China's cloud market is changing and creating headwinds for leading platforms
We still believe China's cloud market can return to a 32% CAGR growth in 2022-26, after a slowdown in recent quarters due to macroeconomic and COVID-19 related issues. China's IT spending in 2021 was 3.0% of GDP and cloud spending was 6.8% of total IT in 2020, both about one-third the rates of the US. However, the shift in spending from internet companies to other verticals, the shift from public cloud to private and hybrid, and recent regulatory concerns are creating new beneficiaries, while current market leaders, come under more pressure.
Customers want private cloud and partners to help build the infrastructure
We believe the majority of cloud spending for the next few years would still come from Infrastructure as a Service (IaaS) projects, as traditional enterprises and government entities digitalize and catch up with tech companies, based on our recent expert checks, company commentary, and insights from UBS telecom and hardware analysts. These incremental budgets often carry low to no margins, especially initially, for cloud providers. We see the three major telcos being more aggressive in recent quarters to win this business, while at the same time internet companies are trying to control costs and improve margins.
The SaaS opportunity is still at an early stage
China's Software as a Service (SaaS) market is still nascent, accounting for 1.3% of China IT spending in 2020, compared with 5.4% in the US, due to a less mature IT foundation and low digitalization. While it has been a long time coming, we believe SaaS can hit an inflection point in the next few years, as enterprises demand operating efficiency and turn to technological solutions as labour costs rise.
