China's cloud services market growth slowed to a record-low level during the second quarter due to a COVID-19 resurgence in the country, a new Canalys report found.

The country's cloud services market growth dipped below 20% for the first time ever, largely impacted by pandemic-induced shut downs across the country, the analyst firm stated. This comes in contrast to the overall momentum of the global cloud services market, which Canalys reported grew 33%.

Despite China's overall slowing growth, total spending on cloud services in the country increased 11% year-over-year in Q2 to reach $7.3 billion and accounted for 12% of all global spending on cloud services. That includes private and public infrastructure-as-a-service (IaaS) and platform-as-a-service (PaaS) but excludes direct software-as-a-service (SaaS) spending, the analyst firm noted.

Analysts remain optimistic about the "strong potential for cloud adoption in the country" despite the growth slowdown. "Enterprise IT spend is far less there compared with countries with higher levels of cloud readiness. There remain many enterprise customers in traditional industries in China that are looking for ways to migrate to the cloud, especially SMBs," the report noted.

Canalys expects the Chinese cloud market will pick up more speed in the second half of the year due to business activities in first-tier cities that resumed in June.

China's Cloud Service Providers

Alibaba Cloud, Huawei Cloud, Tencent Cloud, and Baidu AI Cloud remained the major players in China's cloud services market. Those four represented 79% of total cloud services spend in China, but each provider suffered a dip in growth rates compared with previous quarters.

Alibaba was the overall market leader and grew 10% year over year, accounting for 34% of the market in Q2 2022. However, analysts reported the provider's "market share saw a significant decline" of 2% compared to Q1, which they credit to Alibaba's challenges acquiring customers in the government sector.

"Chinese cloud vendors typically emphasize having strong vertical focuses, creating products and solutions specific to certain industries, but that comes with high customization costs that can be challenging to navigate when economic pressures increase," Canalys VP Alex Smith said. "Channel partners can help avoid this by taking over the services component, leaving the vendors to focus on broader platform development."

To that point, Alibaba is launching a partner program to expand its ecosystem of services and transition to a partner-friendly business model, and committed to invest $150 million toward partnering with distributors to grab more customers and close 300 new deals in Chinese cities. Canalys also highlighted Alibaba's Q2 overseas expansion into Germany, Thailand, and Saudi Arabia, and the provider's cooperation with telecom operators in Thailand and Saudi Arabia.

Huawei Cloud came in No. 2 with 19% of China's cloud services market. Canalys noted Huawei's focus is on increasing cloud adoption in all upstream and downstream industries in the country by working with various partners. Verticals initially targeted are industrial, government, utilities, mining, and education, which Canalys notes "have historically been less digital but have a high propensity for cloud adoption."

Similar to Alibaba, Huawei announced overseas expansion will be a key growth driver, especially as it targets Chinese enterprises also seeking overseas moves. "Its expertise in localization, data center coverage, and compliance in overseas projects will play an important role," analysts added.

Tencent Cloud was No. 3 in the market with 17% of the cloud services market in the second quarter. However, the provider is less focused on market share growth and more focused on profitability, rendering the provider's performance "in line with expectations," Canalys noted.

Baidu AI Cloud landed in No. 4 with 9% of the market, though it grew 25% year-over-year. That growth is driven mainly through industrial verticals but this quarter was also fueled by the provider's deals in vehicle manufacturing, medical, and digital cities verticals, Canalys reported.

"The top cloud vendors are trying to enrich their cloud capabilities by building their own channel ecosystems to bring together self-developed platform technologies and industry experience from partners. These market leaders have recently held, or will hold, channel ecosystem summits to recruit more channel partners," Canalys Research Analyst Yi Zhang said. "China’s cloud services have entered a new era where cloud vendors are no longer focused on just revenue scale and business growth, but more on high-margin, standardized products."