdings while Chinese shareholders holding at least 50%, to apply for an IDC license.

For the time being, China do not allow foreign majority owned company to apply for IDC license.

In all likelihood, the situation of foreign data center player is participating in the China data center market by not getting involved with the network connectivity or providing server leasing or cloud service. Let us hold the presence of Amazon Web Services and Microsoft’s Azure in China till to later part of this topic.

As for point number 6, most country’s telecommunications or counter-terrorist act or some regulations that empowers the police to seize data or hard drive. I have not heard of any actual case.

3. Regulation of an Internet Data Center

We talked about local data center player having to apply for an IDC license. It is the same for a joint-venture data center company that has any shareholder from Hong Kong/Macau and within the prescribed 50% shareholding limit. They can do the following:

  1. Apply for a nation-wide license with the Ministry of Industry, Telecommunications and Industry (“MITI”). The licensee still has to register their awarded nation-wide license with each city’s Communications Administration that they intend to have a data center facility. So having a nation-wide license doesn’t automatically mean you can build your IDC anywhere. This is the confusing part, besides it may be an obstacle to foreign data center player which intend to abide by the written rule to apply through a 50-50 joint venture with a local partner for the nation-wide license which may not be granted in the first place beside being within the rule and still get rejected even if they somehow managed to get a nation-wide license with their registration in the city that they intend to have a data center.
  2. Apply for a provincial wide IDC license with that particular province’s Communications Administration and do so for each city. The licensee still has to register their awarded nation-wide license with each city’s Communications Administration bureau that they intend to have a data center facility.
  • Apply for a city specific IDC license with that particular city’s Communications Administration and do so for each city.

Generally, there is not much of an issue for a local Chinese company to apply for and receive their license. In 2014, The MIIT ministry issued a document (http://www.miit.gov.cn/n1146285/n1146352/n3054355/n3057709/n3057717/c3651787/part/3651788.doc ), this document is significant as it contain a statement

申请经营IDC业务的企业,应利用自有或租用的机房和场地,以外包出租的方式为用户的服务器等互联网相关设备提供放置

代理维护、系统配置及管理服务,以及提供数据库系统或服务器等设备的出租以及存储空间的出租、通信线路和出口带宽的代理租用和其他应用服务。

In English it meant an IDC license is required should the data center service provider provides colocation space for client to collocate the client’s IT equipment, or if the cloud service provider provide compute and data storage resource.

AWS and Microsoft Azure cannot officially front and provide their cloud service, and instead have to rely on their China partners (AWS is with SINNet, and Microsoft Azure is partnering 21ViaNet) to provide their cloud services.

4. List of Foreign Data Center Player in China

There are more than a dozen foreign data center players that are in the China Data Center Market:

  1. CenturyLink (sits within GDS) through Neusoft
  2. CITIC Telecom CPC
  3. DXYNet (Hong Kong)
  4. Hong Kong TownGas
  5. PCCW (Guangzhou)
  6. British Telecom (partner with 21ViaNet),http://www.china.org.cn/english/BAT/28362.htm
  7. AT&T (through Shanghai Symphony Telecom, 25% holdings, a joint venture with China telecom),
  8. Equinix (through purchase of AsiaTone’s China data centers)
  9. Fujitsu
  10. KDDI-Telehouse
  11. NTT
  12. STTelemedia (through investment into GDS)
  13. Telstra/Pacnet
  14. Foxconn
  15. HP (reduced its shares in H3C-华三通信网络, selling 51% to Sugon)
  16. Japan’s TIS, TIS-Hitech 天津提爱斯海泰信息系统有限公司 (Japan’s TIS)http://www.tis-hitech.com/index.html
  17. SinoCloud (Guiyang, 4,800 racks capacity) (SinoCloud is previously called Armarda Group, an listed entity on the Catalist board of Singapore Stock Exchange)

IBM had sold of Tianjin BlueTek (a data center service provider) to TeamSun. If not, IBM would be on the above list.

There are others that are in various stages of planning to build or are studying to go into China such as Charoya. Digital Realty (announced in 2013 to want to invest into China from 2014) – http://www.scmp.com/business/companies/article/1217705/digital-realty-gears-china-investments

Temasek Holdings, owns 13.1 per cent of 21Vianet, with 5.8 per cent voting power for its $74 million investment in the data centre company. For the Singapore wealth fund, this marks a second major investment into the 21Vianet. Last year, Temasek had invested $100 million to buy around 10 per cent of NASDAQ-listed 21Vianet.

I am fairly certain that there are more foreign data center companies that are operating in China that I do not know of. The above list may not be accurate.

5. Various Options for Foreign Data Center Player

Generally, there are various options for a foreign data center company to go into the China Data Center market:

  1. Focus on owning the building and M&E infrastructure, and sell the data center space through local channel or partner

This is the problem free way. However, it is not easy more in the sense that land plot allocation is usually quite sizable in China, and therefore the investment and capacity will be quite huge.

  1. Partner with a local partner that has IDC license

Most of the foreign data center company establish their presence and operate using this mode.

  1. Establish Hong Kong / Macau entity to go into joint-venture with a China company, and apply for a IDC license

So far, mainly the Hong Kong based companies like HKT, Hong Kong TownGas went about through this mode.

  1. Invest into the local Chinese Data Center company

This is fairly easy for 21Vianet which is listed in foreign stock exchange. However, the local Chinese data center company will need to split its IDC license holding entity with the data center asset because the IDC license holding entity is not allowed to be foreign owned (except up to 50% by Hong Kong or Macau, but it any change has to be pre-approved).

Part 2 to be continued.

Reference:

  1. http://www.chinaz.com/news/2012/1130/284226.shtml
  2. http://www.slideshare.net/tgrhm/datacenter-and-cloud-developments-and-challenges-in-china
  3. http://www.chinalawinsight.com/2013/11/articles/corporate/mergers-acquisitions/%E5%A4%96%E5%9B%BD%E4%BA%91%E8%AE%A1%E7%AE%97%E6%9C%8D%E5%8A%A1%E6%8F%90%E4%BE%9B%E5%95%86%E5%9C%A8%E4%B8%AD%E5%9B%BD%E9%9D%A2%E4%B8%B4%E7%9A%84%E4%B8%BB%E8%A6%81%E7%94%B5%E4%BF%A1%E7%9B%91%E7%AE%A1/
  4. http://www.zwezx.com/a/idc/yunjisuan/2016/0405/6454.html
  5. http://www.lunwenstudy.com/mba/mbascyx/52650.html
  6. http://infopub.sgx.com/Apps?A=COW_CorpAnnouncement_Content&B=AnnouncementLast12Months&F=RWRAW9T6VQN6IO55&H=c8bc90272801af5cb2ddda1de7a9d458e0ed2f10998dcbc8b6dfb32182a80078&fileId=SinoCloud%20-%20Press%20Release%20-%2023%20March%202016%20SCG%20v3.pdf
  7. http://www.ejinsight.com/20140214_views_data-center/
  8. http://www.datacenterdynamics.com/content-tracks/colo-cloud/equinix-signs-up-datang-telecom-as-a-channel-partner-in-china/96448.article
  9. http://www.dealstreetasia.com/stories/temasek-kingsoft-xiaomi-invest-296m-in-21vianet-1224/
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China Data Center Market – Foreign Data Center Player – Part 1 of 2

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