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Surge in AI Development Fails to Drive Growth in China’s Cloud Market

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Surge in AI Development Fails to Drive Growth in China's Cloud Market

Despite the widespread enthusiasm surrounding artificial intelligence (AI), it appears that this excitement has not translated into a significant surge in spending on cloud services in mainland China. According to a report by tech market analysis firm Canalys, the Chinese cloud services market continues to exhibit a conservative stance, with growth primarily being driven by government and state-owned enterprises. The market’s reliance on these entities is identified as a key factor influencing its trajectory, indicating a distinctive trend in the adoption of cloud services within the Chinese landscape.

The anticipation of industry growth fueled by the training of AI models on the cloud, spurred by heightened interest in services akin to ChatGPT, has encountered a notable divergence from expectations. Alibaba’s cloud business, commanding the largest market share in the country at 39%, reported a mere 2% year-on-year revenue growth for the quarter concluding on September 30. In a significant move, the tech giant abandoned its plans for a public listing of its cloud operations in November, marking a strategic shift in response to the evolving dynamics of the cloud services market.

Huawei, the second-largest cloud player and privately held, did not provide a specific breakdown of its cloud revenue for the third quarter, and the same applies to Hong Kong-listed Tencent. The market dynamics remained consistent, with the three leading cloud players in China maintaining their market share from the previous quarter. However, the overall growth rate for the segment decelerated to 10% in 2022, and projections indicate a further slowdown to 12% in 2023. This contrasts sharply with the robust 45% surge witnessed in 2021, as highlighted in the Canalys report.

Cloud services expenditure within the domestic market experienced an 18% year-on-year growth in the third quarter, reaching $9.2 billion, as per the report. Nonetheless, this growth exhibited a significant deceleration, dropping to 5.7% from the 13% recorded in the second quarter, as analyzed by CNBC based on Canalys data. The contrasting growth rates highlight a notable slowdown in domestic spending on cloud services during this period.

Canalys reported that the mainland Chinese cloud market constituted 12% of the global cloud expenditure in the third quarter. Meanwhile, CNBC’s analysis revealed a 1.5% increase in global cloud spending in the third quarter compared to the previous one. The research firm highlighted the industry’s substantial investments in artificial intelligence (AI) and its efforts to capitalize on AI offerings through the establishment of “partner ecosystems.” This involves the creation of networks comprising developers, software companies, and experts, as outlined in the report.

Despite these efforts, the anticipated significant growth in the cloud segment has not materialized. Canalys noted that the inherent complexity of AI technology poses challenges in terms of both adoption and deployment. However, it also concurrently unlocks opportunities for a more extensive AI ecosystem. Throughout the year, Alibaba, Huawei, and Tencent, along with other companies in China such as Baidu, have all introduced AI models and products, showcasing a collective industry push towards integrating AI capabilities.

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