Cloud play in China

The cloud computing market is still relatively nascent in the People’s Republic of China (PRC or China). China has a stronger ecosystem developed to support the cloud computing industry than most other emerging economies. Cloud computing business is an inevitable result when the need for the development of electronic information and technology has reached the threshold level. Cloud players in China are also playing visible roles that have potential to shape the global cloud standards. Companies there are launching various novel and revolutionary products and services, which have effectively transformed business models and processes in China. It is too, the result of vastly increased information volume; repeated use of computing resources, and the popularisation of broadband internet.

On 25 November 2016, the Ministry of Industry and Information Technology (MIIT), China’s telecommunications and Internet regulator, issued a draft Circular on Regulating Business Activities in the Cloud computing Market for public comment.  The stated aims of the draft circular are to improve the cloud computing market environment and further regulate business activities in this sector. The period for public comments on the draft ended on 24 December 2016.

According to reliable sources, China’s cloud computing market was worth $1.5 billion in 2013 and is expected to go up to $20 billion in 2020 with a phenomenal growth rate of over 40 per cent. Its three public telecommunication operators, China Telecom, China Unicom and China Mobile, announced plans to invest up to $50 billion in data centers in Chengdu, the capital of Sichuan province, to create a cloud hub. The country has also established cloud centers in Jinan, Shenzhen and Changsha.

Some of the key legal issues contained in the Draft Circular are:

1) Proposes standards for the protection of personal information and network security.

2) Licencing requirements, and approved methods for domestic/foreign collaborations. The draft circular clearly states that cloud services do indeed refer to the Internet Resource Collaboration (IRC) services subcategory under the category of Internet data centre (IDC) services, a Category One Value Added Telecommunications Services (VATS) under the 2015 Catalogue.

3) Partnering with the local company in PRC. If any foreign company wants to enter and do business in China in the field of cloud computing then they have to tie up with a local company in China.

Prior research indicates that factors such as consumer preferences, income, availability and costs of input, infrastructures, trade policy and other types of government regulations, technological economies of scope, export orientation of the firms, and market size affect the development of an industry. Of course the new cyber security law that has been passed in China is tough and harsh on foreign companies. The new law is designed to strengthen the local networks against hackers and other cyber threats. The law affects both the domestic and foreign firms operating on the Chinese mainland and covers a wide range of activity relating to the use of the internet and information communications technologies. Due to data security laws, the government wants to store data inside China especially for “critical areas”.

So literally the new law covers all the industries across various business lines. Multinational companies usually depend and rely on cross-border flow of business data. Hence, the new law is very tough on foreign and other multi-national companies operating out of China.

The other business restriction that is faced in China are foreign ownership restrictions on cloud computing. These restrictions are similar to those as imposed by Middle East countries. However, foreign companies have managed to circumvent these restriction by sponsorship or creating a partnership arrangements with local Chinese companies. But it appears, that the Chinese government may no longer be tolerant to such operations on its soil. It may want such companies to close down or migrate onto a local partner owned infrastructure.

Obviously, these rules are framed with local Chinese companies in mind. These laws will favour local hardware firms like Lenova and Huawei and local cloud computing companies like Alibaba and Tancent. However, many foreign companies believe that the new rules are flawed because they do not encourage cross-border cooperation and business. The businesses that operate in China are dependent on these local companies which have very favourable contracts. Hence, there is a high risk that these local Chinese companies may terminate the contracts at their will if the laws become unfavourable to them at any point of time in future. It is therefore advised that these local businesses team up or partner with multinational companies to further their business interests.

 (The author is the global head of legal in a major IT company)