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Amazon prepares to battle with Alibaba in Asia's cloud

Two giants rush to build data centers to cover China and Southeast Asia

Amazon Web Services recently launched in Hong Kong, challenging Alibaba Cloud's dominance in the region    ¬© Reuters

PALO ALTO, U.S. -- Amazon is betting it can expand its cloud computing operations in China, despite announcing just last month that it will shutter its online retail operations there.

The U.S. company announced on April 25 that its cloud computing arm, Amazon Web Services, had entered its eighth Asia-Pacific market with the opening of a cluster of data centers in Hong Kong.

"The business in China is going really well and we continue to see strong growth there," Amazon CFO Brian Olsavsky said in an earnings call on the same day. "Launching the Hong Kong region gets us to a footprint of 19 cities in China. So it continues to be a really good story for us."

But while Amazon is upbeat about demand for cloud services in the region, it faces a familiar rival: Alibaba Group Holding, whose grip on China's e-commerce market Amazon was unable to challenge.

The American e-commerce giant hopes the new operation in Hong Kong will give the company a leg up in the battle for the region's cloud services market. It is also eyeing expansion elsewhere in Asia and is confident it has a head start on rivals.

"At AWS, we keep a close eye on our competitors, but we are obsessed with our customers," Alex Yung, managing director of AWS Greater China, said in an email to the Nikkei Asian Review. "Many large technology vendors are now trying to build a replica of what AWS has been building for the last decade."

Amazon has good reasons to pay attention to emerging competitors. The cloud services market has become far more crowded than it was when AWS first launched in 2006. At that time, Microsoft was the only big player.

AWS is still the leader in the Infrastructure as a Service, or IaaS, cloud market, with a 51.8% global share in 2018, according to global research and advisory company Gartner. This is more than double the next four largest providers combined. Alibaba Cloud came the third in the report, with a 4.9% market share, up from 3.4% the year prior.

But it is a different story in Asia, where Alibaba Cloud commands 19.6% of the market, compared to 11% for AWS and 8% for Microsoft, according to Gartner.

"Amazon, Microsoft, and Alibaba all have different playbooks, but Alibaba is playing the home game in China, which gives them advantages Amazon or Microsoft would never have," said Evan Zeng, senior research director at Gartner.

One of the biggest advantages of being the "home team" comes from government regulations that have created barriers to foreign players entering the market.

In 2017, Beijing enacted a series of cybersecurity laws requiring foreign companies to store data locally and outsource the operation of facilities to local Chinese companies. Thus, AWS and other foreign cloud service providers have been forced to team up with local partners, and can only provide their cloud computing services in China by licensing their technologies to these partners.

AWS has been working with two local providers since then, one in Beijing and one in Ningxia Province. The company just announced last month that it will open three more data centers in China. "AWS fully complies with all rules and regulations wherever it operates, and Hong Kong and mainland China are no different," Yung said.

"The internet regulation is not a new barrier for Amazon," said Gartner's Zeng. "They have been adapting and already made some progress in the past few years." He added, however, that complying with these regulations means Amazon is essentially providing "technology, guidance and expertise" to its licensed partners without having full control of its operation in China.

And yet regulations may not be the biggest advantage Alibaba Cloud has in its home market. Rather it is the business ecosystem that Alibaba has created over the years. The Chinese e-commerce titan has invested in over 157 companies in China, totaling over $12.8 billion, according to CrunchBase.

Those investments have helped build a business empire that spans industries and geographies and includes companies at all stages of growth. The goal of this empire, according to Alibaba's mission page, is "enabling small enterprises to leverage innovation and technology to grow." But it has also created a sizable client base for Alibaba Cloud, a preferred choice for Chinese companies, especially those in which Alibaba has invested.

AWS, by contrast, will have an edge in winning over foreign companies that operate in China and have already been using AWS's products in offices outside the country, according to Zeng.

According to market intelligence research firm IDC, China will become the second-largest cloud service market in 2019, worth $10.5 billion. The country will also become the fastest-growing market, with a projected 44.9% annual growth rate in the next five years. Amazon said the Greater China region is already one of AWS's largest business geographies and is one of the greatest long-term opportunities for the company.

"AWS can't afford giving up the China market just because of Alibaba's dominance there, but I don't see them catching up with Alibaba in China anytime soon," Zeng said.

While Alibaba is the home team in China, everyone is the visiting player when entering the Southeast Asian market, a region Amazon certainly has high hopes for.

Southeast Asia's cloud services market expected to generate $40.32 billion in revenue by 2025, driven by increasing demand for cloud computing among emerging small and midsize business, according to a research by India-based Adroit Market Research.

But as governments across the region move toward stricter governance on cloud services, many have enacted regulations similar to those in China requiring cloud services operators to store data in local data centers.

Indonesia, for example, ruled that the country's financial data should be housed within Indonesia. AWS announced that it is planning to launch multiple data centers in Jakarta, where Alibaba Cloud already has two.

"So far in Southeast Asia, we have opened offices in Singapore, Malaysia, Thailand, Philippines, Vietnam, and Indonesia, and we're not close to being done expanding," Yung said.

Alibaba Cloud currently has a more extensive network in the Asia-Pacific region than AWS, with 15 data centers outside mainland China, covering Hong Kong, Singapore, Australia, Malaysia, Indonesia, India, and Japan markets. It is also the only cloud provider that has set up local data centers in Indonesia and Malaysia.

"With our extensive availability zones in the Asia Pacific, robust local partner ecosystem, diverse product portfolio, and advanced data intelligence offerings, we are confident about our continued growth as the number one cloud provider in APAC," an Alibaba Cloud spokesperson said.

With Amazon and Alibaba accelerating their expansion in the region, Zeng said it has created a beneficial competitive environment that is driving companies to lower their prices for their products and services.

But at least for now, price alone will not be the deciding factor in who wins in Southeast Asia.

"This is still a more regulatory driven than price driven market," Zeng said.

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