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Will the Bean Counters Control Cloud Computing in China?

There Are Reasons to Get Excited by China, But be Careful What You Wish For

I'm going to Shanghai this week, to speak to a group of people about Cloud Computing. I plan to listen at least as much as I talk, with the goal of perhaps learning something.

I've been getting a different perspective of the world, literally, as I sit in Southeast Asia observing and writing.

From here, the United States seems to be a distant power that continues to pay far more attention to Europe and the Middle East than to a region that holds more than half of the world's population.

Considering that China owns between $750 to $800 billion-how do you like that number, Dr. Evil?-in US debt, it would behoove the US to engage even more fully than it is with what is now the world's second biggest economy.

Although that's a discussion for another day, the sheer size and scope of what is happening in China made me think a bit about Cloud Computing and its future in the country.

I am not an engineer. I've made a living trying to bridge the yawning communications gap that exist between the technical and business side of companies, whether they develop and/or use that technology.

The imperative to close that gap has never been stronger than it is with Cloud Computing. Already, the term has been thrown about to talk about everything from abstruse virtualization to plain old email. I doubt there is a technology vendor today lacking some sort of Cloud Computing "strategy."

This communications gap exists in China as well-not only between techies and business types, but between China and the rest of the world. So that is what I'll talk about later this week.

Before vendors can jump down various technical rat holes in an effort to win business in China, let's take a very high-level view.

First of all, how big is Cloud Computing and how big will it get in the next few years?

IBM says 28% annual growth, reaching $128 billion in 2012.

Merrill Lynch is even more aggressive, seeing $160 billion in 2011.

Well, how far can we trust a Wall St. company these days? Besides, Merrill is counting ordinary email, and online advertising, as huge components of this. IBM is counting a lot of old wine in new bottles, ie, products and services it's been offering for years (eg, Lotus Notes).

IDC sees an annual growth rate of 27% in Cloud Computing services, reaching $42 billion 2012. Gartner sees continued 21% annual growth, after Cloud Computing revenues reached $56 billion last year.

Lesson: It's not a dreaded zero-billion-dollar market. It's not going away, no matter how you measure it.

The second high-level view is that of global economies. China famously surpassed Japan in the total size of its economy in nominal terms (that is, not adjusted for the local cost of living). Last year's global economic disaster was also "bad" for China, as it racked up a growth of only 8.7%. This year, it's shown annualized growth of 11.9% and 10.3% in the last two quarters.

By contrast, the US grew only 0.25% last year, after negative growth in 2008. This year, the US is on course for an anemic growth rate of 2.6%. The Sick Man of Europe is now all of wealthy Europe-the EU economy is looking to be absolutely flat this year, after declining 2.9% last year.

Yet the US economy is still 2.9X that of China, and the EU economy is 14% larger than the US. Taken together, the US and EU total about one billion souls with an economy that is more than six times the size of China's.

As a side note, India continues to grow rapidly as well, although more slowly than China. Even with 6.8% growth in 2009, and a projected 8.3% this year, the Indian economy totals about 25% that of China, and there is a red shift going on.

Meanwhile, China continues to transform itself. In recent years, the country has gained enough self-confidence to bring in (and pay for) world-class assistance, whether hiring famed Chicago architect Adrian Smith (of Skidmore, Owens, and Merrill at the time) to design its showcase Jin Mao tower in Shanghai, or working with the Germans to develop its maglev train, or joining forces with the European Galileo satellite project.

The country has also proudly showcased itself to the world, whether through the 2008 Beijing Olympics or the Expo 2010 in Shanghai.

The country is poised to become a high-end exporter, whether of cars, satellites, or airplanes. It is already the world's leading steel producer. And perhaps most important, it is simultaneously poised to become a major importer, given its new-found wealth, pressures exerted by a new and striving middle class, and pressures on its currency.

Lesson: It's not the size of the Cloud market that matters to China, it's the size of China that matters to Cloud.

So, what's not to like? Many things, clearly.

Heading the list: Major US vendors have been frustrated with China, whether Microsoft's past efforts to stop the use of stolen software, to Google's current efforts to dance to the government's tune. Another hindrance to outside vendors is IBM's dominance; Blue was in there early and often, and has set a sort of benchmark that Chinese technology buyers don't want to abandon. Third, Chinese technology buyers use a variant of that old real-estate slogan and focus on three things: price, price, and price.

Lesson: The "two billion armpits" slogan of consumer companies trying to break into china in the 80s proved untenable. The "2.6 billion eyeballs" mantra of today may meet the same fate.

So, what's to like? Many things, too.

The fulcrum on which the country rests, in which it now wishes to transform from a mammoth supplier of low-end goods to a big supplier and mammoth importer of high-end goods, means Western technology vendors should be doing everything they can to sell to China. The two billion armpits of the 80s had no money; today's billions of eyeballs do.

To get Chinese buyers off of price, it's time to say exactly what your product will do. Will it scale? How quickly? What unique security concerns does this very secured state need to address? How much will you be competing with local vendors? What's the joint-venture climate like (assuming you are selling widgets instead of Web searches)?

Who wants to have applications come to them from the ether? This approach eliminates fraud, but how many buyers see the capabilities of SaaS as a trade-off for paying a fair price for it? What's the landscape for server farms in China? What opportunities, if any, are there for outside vendors? And is IaaS-The Big Switch-really an option in this country today or anytime soon?

Finally, the discussion may turn into one of accounting. China has recently made a move from its own Chinese Accounting System (CAS) rules to the International Financial Reporting Standards (IFRS) approach, to bring it into alignment with most of the rest of the world.

However, the US remains stuck to its own Generally Accepted Accounting Principles (GAAP), which has significant differences from IFRS, particularly in the way it values assets.

Longtime Silicon Valley watchers know that many companies are loathe even to report GAAP numbers (which they're required to do if they're public companies), preferring to "forget" about pesky things such as acquisition costs and report "more important" non-GAAP numbers as well.

My oh my, who wants to talk about accounting? The reality is, that strip away all the hype, all the claims and counterclaims, phony benchmarks, "totally unique" approaches, and realize that in China, you might be best served to bring your CFO and a hired-gun CPA if you are serious about doing business there.

Lesson: It's a bean counters' world. We just live in it.


More Stories By Roger Strukhoff

Roger Strukhoff (@IoT2040) is Executive Director of the Tau Institute for Global ICT Research, with offices in Illinois and Manila. He is Conference Chair of @CloudExpo & @ThingsExpo, and Editor of SYS-CON Media's CloudComputing BigData & IoT Journals. He holds a BA from Knox College & conducted MBA studies at CSU-East Bay.

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