China Takes Lead in Internet Infrastructure Growth

By 2023, the Asia Pacific region is expected to account for more than 50 per cent of the global gross domestic product (GDP) when measured in purchasing power parity (PPP) terms. According to The Financial Times, this year Asia became home to half of the world’s middle class [1]. The increased sophistication and purchasing power of these people are driving growth in Asia Pacific.

China is the main growth engine of Asia and it now has a bigger economy in PPP terms than the US, accounting for 19 per cent of the world’s GDP output in 2019. China’s economy has more than doubled since 2000 and has been growing at a continuous clip over the past three decades. Interestingly, the quality of its growth has changed over the past 10 years. From being a source of cheap manufacturing due to labor arbitrage, China has transformed into a technology powerhouse.

This is reflected not only in the range and sophistication of its manufactured products and services but also in the rapid growth of its technology infrastructure. China has the largest market share and fastest growth rate in Asia Pacific’s burgeoning internet infrastructure market. This new focus has the attention of the Chinese government who has recently proposed to accelerate the construction of ‘new infrastructure’. This classification includes data centers as a priority for ‘new infrastructure’ [2]. Following that proposal, Alibaba announced a three-year investment of US$28 billion, and Tencent announced a five-year investment of US$70 billion in new infrastructure.

The Asia Pacific data center and hosting services market is expected to be worth US$32 billion by 2023, second only to the US market. Within the Asia Pacific region, China will account for the largest market share with around 36 per cent of the overall market opportunity by 2023, followed by Japan and Australia with 22 per cent and 8.3 per cent respectively [2].

China’s internet data center (IDC) market size has been estimated to be worth around US$25 billion in 2020, up from US$18 billion in 2018 [3]. The country’s data center colocation market is also booming and is projected to reach US$6.9 billion by 2025, growing at a compound annual growth rate (CAGR) of 22.12 per cent from US$2.1 billion in 2019 [4].

The growth drivers include the availability of a large amount of enterprise data, coupled with a rising concern regarding data security and recovery in large and small enterprises. Apart from the China-based big international players, the country has many local companies who are looking for data center colocation solutions. This is driving growth in the data center colocation market.

In keeping with its booming data center market, China is home to two of the world’s biggest data centers. Both located in Inner Mongolia, one is a US$3 billion, 10.7 million square foot data center and the other is a 7.7. million square foot data center built at a cost of US$1.92 billion [5].

With rapid digitalization, telecommunications companies dominate the Chinese data center market with a combined market share of over 50 per cent [6]. The ongoing induction of fifth generation mobile telephony (5G) in China is likely to result in major increase in demand for data center rack space.

eSports is booming
Interestingly, eSports is being viewed as a major driver of China’s future data center demand. China’s domestic gaming market is expected to grow from US$30.8 billion in 2018 to US$41.5 billion in 2023 [7].

The country already has the world’s largest number of gamers, at 600 million, which is almost half of the total population of the country. This number is expected to reach 878 million, or nearly a third of video games globally by 2023 [6]. China has always been a hard market to crack for non-Chinese game companies. But the regulatory approval of games imported into China has started to improve, according to market researcher Niko Partners [8].

On March 24 this year, China released the second batch of game licenses for the month which authorized 53 domestic games, including 47 mobile titles, two Switch games, and four PC games. It is likely that in 2020 the country’s regulators would approve around 1,500 games, the same as in 2019. In late March, Shengqu Games, Tencent Games and Tencent Cloud jointly announced that they will initiate a strategic collaboration to promote cloud gaming [9].

Cloud gaming made possible by the low latency and high bandwidth which fifth generation mobile telephony (5G) offers is likely to provide a major boost to China’s gaming industry. One way that 5G networks address latency issues is by moving streaming video closer to the edge of the network on 5G-enabled devices. This has huge implications for internet infrastructure and is likely to fuel demand for next-generation data centers.

Leading eSports gaming companies are partnering with data center operators to deliver the seamless online experience that both players and fans look out for [10].  Sensing the opportunity, cloud companies are racing to engage in the eSports industry in China.

Exciting growth prospects
China’s 5G push and the e-commerce sector are elevating the value of data centres. Currently, more than 70 per cent of the population in China are using e-commerce services for performing commercial and non-commercial activities [11].

In 2019, China’s retail e-commerce sales expanded 27.3 per cent to reach US$1.935 trillion, which accounted for 36.6 per cent of the total US$5.291 trillion retail sales in the country, according to eMarketer [12]. Retail e-commerce sales are expected to maintain strong growth till at least 2023.

Sensing the growth, companies like Alibaba have doubled down on cloud computing with a US$28 billion three-year investment plan. According to The Financial Times, the Chinese groups, one of the world’s top cloud services providers, plans to spend the money to build next-generation data centers and develop related technologies including semiconductors and servers [13].

The Chinese market has some interesting characteristics. In a recent report, The Financial Times, quoting China’s Ministry of Industry and Information Technology (MIIT), notes that while there are twice as many data centers in north-eastern China than required, resulting in low capacity utilization, data centers in the main cities are running at capacity; for example in Beijing and Shanghai, demand outstrips supply by 20 per cent and 25 per cent, respectively [14].

A DBS bank sector insight briefing adds that the demand for data center services are mainly from Beijing, Shanghai, Guangzhou and Shenzhen and the utilization rate is high at around 80 per cent for established data centers in top-tier data center cities and demand will continue to grow at 20-30 per cent per annum.

Princeton Digital Group (PDG) started its operations in the Chinese market in 2017 and its ongoing projects are strategically located in Shanghai and the Yangtze River Delta region which has emerged as China’s No1 data center market with sustained growth projected over the next decade.

PDG currently has six data centers in China. Its flagship data center at Fengxian district in Shanghai will have over 14MW capacity by the fourth quarter of this year and 40MW in all.  PDG has two other projects in development and it expects to initiate construction on these by early 2021. One project is in Nantong in Jiangsu province, while the other is in Nanjing which is the capital of Jiangsu province. Both projects are hyperscale facilities with capacities of more than 50MW in Nanjing and 70MW in Nantong respectively and is currently targeted to be ready for service in 2022. Three other sites are fully utilized and operated through a joint venture.

PDG’s operations in China are focused on the internet sector with hyperscale players. The company is also looking at large content firms as potential customers. With the Chinese internet infrastructure market growth showing no signs of slowing down, there are many opportunities for both organic and inorganic growth.