By Ma Peng
Released by Alibaba Cloud Research Center
In 2020, the pandemic impacted the global economy and society severely, but it also highlighted the importance of the digital economy for businesses to stay relevant. Last year, China’s digital economy reached 39.2 trillion yuan, achieving a high-speed growth of 9.7%, which is 3.2 times that of the GDP growth rate in the same period. The proportion of digital economy in China's GDP increased by 2.4% compared to the previous year, which has reached 38.6%.
Cloud computing is an important part of digital technology, and has become the key pillar for digital economy. In 2019, the size of the public cloud market of the world’s top 35 economies was strongly correlated to their digital economic volume (see Figure 1). However, as the second largest economy, China contributed 16.3% of the global GDP (World Bank, data in 2019), while the public cloud market only accounted for 5.1% of global GDP (IDC, data in 2019). This data shows a significant mismatch between the public cloud market and the GDP, which may restrict the growth of digital economy in China.
Based on this observation, this article compares the development status of the cloud computing market in China and the United States, analyzes the reasons for the differences between the cloud computing market in both regions, and discusses the development prospects of cloud computing market in China.
Figure 1: Public cloud market size and digital economic volume of world's 35 major economies in 2019
Note: Market size data of public cloud comes from IDC, and economic volume data of digital economy is from China Academy of Information and Communications Technology (CAICT). All data has been processed through logarithmic computation.
Compared with the United States, China’s cloud computing market size is small, and the proportion of public cloud and SaaS are less. The size of China’s public cloud market is only 10.8% of that of the United States.
According to data from IDC, in 2020, public cloud market size in China was USD 19.38 billion, which was only equivalent to 10.8% of that of the United States in the same year (see Figure 2). However, in the past five years, the compound annual growth rate of China's public cloud market has reached 61.1%, which is significantly higher than that of 23.8% in the United States.
Figure 2: Comparison of the size and growth rate of public cloud market between China and the United States from 2016 to 2020 (Source: IDC)
The market size of public cloud and private cloud in China are similar, while public cloud in the United States is mainstream
According to data from CAICT, the overall market size of China’s cloud computing was 133.45 billion yuan in 2019, of which the public cloud market size exceeded the private cloud for the first time, the ratio of the two was 1.07:1. Due to the unclear market boundary of private cloud, most market research institutions have not disclosed the data about private cloud market size in the United States. Here, the ratio of deployment overhead between private cloud and public cloud is used to reflect the relative size of two market sizes. The ratio of the United States was 28.7% (as a contrast, the ratio of China was 70.3%) in 2019, that is, the size of private cloud market was significantly smaller than that of public cloud which was the preferred choice for users in the United States.
Public cloud IaaS accounts for more than 60% in China, while public cloud SaaS accounts for nearly 70% in the United States
In 2020, public cloud market size of IaaS, PaaS and SaaS in China accounted for 61.6%, 12.9% and 25.5% respectively. The proportion of IaaS was the highest in the three, which was from 49.6% in 2016 % up to 61.6% in 2020, the proportion of IaaS has increased in the past 5 years (See Figure 3). In the same year, public cloud market size of IaaS, PaaS and SaaS in the United States were 16.6%, 16.4% and 67.1% respectively. SaaS accounted for the highest proportion in the three, but the proportion has decreased continuously in the past 5 years, which was from 79.3% in 2016 drop to 67.1% in 2020.
Figure 3: Changes in proportions of IaaS, PaaS, and SaaS in the Chinese and United States public cloud markets from 2016 to 2020 (Source: IDC)
Concept awareness, labor costs, industrial structure, supply capacity are the key factors that cause the differences on cloud computing market between China and the United States. Chinese enterprises have a short life cycle and low priority for investment in digital technology.
According to Fortune, in the United States, the average lifespan of small and medium enterprises is less than 7 years, and the average lifespan of large enterprises is less than 40 years. While the average lifespan of small and medium enterprises is only 2.5 years, and the average lifespan of group enterprises is only 7 to 8 years in China. About 100,000 companies close down every year in the United States, while 1 million companies close down every year in China. The survival pressure on Chinese enterprises, especially small and medium enterprises, is much higher than that of enterprises in the United States, which makes Chinese enterprises more inclined to invest in places where the return effect is direct and significant, such as the expansion of marketing channels.
For digitization, its return on investment has a long cycle and is not significant, so that it is usually not a priority or even a must-option for Chinese enterprises.
Due to low labor costs, Chinese enterprises tend to use manual workforce rather than technical means to solve problems
According to Bureau of Labor Statistics, in 2018, the per capita income of residents in the United States was 36,000 dollars, of which the annual income of “non-farm payrolls” was about 50,000 dollars. In contrast, in 2018, although China’s per capita disposable income has been increasing in recent years, the per capita disposable income of residents was only 28,228 yuan (about 4,266 dollars), the per capita disposable income of urban residents was only 39,251 yuan (about 5,931 dollars), and China’s labor cost was only about 12% of that of the United States.
However, the costs of digital products and services in China and the United States were almost the same. Under the circumstances, Chinese enterprises are more inclined to use labor instead of information technology to meet business needs - compared with information business systems, use of manpower is inefficient, but labor cost is low, and resource is easy to reuse in the short term.
Digitalization level in the service industry is higher than that of other industries in the United States, and the proportion of service industry is higher than that of China
In both China and the world, development of digitization is rising and flourishing in individual users. Correspondingly, in commercial institutions, the industries and businesses closer to individual users have higher digital level, that is, in national economy, digital level and cloud usage of tertiary industry are usually higher than that of the secondary and primary industry. Research by CAICT also supports this result: In 2019, global digital economic penetration rate of agriculture, industry and service industries were 7.5%, 23.5%, and 39.4% respectively.
However, there are marked differences in the current industrial structure between China and the United States: In 2020, the added value of the primary, secondary and tertiary industries in the United States accounted for 0.8%, 17.7% and 81.5% of GDP in turn, while the proportion of China in the same year were 7.7%, 37.8% and 54.5% respectively (see Figure 4). The proportion of service industry with the highest digital level and the most cloud usage in the United States was significantly higher than that of China.
Figure 4: Comparison of three industrial structures of national economy between China and the United States in 2020 (Source: National Bureau of Statistics of China and Bureau of Economic Analysis of the United States)
China’s information infrastructure is imperfect. Cloud and informatization are developing simultaneously
Informatization is the foundation and pre-development stage of digitization. Through large-scale investment in information technology in the 1980s and 1990s, the United States has laid a solid foundation for Informatization: Data show that the major companies in the United States have achieved office automation in 1993. In the late 1990s, nearly 80% of the world’s top 500 enterprises have used ERP (Enterprise Resource Planning) software.
Before the cloud era, the United States has completed the construction and popularization of information technology infrastructure. When cloud computing began to rise in China in 2014, the information technology infrastructure of whole society was still under construction, which made China’s information technology infrastructure investment and cloud computing develop simultaneously in recent years, and IaaS has long dominated the China’s cloud computing market.
Gap in market supply capacity is significant, and China’s industrial ecology is still budding
Imperfect industrial chain and insufficient supply capacity are also the important reasons for the small size of China’s cloud computing market and the low proportion of SaaS. In China’s cloud computing industry, the core hardware such as server CPU and memory, and the basic software such as database and middleware, which are highly dependent on foreign products. For example, market share of Intel CPU chips accounts for more than 97% of China’s server market.
The supply of common basic products can be met through global supply, while the supply of business application is still in exploration: China has rich industrial categories and many personalized demands, while foreign SaaS products can only meet a few needs, and most local SaaS manufacturers lack experience in software standardization. The overall SaaS market is still in the initial stage of target user selection, product polishing and business model verification. So, SaaS supply cannot meet the market demand in both quality and quantity.
Cloud computing leads to reshape the ecology of digital industry. Public cloud becomes the core infrastructure of digital economy. The size of cloud computing market continues to grow, driving a significant increase in China’s information technology market expenditure.
Increase in industrial penetration rate of digital economy expands cloud computing market space
Research from CAICT show that the digital economic penetration rate of China’s primary, secondary and tertiary industries was 8.2%, 19.5% and 37.8% respectively in 2019. Except that the digital economic penetration rate of the primary industry is slightly higher than the global average level (7.5%), the secondary and tertiary industries are lower than the global average level (23.5% and 39.4%). The digital economic penetration rate of the three industries is all significantly lower than that of the developed countries represented by the United States (13.3% for the primary industry, 33.0% for the secondary industry and 46.7% for the tertiary industry), as shown in Figure 5.
In the next few years, it is expected that the proportion of China’s three industrial structures will be basically stable, and the proportion of service industry will increase slightly. On this basis, digital level of the three industries will be comprehensively improved, and cloud computing, as the infrastructure of digital economy, will be widely used.
Figure 5: Comparison of penetration rate of digital economy in three industries among China, the world and developed countries in 2019 (Source: CAICT)
New infrastructure brings unprecedented opportunities for cloud computing
At present, the acceleration of China's “New Infrastructure” has helped upgrade industries and cultivate new momentum for the economy. Cloud computing is an important part of new infrastructure. It also provides benefits such as resource management integration, technology environment deployment, network connection optimization, and elastic scheduling of computing capabilities. It has become the key support for value realization and utility improvement of new infrastructure.
According to China Center for Information Industry Development, direct investment in new infrastructure will reach about 10 trillion yuan by 2025, driving the investment to exceed 17 trillion yuan. This trend will continue in the coming years, which will in turn increase the scale of investment in cloud computing in the future.
Fast-growing data volume supports the application space of cloud computing
According to IDC research, in 2020, data volume generated by China reached 13.1 ZB, accounting for 21.4% of global data. In the next five years, China’s data volume will continue to grow rapidly, with a compound annual growth rate of 24.4%, exceeding the global compound annual growth rate of 22.9%, which is one of the fastest growing fields in the world (see Figure 6). Data needs to be processed through computing and storage in information technology infrastructure before it can play its role as a production factor, and cloud computing has become the mainstream model of information technology infrastructure.
In 2019, China’s cloud infrastructure investment exceeded the traditional one for the first time. Fast-growing data volume will promote the development of China’s cloud computing market.
Figure 6: Forecast of China’s data volume and growth rate from 2020 to 2025 (Source: IDC)
In the next few years, China’s cloud computing market will develop rapidly and drive China’s information technology market to grow continuously
According to the prediction of CAICT, by 2023, the size of China’s cloud computing market will reach 375.42 billion yuan, which has increased by 1.8 times compared with that of 2019, and the compound growth rate from 2019 to 2023 will be as high as 29.5%. Driven by cloud computing, size of China’s information technology market will continue to grow. It is expected to reach 547.78 billion dollars in 2024, which is an increase of 23.6% compared with that of 2020, as shown in Figure 7.
Figure 7: Forecast of China’s information technology market size and growth rate from 2019 to 2024 (Source: IDC)
Public cloud will serve more than half of China’s digital economy and become a key infrastructure in 2025. Enterprise’s awareness of digitalization is enhanced, and public cloud becomes the best portal for digitization.
Amid the COVID-19 pandemic, the success demonstrated by digital economy has reshaped people’s understanding of digitalization. Digitalization is no longer only an option for enterprises to seek better development, it has become the necessary skill for enterprises to face uncertainty.
When enterprises, especially small and medium enterprises, foster digital capabilities, public cloud has incomparable benefits: Its pay-as-you-go billing method transforms CAPEX (Capital Expenditure) of traditional information technology projects into OPEX (Operating Expense), which effectively reduces the financial pressure on enterprises. Compared with private cloud, public cloud has the benefits such as lower cost, maintenance-free, and better scalability, so it is the best choice for enterprises to quickly obtain digital capabilities with low cost.
Benefits of public cloud emerge as labor cost rises
Compared with the United States, labor cost in China is still low, but it has been rising in recent years, especially since 2012, labor population in China has declined year after year. It is predicted that labor cost in China will continue to rise in the future. Meanwhile, due to Moore’s law and marginal utility, digital products and solutions face higher performance but lower prices. With the shift, enterprises will re-examine the labor force and digital technology, and incline to solve problems through digital technology, especially the public cloud with cost-effective and rich application ecology.
Large enterprises focus on individual user services, and deploy businesses on public cloud
When large enterprises carry out digital transformation, they usually build a unified private cloud platform to open up business systems to improve process efficiency. Today, the major users of private cloud, such as finance, are increasingly emphasizing the ability to serve public. The coverage level and service ability of public cloud to individual users cannot be replaced by private cloud. In the future, large enterprises will deploy more and more individual businesses on public cloud.
With the effect of above factors, China’s public cloud market will expand quickly
IDC predicts that China’s public cloud market will reach 65.95 billion dollars in 2024. The market size is 3.5 times that of 2020 (see Figure 8). The existence and development of a digital economy depend on hashrate and data, while information technology infrastructure and hardware are the physical units that carry hashrate and data.
In recent years, the proportion of China’s public cloud IaaS in information technology infrastructure hardware overhead has increased year by year, which has reached 25.7% in 2020. IDC expects that the proportion of public Cloud IaaS in information technology infrastructure hardware will reach 45.3% in 2024, as shown in Figure 9. This shows that the growth rate of public Cloud IaaS market size is much higher than that of information technology infrastructure hardware market.
In addition, 40% of public cloud services are provided in form of PaaS or SaaS, and the corresponding hardware resources are not fully carried by IaaS. It can be seen that public clouds will serve more than half of China’s digital economy in 2025 and become a vital digital economic infrastructure.
Figure 8: Size and growth rate of China’s public cloud market from 2020 to 2024 (Source: IDC)
Figure 9: Proportion change forecast of public cloud IaaS in information technology infrastructure hardware from 2019 to 2024 (Source: IDC)
Cloud computing leads a new technological innovation and reshapes the digital industry ecosystem. Cloud computing has become a breakthrough for China to build a new benefit in information technology industry
As the core of new infrastructure, cloud computing is the foundation of new generation digital technologies such as big data and artificial intelligence. Under the new technology system with cloud at the core, China will make full use of the opportunities brought by technological upgrading, rapidly narrowing the gap with information technology industry in developed countries. IDC in 2020 released that three of the top seven global public cloud IaaS market service providers are from China.
With the cloud’s definition power for upstream and downstream products in the industry chain, China’s digital industry is expected to be bigger and stronger
Cloud computing can downward define the evolution of core hardware, such as server, storage and network, and upward re-plan the development path of basic software, such as operating system, database, middleware and big data platform. In terms of core hardware, China’s cloud computing industry has already taken shape and can provide room for server CPU: With the characteristics of strong fault tolerance of distributed deployment, a single point hardware failure will not affect overall performance, and cloud computing has naturally become the best testing ground and incubator for hardware products.
Cloud localization has been expanded from basic information resources to digital operating systems. SaaS has become a focus for manufacturers
For a long time, cloud computing has been regarded as a type of inclusive and flexible basic resources. With the continuous digital transformation of society, cloud-based resources cannot meet the needs of enterprises that expect more comprehensive cloud in business application system.
Cloud computing is also regarded as a social innovation platform that can provide “digital base and digital operating system”. The base solves the problem of hashrate support, while the operating system provides enterprises with rich application services, and helps enterprises achieve business upgrade, operation efficiency improvement, experience optimization and organization upgrade. Correspondingly, the focus of cloud computing moved upward, and SaaS became the key point for manufacturers: Traditional software manufacturers continue to push forward the transformation by taking cloud as the core strategy.
The number of SaaS startup companies is growing rapidly. Internet manufacturers take collaborative office products such as DingTalk as a platform to provide industry solutions for users by building an ecological environment. In the next few years, ecology of China’s SaaS market will take shape and service capability will be rapidly improved.
Disclaimer: The views expressed herein are for reference only and don't necessarily represent the official views of Alibaba Cloud.
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