Don’t make the mistake of looking at China’s past growth in cloud IaaS as an indication for the future. The opportunity lies dormant within the near-term shift in trajectory this service will have in the rapidly growing Chinese economy.
Over the past few years, China’s IaaS market has bared little resemblance to the United States, as the U.S. dominates the global IaaS cloud market size of $40 billion. Of this, we see China is at 1/40thof the global IaaS cloud market totaling 1.2 billion in 2018. Due to reasons below, I foresee China’s market share of cloud IaaS undergoing an important increase in the next 1-3 years.
The goal of this analysis is to look closer at cloud infrastructure-as-a-service for the geographic region of China, and to analyze the forward growth of the leading cloud provider in China, Alibaba. Being a secular revenue segment, stock prices may be affected by a market pullback, but this revenue segment will continue to report strong growth despite macro conditions.
Note: I’ve written extensively about cloud infrastructure-as-a-service and you can access the analysis under my FATrader profile.
From Zero to One-Hundred: China’s AI Push
In 2017, China published a roadmap on how it seeks to become a global powerhouse in AI. According to the report, which is titled, “Next Generation Artificial Intelligence Development Plan,” the domestic AI market will be worth a total of $150 billion. Today, China’s AI market is worth $6.2 billion.
Artificial intelligence and machine learning require private cloud and public cloud infrastructure-as-a-service (or a hybrid mix with on-premise servers) as storing data in separate silos weakens AI and ML capabilities, reduces training performance and lowers accuracy. Artificial intelligence and machine learning require speed with most AI solutions split between 40/60 with private/public cloud or 60/40 if you’re a regulated industry.
To give you an example of how important cloud infrastructure is to scale, the United States CIA describes moving to the cloud in 2013 as “the best decision we’ve ever made.” For instance, what used to take 180 days to provision a server, improved to 60 days and now takes a few minutes.
The chart above does not show the growth beyond 2020, which is where the runaway growth should occur. China is revving up from zero to one-hundred by having sizeable and sudden ambitions in artificial intelligence and machine learning that is not yet reflected in the annual $1 billion cloud IaaS market. At the roughly fifty percent year-over-year growth that this chart depicts, the AI market will reach approximately $60 billion by 2023-2024, which is in line with China’s Development Plan. This is also in line with the global market forecast which puts the AI market at $190 billion by 2025.
When looking at total equity funding around the world, China exceeds the United States, claiming 48 percent of all AI equity investments compared to the U.S. at 38 percent and the rest of the world at 13 percent . China’s AI investments are up nearly 4x since 2016 when it stood at 11.3 percent. The overall Chinese AI industry is growing at a rate of 67 percent and the country is now producing more AI patents than the United States.
It’s no surprise that China has been running a massive trade surplus (especially last year), and this requires robust manufacturing infrastructure. There are millions of manufacturers in China that will benefit from robotics and automation as machines provide an increase in GMROI (gross margin return on investment). This will have a substantial impact on cloud IaaS requirements due to IoT automation, which is machines communicating with machines at the speed of humans. Next week, I'll break down more specifics on Alibaba Cloud.
Note: The United States is still the leader in total number of AI startups and has a much higher quantity than China.