The current market of cloud service in China is roughly dominated by several prominent companies, such as Alibaba, Tencent, Huawei, Baidu, JD.com, and others. Each of these companies has its own uniqueness. The B-end business still has much space to fill. Therefore, we believe that when the cloud service penetrates more sub-sectors, more opportunities are created, especially for the cloud service providers ranked lower to catch up. Whether these giant companies could maintain their advantages has been a frequently asked question. We analyze that in the future, in terms of the three giant cloud services, Alibaba may maintain its leading status due to its clear business plan and Matthew effect. And JD.com, as a company entered later comparably, has a vast potential to grow in the future.
A seemingly crowded but empty sector
We believe that the cloud service market of China is the next trend in the society. As C-end has been developed sufficiently and crowdedly, many companies are looking into B-end to open up a new growth space. The general well-known public cloud service could be split into three major parts: IaaS (Infrastructure as a Service), PaaS (Platform as a Service), and SaaS (Software as a Service). Infrastructure as a service is the most basic but essential part of cloud services, such as cloud computing, cloud storage, and CDN acceleration. The value of PaaS is that it can provide the basic functional modules required for software development, especially these non-core but generally required modules. SaaS is mainly a service for enterprises, and is often used by employees. Cloud services have extremely high market value, helping other companies and saving their own company. Internally speaking, we believe that self-built cloud services can reduce companies’ dependence on cloud service providers, and secure companies’ local and users’ data. Companies can also reduce costs, strengthen uniqueness, increase efficiency, and find new growth tracks.
Around the world, there are many successful precedents. For example, Amazon’s AWS has grown into the largest public cloud globally. It accounted for 38.9% of the IaaS market worldwide in 2021, according to Gartner. This section is also the largest profit source for Amazon. Microsoft is the second largest. And it accounted for 21.1% of the IaaS market worldwide in 2021, according to Gartner. Google’s GCP started late compared with these two companies. And it is catching up, and competing for the third place of public cloud service with Alibaba.
In China, even though the idea of cloud service is relatively new when comparing with the world, it has been a hot topic pursued by the public and many high-tech giants. A huge number of companies have been transforming their businesses or creating a new part of businesses of cloud service. Therefore, the market seems to be crowded with different kinds of companies. From our perspective, for these high-tech giants who are successful on the C-end, they have the natural advantages of developing their B-end innovation, as these techniques could be similar. And they also have advantages of cost and resources brought by the economics of scale. For example, Alibaba has rich cloud computing application scenarios and rich resources. By taking advantage of them, Alibaba can save hardware development costs and negotiate prices with customers. Alibaba, Tencent, Huawei, and other mainstream cloud vendors already have full-stack capabilities, including public, private, and hybrid clouds.
Meanwhile, we believe that the natural advantages of these high-tech giants make the cloud-service market hard to enter. Because these high-tech giants have better and easier access to labor and parts, similar to the Matthew effect. However, if we break down into details of cloud service, small companies could also survive and take the lead if they are specialized in one part. According to Canalys, the cloud service market in China will reach USD 85 billion by 2026, with a five-year compound annual growth rate of 25%. This indicates that the cloud service market of China is further expanding, and rooms inside of it have much to fill. In our opinion, even though many companies have joined this market, the penetration rate of the current market is still low. Each company has its own specialization in its particular part of the market. In later paragraphs, we will go into more details about companies and discuss whether one might succeed in the future.
Could Alibaba Cloud maintain its first place in this competition?
We believe that Alibaba Cloud has taken the first place in the cloud service market in China. Alibaba accounted for 37% of the cloud market in China in 2021, according to Canalys. According to Gartner, Alibaba’s IaaS accounted for 9.5% of the cloud market worldwide in 2021. According to its annual report for the calendar year 2021, Alibaba Cloud’s operating income was CNY 72.4 billion, up 29% year-over-year. This amount of operating income was comparably multiple times larger than its competitors of China market.
We think that Alibaba Cloud’s financial data indicates a good sign. If we look at its financial report for its fiscal year 2022, which is from April 2021 to March 2022, Alibaba Cloud gained revenue of CNY 100.18 billion in this fiscal year. This marks the first time Alibaba Cloud has achieved an annual profit since its establishment 13 years ago. This also implies the first time gaining over CNY 100 billion. Breaking the revenue stream, the revenue from Alibaba internal is roughly CNY 26 billion, and the revenue from external services is about CNY 75 billion. Under adjusted EBITA, the operating profit reached CNY 1.15 billion. We believe that Alibaba Cloud has done a great job this fiscal year, especially turning losses into profits. In the fiscal year 2021, Alibaba Cloud had a loss of CNY 2.25 billion.
From our perspective, Alibaba Cloud’s growth path is clear and well-directed. Talking about the origin of Alibaba Cloud, it started to serve as an e-commerce company with customers mainly in the retail field. In order to master the core technology, Alibaba decided to move on the development of cloud service. At Double Eleven Shopping Festival in 2013, Alibaba Cloud was officially launched. At that time, 75% of the orders were processed, with no order missing. In 2014, Alibaba Cloud had more than 1.4 million customers. In 2016, it ranked first place of the domestic market and ranked third in the world. The current Alibaba Cloud has established a complete cloud structure from the underlying data center to the upper-level product solutions. Alibaba Cloud enables the integration of software and hardware, such as self-developed chips, servers, computing, storage, communications, and networks. In 2019, the idea of “not focusing on SaaS itself and letting other business partners investigate better SaaS” saved more time, money, and labor for Alibaba to focus on other things. In 2020, the launch of the “Cloud Nail Integration” strategy and the “Shadowless” cloud computer indicated Alibaba Cloud’s a higher stage success. “Cloud Nail Integration” combines Alibaba Cloud and DingTalk to provide a flexible and open SaaS platform for small and medium-sized companies. The number of current organizations in DingTalk has over 21 million. In 2022, Alibaba launched its CIPU (Cloud Infrastructure Processing Unit), a control and acceleration center of cloud computing that substitutes the existence of the CPU. Different from the DPU and IPU chips of NVIDIA and Intel, the innovation of CIPU amplifies the technical advantages and works as a super-computer. CIPU deeply integrated with Alibaba Feitian Cloud operating system to combine the assistance of computing resource scheduling and the control of the overall situation. We think the development of CIPU has marked Alibaba Cloud’s a higher stage and a new lead in this field.
However, we consider that Alibaba Cloud has encountered difficulties on its way to grow. Firstly, in its fiscal Q4 2022, Alibaba Cloud’s revenue was down 12% year-over-year. This is the lowest rate of itself over the past years. When analyzing its past data, we believe Alibaba Cloud is in the stage of respite. Second, Alibaba Cloud faced less cooperation from its top customers. For example, as ByteDance decided to develop its cloud business independently in 2021, ByteDance turned its cooperative relationship into competition. Third, due to COVID-19, Alibaba Cloud was influenced by itself and its business partners. COVID-19 caused the depression of macro economy of China. The lockdown of several regions also caused the slow-down of business activities and project deliveries. Fourth, Alibaba Cloud is restricted by the government. Alibaba Cloud has access to the local users’ privacy, which could potentially be a threat to data securities. And some rumors also treated Alibaba Cloud as the monopoly in this market. Fifth, though Alibaba Cloud sits as the first place in China’s cloud service market, its several segments were surpassed by other competitors. Sixth, the year-over-year increase rate of Alibaba Cloud’s operating income was decreasing relatively, as listed in the graph below. This also indicates the slow growth of Alibaba Cloud.
In our opinion, Alibaba Cloud has to develop other new techniques, in order to maintain its leading edge. Alibaba Cloud has decided their next stage of the business plan to be “Back to Basic.” Compared with other competitors in this market, Alibaba Cloud definitely has its absolute advantage in development and innovation. Alibaba Cloud also can change its direction quickly, by following its users’ needs and the current trend. We believe that if it could develop new products and redefine the cloud or not, Alibaba Cloud might be able to keep its first place in existence.