There’s a stark difference between the cloud market in the US and China. 

Amazon Web Services (AWS), a subsidiary of Amazon providing on-demand cloud computing platform, has grown revenues from $200 million to $43.2 billion in eight years. The rapid rise owes much to the software-as-a-service (SaaS) model, which saw enterprises shift to the cloud to reduce their up-front costs for new software. Signing up for new services at a subscription level rather than buying on-premise licenses converts capex to opex and lets companies access new functionality without large up-front payments. 

In China, companies are accustomed to paying much less (or nothing) for their software. Businesses spend less on IT as a proportion of GDP compared with large economies with high levels of cloud adoption.

According to analysis by Bain & Company, every dollar spent on hardware infrastructure in the US supports more than three dollars of software spending, while a dollar spent on hardware in China generates only about 50 cents worth of software spending. That’s why China’s cloud market has developed more slowly than in the US.

However, Ram Parameswaran, CIO of Octahedron Capital, sees China’s cloud growth accelerating as companies increase the use of online business tools in the aftermath of the coronavirus pandemic. The government is also actively pushing companies into digital business models by shifting their IT systems into the cloud. 

Cloud services spend reached a record $4.3 billion in the second quarter, growing 70 percent year-on-year. China accounts for 12.4 percent of global cloud spending, making it the second largest market. 

Alibaba Cloud, the world’s third-largest cloud provider behind Amazon and Microsoft, has a leading 40 percent share of China’s cloud market and plans to invest $28 billion over the next three years to enhance its cloud software and hardware. 

The subsidiary of Alibaba Group is annualizing $7 billion in revenues today and Parameswaran expects it to increase to $35 billion over the next 10 years. He is long Alibaba Group as a way to play this theme, which he said is “one of the cheapest companies in the world today.”

Source: Company filings, Octahedron estimates