Amazon Sells AWS China for 2 Billion Yuan Over Compliance Issues

Compliance issues have been an important factor limiting the development of foreign cloud service providers in China.SINNET (SZ. 300383) announced intent to purchase assets related to Amazon’s cloud services from Amazon Technology Services (Beijing) for no more than 2 billion yuan on November 13.

The purchase will include servers and other IT equipment related to cloud services. After the transfer, SINNET will continue to offer cloud services based on Amazon’s cloud technology in China.

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SINNET was Amazon’s partner in China. On August 1, 2016, the company announced it signed an operating agreement with Amazon to provide Amazon’s cloud technology and related services (Amazon Web Services) in China with an operations base in Beijing. The agreement was valid for two years and would automatically extend one more year when expired.

That contract marked the official start of AWS in China.

But AWS began laying groundwork in China in December 2013, when Amazon began offering cloud computing platform services in China. It began limited testing in 2014.

After entering the Chinese market, Amazon also started building a data center in Ningxia. The center has not been put into operation. In May, Jay Carney, Amazon’s senior VP, said the data center in Ningxia remained in development and that Amazon was in talks with relevant government agencies. According to Chinese regulations, providers of public cloud services in China must ensure all data from China stays in China and that all technical services are provided by China.

In its announcement, SINNET did not mention whether the acquisition involved the data center Ningxia. Comments suggest the deal included only the Beijing area, where the SINNET is operating, as well as IT equipment in Beijing.

Compliance issues have been a limiting factor in the further development of foreign cloud service providers in China. The 2015 edition of the Telecom Business Catalog, which took effect on March 1, 2016, requires that cloud computing infrastructure be part of an Internet data center and under its key regulatory domain. The regulation may have been a direct cause of Amazon’s cooperation with the SINNET.

But the game between Amazon and the Chinese government did not end with this deal. Caijing magazine quoted a source close to SINNET as saying AWS does not want its core competitive resources, such as customer data, software and servers, falling into the hands of a third-party company. Although AWS has found a partner in China, which party will dominate in data, software and other factors is still up in the air.

The takeover is sort of a solution to the problem. SINNET purchased the front-end operation service while Amazon will provide low-level technical support. It is a relatively reasonable solution to AWS’s compliance problems in China, according to industry insiders.

Previously, Microsoft Azure cloud service adopted a similar pattern of cooperation when it entered the country. In early November 2012, Microsoft signed an agreement with the Shanghai Municipal Government. Based on the agreement, 21vianet will operate the cloud computing platform as “Blue Cloud,” focusing on the operations and services of cloud services based on Microsoft technologies, including Windows Azure and Office 365. Microsoft offers backend software and technical support, while 21vianet is responsible for operation.

At present, Amazon AWS is available in more than 190 countries. Its earliest market was the United States, followed by Britain, Germany, France and Japan. China, southern Europe and eastern Europe were the third group.

According to AWS data, 40 percent of its customers in the Chinese market are start-ups and 50 percent to 60 percent are enterprises. Start-ups mainly focus on C end, but the demand for the B end is getting bigger.

AWS has not performed well since entering the Chinese market more than a year ago, according to third-party market research firms. IDC previously published the 2017 H1 China Public Cloud IaaS Market Report, showing the Top 5 in the domestic cloud market were Alibaba, Tencent, Kingsoft, China Telecom and Ucloud.

On October 27, Amazon released its Q3 earning report. According to the report, the Amazon AWS cloud computing business’s revenue in Q3 is $4.57 billion, up by 42 percent, roughly equal to the previous quarter.