The pricing moves come as China’s economy makes a cautious recovery following the relaxation of strict Covid-19 restrictions.
Chinese internet giant Tencent Holdings has helped spark a price war in the cloud services sector with a 40% price cut on service starting in June. It comes as rivals Alibaba Group and China Mobile make similar moves, intensifying the competition in a market already hit by softer corporate demand.
The pricing moves come as China’s economy makes a cautious recovery following the relaxation of strict Covid-19 restrictions. Providers, under pressure to meet sales targets, have used price cuts to tackle sluggish appetite among businesses.
Alibaba, the current market leader for cloud services in China, said in April that it would reduce prices for certain cloud products by nearly 50%, after it announced a planned IPO for its cloud division. State-owned China Mobile, the second-largest player, also declared cuts of up to 60% for select services, albeit for a limited time in May.
Until recently, the sector saw remarkable growth as increasing digitalization—and growing demand for data storage and processing capabilities—helped fuel a surge in demand for cloud computing power. According to Canalys, a technology market research firm, the Chinese market for cloud infrastructure services in 2021 totaled $27.4 billion, a 45% increase from the previous year.
However, that growth began to cool in 2022, with the Chinese market growing 10% to $30.3 billion, as caution surrounding IT budgets persisted even as Covid-19 restrictions were lifted. As a result, in 2023, Chinese cloud infrastructure services spending is expected to grow by just 12% for the entire year.
The intensifying competition is unlikely to help. With the current price war, existing players like Tencent will likely struggle to maintain profitability as they look to deliver high-quality offerings on much thinner margins. The new market dynamics may even lead to consolidation among smaller players aiming to take advantage of economies of scale through mergers.
There will be long-term effects, too. In a rapidly evolving digital landscape, where cloud services have played a vital role in enabling technological advancements, a price war could shape the future trajectory of China’s tech industry. But, for now, the short- to medium-term winners will be those businesses benefiting from improved affordability of distributed computing power.