China is to blame for the reduction in spending on cloud and data center infrastructure

The reluctance in spending of Chinese companies has made a strong worldwide growth slow down to a modest capex reduction.

The biggest players in the field including Amazon Web Services (AWS), Google Cloud, Microsoft Azure, etc. have shown steady quarterly growth, even though they have experienced some slowdown compared to last year results.

Their significant growth has been attributed to high spending on hardware assets. However, an industry-wide decrease in the latest quarters has been reported by 2 research companies both of which have said that China should take the responsibility for the decline. However, they also noted that this change was not permanent.   

Synergy Research, a long-time analyst company in the cloud infrastructure market, found that there was a 2% decrease in growth in August compared to the figure at the same time last year. Technology companies spend over 28 billion USD on cloud and data center infrastructure in the latest quarter, while the number for the first quarter was almost 25 billion USD. Even including the one-time purchase of Manhattan real estate of Google, which was worth 2.4 billion USD earlier this year, the amount of expenditure in Q1/2018 was still higher than Q1/2019.  

On a year-by-year basis, Chinese spending reduced by 37% in Q2 this year, according to Synergy. All the Chinese big players including Alibaba, Tencent, JD.com, and Baidu were hesitant in spending.

All other areas experienced nominal rises. Among different regions, the US had the biggest annual increase of 5%, following by EMEA (3%) and the rest of APAC (2%). If China were not accounted for, the overall year-by-year increase would go up to 4%.  

Synergy’s numbers originated from the data center and capex footprint of the top 20 largest cloud and internet providers with the top 5 (Google, Amazon, Microsoft, Facebook, and Apple) usually dominating the list.

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According to John Dinsdale, a chief analyst working at Synergy, it is these biggest 5 companies that usually set the scale and trends in hyperscale expenditure, however, the reluctance in spending of Chinese companies also made the strong worldwide growth slow down to a modest capex reduction.

A similar trend is recorded in data center switches. Dell’oro Group, a telecom, and network analyst reported that Chinese stagnation repressed the growth of data center switch market in the second quarter of 2019. The decrease was the first experienced in 5 years because of both a slowdown in the expenditure of cloud service companies and sustained uncertainty over Huawei.

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Sameh Boujelbene, Dell’oro Group senior director, said that: “In contrast, data center switch market revenue in North America managed to grow despite a slowdown in spending by major cloud service providers. Most of the slowdown was driven by reduced server purchases while data center switches performance well. Large enterprises also contributed to the growth in North America as they accelerated their 100 GER adoption and helped Cisco emerge as the new leader in 100 GE revenue in Q2/2019.”

Dinsdale added: “The situation in China is likely to be a short-term phenomenon, however, as the four Chinese hyperscale operators continue to grow revenues more rapidly than their US-headquartered counterparts. After some short-term financial belt-tightening, we expect to see Chinese capex rise strongly once again.”

 

 

By: Joe Cook