Published 29 August 2016
This is the sixth post in the series of posts on the China Data center market. You can find the earlier post to this series on linkedin under my posts or via https://newwitblog.wordpress.com/
China is a restricted market for telecommunications services that is closely related to the data center market. Internet Data Center (“IDC”) license is a category under the telecommunications regulations under the control of the China Ministry of Industry and Information Technology (“MIIT”).
Foreign Data center players do participate 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.
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 While some are true, and there are some that are purely outdated or misinterpretation.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:
- China do not welcome foreign data center player
- China allow foreign data center player, subject to 50% foreign ownership
- 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)
- There is not much presence of foreign data center player, only PacNet and Equinix are there
- Owning and operating a data center in China is very risky for a foreign data center company, because you are violating the rules
- The local police (Public Security Bureau – 公安) will enter your premises and take away data (hard drive) without any warning
Let us get the first three points above 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, colocation service provider that lease IT hardware or provide 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 the last point, 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.
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:
- 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.
- 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.
Usually, 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
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.
List of Foreign Data Center Player in China
From what we have learned, there are about twenty and possibly more foreign data center players that are in the China Data center Market. In our case, foreign is defined as not from mainland China so Hong Kong is counted as outside of mainland China given that the regulations treats Hong Kong or Macau registered companies as a separate group of companies from the mainland China companies. A list of some of these foreign data center players are listed as below:
- CITIC Telecom CPC
- Hong Kong TownGas
- Hong Kong New World Telecom
- PCCW (Guangzhou)
- Equinix (through purchase of AsiaTone’s China data centers)
- KDDI Telehouse
- British Telecom (partner with 21ViaNet), http://www.china.org.cn/english/BAT/28362.htm
- AT&T (through Shanghai Symphony Telecom, 25% holdings, a joint venture with China telecom),
- CloudSite (Tianjin)
- CenturyLink (sits within GDS) through Neusoft
- STTelemedia (through investment into GDS)
- HP (reduced its shares in H3C-华三通信网络， selling 51% to Sugon)
- TIS-Hitech Tianjin (Japan’s TIS)
- SinoCloud (Guiyang, 4,800 racks capacity) (SinoCloud is previously called Armarda Group, an listed entity on the Catalist board of Singapore Stock Exchange)
AsiaTone had sold six of its data centers in China and Hong Kong to Equinix back in 2012, AsiaTone is still building new data centers in China, including Shenzhen, Shanghai’s WaiGaoQiao area, and Nantong city in JiangSu province.
IBM had sold of Tianjin BlueTek (a data center service provider) to TeamSun. If not, IBM would be on the above list.
There are a lot more announcement of possible new entrants into the China data center market such as Charoya, Hitachi Data Systems, South Korea’s SK Broadband, Digital Realty, and AirTrunk intention to build new data center in China.
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.
There are a number of private equity funds that operates in China and Hong Kong that has China data center buildings in their portfolio of assets. For example, Cybenaut Investment Group is started and based in China, it is open to foreign funds for investment. Cybernuat has data center investements in ZhongWei city of NingXia province, and GuiYang of GuiZhou province.
Various Options for Foreign Data Center Player to enter the China Data Center market
Generally, there are various options for a foreign data center company to go into the China Data Center market:
- Focus on only the building and M&E infrastructure
This is the problem-free option. It is still not completely easy going forward as there can be problems in getting land, power, and sales going but it is the least difficult option amongst the options. This is also where the local large enterprises can and do compete in plus they have less of a problem to go upstream, meaning they can get an IDC license and package the whole data center suite/rack + connectivity and makes it easier for the client. Plus land plot allocation is usually quite sizable in China, and therefore the investment and capacity will be quite huge.
- Partner with a local partner that has IDC license
Most of the foreign data center company operate using this mode. There is slightly different variations in using this model of operating in China, depending on what the local IDC and foreign data center are looking for in this type of partnership and what their plans are going forward. More on this in the next section of this post.
- 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. PacNet (now owned by Telstra) previously go by this way to have their Hong Kong entity register a China JV called PacNet Business Systems that they own 50% with the other half by a China state-owned enterprise, which is how they get the country-wide IDC license. It is still likely to continue to operate in this manner after Telstra has bought PacNet.
- Invest into a Chinese Data Center company
This is fairly easy for Chinese Data Center companies which are listed in foreign stock exchange. For the non-listed types, the local Chinese data center company typically will organize itself into two companies (or more, depending on its business model) whereby one of the entity holding an IDC license will be 100% owned by local Chinese shareholders or up to 50% by Hong Kong or Macau but this has to be pre-approved by the government ministry.
I have had discussions with foreign data center companies that are exploring options and partnership opportunities with potential local Chinese data center companies. It is a fairly involved process just on business compatibility itself.
Points to consider for a Data Center company
There are some important points to be aware of about the China data center market.
This is not about site selection. China is a large market and the data center market is not a single homogenous market. Beijing, Shanghai, GuangZhou/ShenZhen, ChengDu/ChongQinq and other up and coming regions such as the designated cloud development zones are sub-markets to consider. And government support (lower taxes) or restrictions (such as Beijing city discouraging new data center build unless it is cloud data center with PUE less than 1.5) are points to consider.
Different regional/district/county government will have different incentives to attract new data center development. Beijing and Shanghai are not so welcoming to new data center development while districts in neightbouring provinces like LangFang and KunShan will be more welcoming in terms of possibilities of tax incentives and land allocation.
The major data center hubs in China are high competitive. The dominant telco carriers’ data centers generally are doing well while China Telecom or China Unicom fair better in Shanghai or Beijing respectively and their pricing is used for baseline for the mid to low end of the co-location and hosting business. In general, wholesale co-location data center service segment is relatively new in China, with Range International (LangFang), Cybernaut’s ZhongWei project, and those cloud development zones/parks coming up in various parts of China dominated by the large Chinese state-owned enterprises (e.g. AtHub at ZhangBei, China telecom in Inner Mongolia and GuiYang) and potentially Charoya, it is interesting to see if this sort of scale will be a major trend in China.
Network connectivity is very important for a data center. While a wholesale co-location data center service providers and the data center REIT players do not play on the upper layer on the co-location hosting stack, their customers do care that they can easily get the network connectivity that they will need. In this aspect, the right partner will have a fatter sales pipelines and in some cases cost advantages compared to others and this is an area that requires greater scrutiny and analysis.
Why a Local IDC Goes into Partnership with a Foreign Data Center Player
While partnering with a local IDC company is the most common mode of foreign data center companies entering the China data center market, there are some key points that I learned from both sides.
From the Chinese data center companies, they seek partnership from foreign data center companies in terms of three areas:
- Capital injection
- Foreign clients
- Technical know-how
With capital injection and a pipeline of foreign clients, the local Chinese data center company will greatly reduce risk when come to scale and new data center development. The technical know-how is a rich topic in itself as we heard cases of complaints of service level gap and ability to fully appreciate the needs of MNC clients; suffice to say on the surface that this point on technical know-how involves technical design & implementation, and operational knowledge to meet more stringent SLAs and expectations of foreign clients which ties in with point 2 above.
For foreign data center companies that have been established for quite a number of years and have a portfolio of Fortune 500 customers, the consideration for partnership with local data center company can be quite different depending on which layer of the market they focus on. Below are some of the points to consider:
- Financial risk
- Long term strategy
- Local demand
- Access to the IDC license
The financial risk can be capital required, repatriation of profits, profit margin required, ownership/control etc.
The ambition and long term goals of both foreign and local partners have to be roughly aligned. There is no point for a large Chinese state-owned enterprise to go into partnership with a well-known foreign cloud service provider if the local Chinese partner also have a cloud service to offer. However, if the foreign data center company has had the full stack of data center services from cloud service (refer to diagram in earlier part of this post) to telecommunications services and then to pure co-location space leasing, then it will need to cut down its suite of services to pure co-location space leasing. It will also be a problem if the state-owned enterprise is “forced” to list on local bourse while the foreign partner looks to list outside of China. It is better to find out each other’s ambitions early on.
The foreign data center company will want a certain commitment to capacity when considering the investment or a new data center build which can be a sticky point. Last but not least, be it for potential client demand or norm, access to network connectivity via a partner or channel that has IDC license will affect the confidence in the joint venture. If the demand is driven from the foreign data center company’s portfolio of clients, then it is a strong push although there rarely do such case come up because most if not all foreign clients of the foreign data center company would have already been using local data center services in China or Hong Kong, and at most has incremental demand rather than demand for big new capacity.
The issue of IDC license will need to be dealt with in each city that the joint venture plans to build data center, even if the joint venture is will only focus on wholesale co-location service as the local authority may only grant land for leasing if it comes under the cloud data center development headline as part of the local government KPI (cloud data center is required to be licensed under the Chinese government regulations).
Surprisingly there are plenty of local candidates for partner. It is however fairly cumbersome to find out their strengths and ambitions. The previous posts on local Chinese data center companies is one source, another would be list of large well-funded state-owned enterprises that has sizable internal demand and wants to build on it to move into the smart city sector or cloud service sector as the prior requires strong local knowledge and relationship while the second is a controlled and licensed sector.
There are some successful examples of partnerships between local Chinese and foreign data center companies, such as NTT with SDS, KDDi with SDS, KDDi with SINNet. Cloud companies Amazon with SINNet and Microsoft with 21Vianet for its Azure services. There are some examples of partnership by foreign data center companies with local government-owned companies which meant they are tied to each local government’s jurisdiction such as the case of CloudSite joint-venture with Tianjin economic zone’s subsidiary.
The China Data Center market is not the forbidden city and even the forbidden cities has doors for entering and exiting the palace. There has been proven cases of foreign data center companies that participate in China and it is more than a handful of foreign companies. China companies like Alibaba, Tencent, 21ViaNet have came out of China have started building data centers in Singapore, Middle East, Europe and US.
While Hong Kong has been considered the gateway for data and network for China, data center companies have thrives in the China data center market as the internal demand is greater than China network traffic that goes through Hong Kong. The China Data Center market is part of the global data center market that should be looked at in depth and a strategic market in Asia Pacific region.
- 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