China’s tipping point

Everyone wants to do business with China, it seems, but challenges are still holding back some companies wanting to benefit from growing data center demand

7 February 2013 by Penny Jones - DatacenterDynamics

China’s tipping point
China - moving forward but still facing some data center challenges

It is becoming increasingly difficult for anyone in business to ignore China. The world’s second-largest economy, which boasts a population of more than 1.3bn, holds promise for global players wanting to go that extra mile and overcome the hurdles that come with doing business in the People’s Republic. It also holds promise for Chinese nationals with a good and tech-savvy idea, with China’s youth – similar to those of other BRIC nations – showing an enormous appetite for modern technology.

But when Savvis realized it had to meet rising demand from international clients and provide a service for China, it bypassed mainland China and instead chose to operate out of the Special Administrative Region of Hong Kong. It now provides virtual hosting services into China using low-latency connections through its own facilities in Hong Kong – an arrangement, it says, that allows it to overcome issues around regulation, data protection and storage, physical security and network connectivity.

This is not to say Savvis will not enter China one day. Savvis Asia Managing Director Mark Smith says he hopes the company will be ready to announce a data center presence in the country within the next 12 to 18 months. “I certainly hope we’ll be able to announce a plan for China in 2013,” Smith says. Demand is rising for services in China, and not just from multinational companies wanting to make the most of a growing economy, he explains.

“The new Hong Kong platform is not only targeting those enterprises looking to do business in China, it is also targeting Chinese companies wanting to do business internationally. The first step for Chinese companies wanting to go global starts here in Hong Kong, especially if you are in financial services, because China doesn’t always have the IT resources needed to support them,” Smith says. In a number of areas, from securing intellectual property to ensuring full control over your data, Hong Kong’s laws are much more favourable, according to Smith. Even latency can be a concern in China, and upload times for end users can be slow.

Savvis says it believes it gets much faster connectivity by hosting out of Hong Kong, with its records showing slow connections between Shanghai and Beijing due to congestion. Add to this a complex network topography, which can mean that ensuring connectivity levels can be a nightmare, and it is easy to see why some companies still sit on the fence in regards to a local investment.

“I met the CIO of a large US autoparts manufacturer, and one of the real issues they faced was actually ensuring the physical security of their designs – making sure staff were not walking out the door with thumb drives full of their own IP,” Smith says. “We do have some PoPs and some light network connectivity into China, and eventually we will see a very real need to enter China and deliver services from there, but we still need to find a local partner for our license and to have access to their local market knowledge. But there are a number of things to take into account before we can do this,” Smith says.

Savvis is not the only data center company that realizes the potential of China. According to findings from the DatacenterDynamics Industry Census for 2012, the Chinese data center market is forecast to have a compound annual growth rate of 20% in the next five years, and in 2013 total investment is likely to grow to US$7.5bn – up from 2012’s US$5.9bn.

It’s all looking up
According to the census statistics, China currently has 1.51m sq m of raised floor, 30% of which is in the leading markets of Beijing and Shanghai. End users operate around 377,000 racks and a quarter of respondents outsource their operations to third parties. The industry consumes 1.88GW of power.

But China’s data center industry is investing in both new data centers and the refitting and extension of older facilities. And this is where, according to domestic provider GDS – which has provided data center services for more than ten years in China – the market starts to realize levels of maturity.

GDS CFO Dan Newman says that when GDS was formed in 2010, its investors – which are both global venture capitalists and local institutions – were focused on the early development of the industry. “It is only really in the last three years that we have seen much stronger interest from industry players getting into the Chinese market,” Newman says. “I guess it is because global players tend to follow their own market customers – the customers from the US or UK asking their managed service provider what they can do for them in China.”

GDS has 15 sites in operation in China, 12 of which are inside the facilities of a third party. It built its own data centers, however, to meet its own demand, “because there was simply not enough supply of the right kind of data center to serve our customers (namely government customers and financial institutions)”, GDS founder and CEO William Huang says. “So, now, two of our own data centers are located in Shanghai, one in Chengdu and further facilities are in the pipeline, which will increase by several multiples within the next few years.”

In China, much attention is given to the large data centers being designed and run by state-owned telecommunications companies. But according to Newman, there is a new need for mission-critical facilities of much higher tier levels for new customers doing business inside and outside of China. To build its own mission-critical facilities, however, GDS had to employ a number of famous international designers and engineer consultants, due to a shortage of local skills. Newman says this also allowed the firm’s facilities to be marketed to global customers more used to operating in mature markets such as US and Europe.

This approach is part of a plan by GDS to specialize its offering – to target a market sector with high levels of redundancy and resiliency.Huang believes that, as the market matures, more specialist players will enter the Chinese data center market. “Companies will start positioning themselves very clearly against the kind of services they will offer, and there will also be services targeted at vertical industries,” Huang says. This will inevitably lead to the rise of more Tier III and Tier IV facilities in China, and will also lead to consolidation. Customers will start concentrating their own operations into fewer and larger sites, with many of these being housed in third-party facilities.

“The other requirement for the market will be more efficient data centers,” Newman says. “At the moment, there are a large number of data centers operating inside buildings or small data centers, and it is still quite common in China for third-party providers to take existing industrial buildings and convert these, which doesn’t tend to happen as much in the developed world. It is a shortcut to creating supply, but invariably, it requires a lot of compromise as these data centers are not going to be very efficient.”

“The government is creating many initiatives around the environment, and things like monitoring and management, which can help handle energy efficiency, are still fairly new.”

Multinational companies are increasingly investing in China and looking to take on data center space, according to Newman. This has largely pushed the Beijing and Shanghai markets, he says, but the major driver for the industry is the rise of the Chinese enterprise and their approach to global markets.

GDS believes it will see competition rise from local players in regional markets, especially with increased investment and initiatives of the municipal governments, which have been attracting local investment in recent years. But barriers to setting up a data center in China still exist. Newman says, like in Russia, establishing a data center in China can be a multiyear process, “and if you want to offer services in China, it can take many years to establish a reputation”. “I think the competitive landscape will get more crowded, but it is difficult to see who the main long-term players will be.”

This article first appeared in FOCUS issue 27. To sign up for your digital edition, click here.



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