How China Can Coax Rain from the Cloud

by Russell Fish

January 11, 2011

 

Preparing for the Game of the Century

Today's China is in many ways analogous to Tiger Woods before he won the 1997 Masters by 12 strokes.  Prior to that historic event everyone knew he was pretty good.  Afterwards, everyone knew he was great, probably one of the best ever.

 

China has been getting good for about 3 decades, beginning with the leadership of Deng Xiaoping.  China hasn't yet played their 1997 Masters, but it's coming.

 

It is difficult for an Occidental to comprehend the distance China has progressed during a single generation.  It is even more difficult to understand how it could have been possible.

 

Deng should be considered the creator of the modern Chinese era.  As a youth he moved to France to study Revolution.  He continued his education in Marxism at Moscow's Sun Yat-sen University.  Following graduation, he returned to China to be one of the 10% who survived the 8,000 mile Long March.  Then he had to fight the Japanese and survive various Chinese purges and counter-purges.

 

The results speak for themselves. 

 

The China of 1960 was a much less rich place that it is today.  The China of 2011 is a country where a large portion of its citizens (mostly between Beijing and the coast) live better than France.

 

China is following the commercial path to success trod by post-war Japan and then post-war Korea.  Each started as a low-cost manufacturer of low-quality Western product copies.  Americans of a certain age still remember when "Made in Japan" meant junk.  But Japan matured to the point that sophisticated Americans will only drive a Lexus. 

 

Japan began its rise from commercial copycat to innovative industrial powerhouse when Akio Morita licensed the recently invented transistor from Western Electric in 1953.   While the rest of the world was planning transistorized weapons, Sony planned a consumer product dynasty.  Within a few years they repurposed from rice cooker maker to semiconductor manufacturer and began to invent the transistorized world. 

 

A blizzard of Sony pocket radios spewed forth from Tokyo.  In 1958 Sony introduced the first transistorized television. In the following decades tape recorders, hearing aids, video cameras, computers, game consoles, and robots all descended from Morita's license.  Today Sony has annual revenue of nearly $80B.

 

In a similar way many Americans think of China as the country of exploding tires, dangerous toys, and inexpensive t-shirts.  They conveniently forget that every single iPod, iPhone, and iPad is "Made in China".

 

Furthermore China is planning the same technology ascent pioneered by Sony.  They are acquiring intellectual property.

 

How China Might Control the Cloud

The post-PC computer world is coming into focus in the strategies of Apple and Google.  We are headed for a cloud based world that consists of cloud servers, access devices, and the networking to connect them.

 

Cloud servers store the data and will execute most of the applications.  Access devices will be mostly portable and wireless tables whose purpose is to command, retrieve, and present.  The networks will be a mix of local wireless such as Wi-Fi, 3G and 4G cell phone, and as yet unannounced "white space" devices.

 

No single Chinese company possesses all the skills necessary to dominate the cloud in the way Apple or Google can.  However, it is possible that a collaboration between several Chinese enterprises could successfully compete with and possible vanquish either Apple or Google and possibly both.

 

Some of possible Chinese players include:

 

Huawei

Many Chinese companies can trace their roots to the government or military.  Founder, Ren Zhengfei, was a People's Liberation Army officer.  Chairman Sun Yafang worked in government intelligence over two decades ago.  The military connections are often cited by competitors as a reason to avoid Huawei.  For context, according to executive placement company, Korn Ferry's study "Military Experience & CEOs", 59 Fortune 500 CEOs had military background.

 

Huawei is a private company that does not have to file public reports.  Their self reported annual revenue is about $23B..  It is undisputed that they are a major player in networking and telecommunications equipment, second in the world, only to Ericsson.

 

China is a culture that has encouraged conformity.  It will be another generation before we are likely to see very many Chinese individualists like a Steve Jobs, Larry Ellison, Bill Gates, Michael Dell, or even an Akio Morita.  It is these individualists that see the future and make it happen. 

 

Ren Zhengfei, the Huawei founder, appears to be a rare Chinese individualist.  His early career was distracted by the Cultural Revolution, so he was over 40 and working as an electronics store manager when he started Huawei.  Some have described his management style as a mixture of East and West, and even he cites Chairman Mao and IBM's Louis Gerstner as his greatest influences.

 

Ren is also a follower of Chinese military strategist Sun Tzu and has demonstrated some ability as a strategist.  He entered into an joint venture with US network pioneer 3Com with the intention of gaining a foothold in the American marketplace.  The JV known as H3C ended up generating most of its revenue in China.  Huawei then made a noisy bid to acquire 3Com which aroused protectionist sentiment at the State Department which blocked the acquisition. 

 

3Com found itself bound to a hostile Chinese partner and agreed to buy out Huawei for $882M and an 18 month non-compete agreement.  Huawei got badly needed cash for European expansion.  They waited out the 18 month non-compete and then proceeded to successfully capture much of 3Com's Chinese business, eventually driving the empty shell of a company into the arms of HP.  No one knows exactly how much of this was Ren's plan all along or just his way of skillfully playing a bad hand.

 

Huawei has announced a cloud strategy divided into three parts: the cloud platforms, cloud applications and cloud services.  They have made what could be strategic hires in CTO Matt Bross from British Telecom and Haiying Wang, Chief Marketing Officer Cloud Computing.  Haiying spent time at Silicon Graphics and cloud pioneer VMware and has a PhD Computer Science as well as an MBA from Wharton. 

 

In December 2010 Ren predicted, "Huawei will soon catch up with Cisco in the cloud platform, and catch up with Google in the cloud business."

 

On the hardware side, Huawei has a chip design subsidiary HiSilicon.  They are an ARM licensee and have also licensed Tensilica's customizable 32-bit CPU.  Huawei also seems to recognize the importance of tablet computing as a portal to the cloud servers and has introduced an Android tablet.

 

All is not roses however, Ren is nearing retirement and has proposed his son Ren Ping as successor and daughter Meng Wanzhou as CFO.  This has caused some internal dissention.

 

ZTE

ZTE is roughly the same age as Huawei but is a public company.  Prior to founding ZTE Chairman Hou Weigui was Workshop Director for the Ministry of Aerospace Factory No.691.   ZTE is now China's second largest telecommunications company after Huawei and growing at a furious 30% year-to-year pace.  It is half the size of Huawei, but growing almost twice as fast.

 

Like Huawei, ZTE is a fierce competitor in both cell phone equipment and handsets.  They currently hold 7% of the total LTE (Long Term Evolution) essential patents for next generation phones.

 

They have been writing technical papers and organizing conferences on cloud computing, in anticipation of entering the market with some offering.  They also have announced an Android tablet which could be part of a cloud strategy.

 

Lenovo

Lenovo is the fourth largest PC maker in the world.  The current Lenovo is like Dell after Michael returned to save the company in 2007.  Lenovo experimented with outsourcing its management to IBM following the acquisition in 2004.  The experiment failed and the company lost market share.  The founder, Liu Chuanzhi, was recently asked to return. 

 

Strategies are still not clear as seen in their dual-OS Android/Windows7 IdeaPad shown at CES.  They recently repurchased a cell phone maker they previously sold.  Following CES they announced the formation of a new business unit called the Mobile Internet and Digital Home Business Group to focus on smart phones, tables, and devices to interface with the cloud.

 

China Telecom

For four decades China Telecom was a government monopoly, with characteristics similar to the US AT&T prior to the 1982 court ordered breakup.  Like ATT, China Telecom was known for incredible bureaucratic inefficiency.  To prod the lethargic company, in 1994 the Chinese government created a second telecommunications company, China Unicom.  In 2000 China Telecom was split into four operating companies split by market segment.  One of the pieces retained the name and is now a publicly traded telecommunications company that is majority owned by the Chinese government.  The other three were named ChinaSatcom, ChinaRailcom, and China Mobile. 

 

China Telecom continues to operate the long-distance voice service and charge what some consider overly high rates of several dollars per minute.  As a result a very vibrant VoIP business sprung up overnight dramatically undercutting China Telecom rates and eventually forcing competitive rates.

 

China Telecom calls its cloud computing effort "Star-Cloud".  They claim 260 Internet Data Centers worldwide capable of supplying hosting and data storage services.  These centers are not the 500,000 ft Apple NC center or even one of the 100,000 ft Google centers.  They are more likely to be 20,000-30,000 ft and have been initially built to support various wire line switching tasks.  These centers either have been or are currently being upgraded to offer IaaS (Infrastructure-as-a-Service) capability.  In December they announced cloud trials in Beijing, Shanghai, Guangzhou, and Chengdu.  CT also runs a network of 30,000 Wi-Fi hotspots in hotels, airports, and malls.

 

China Mobile

China Mobile is one of companies divested from China Telecom in 2000.  It is probably the largest cell phone provider in the world with a reported 570 million users.  Even though most Chinese access the Internet through smart phones, China Mobile has been criticized for lagging in upgrading from 2G to 3G.

 

One of China's more interesting entrepreneurs is CEO of a China Mobile subsidiary.  Li Yinan was a vice president at Huawei at age 27 and was purportedly being groomed to be the president one day.  Instead he left to start communications switch company Harbour Networks which was in turn bought by Huawei for $110M.  He then joined web services company Baidu as CTO.  He was subsequently quoted as stating that cloud computing was the most important core Internet technology after search.   A year ago he left Baidu to become CEO of the CM wireless server portal subsidiary.

 

Baidu

Baidu is the number 1 search engine in China.  They offer many of the services that are familiar to US Google users including add placement, text search, music search, image search, mapping, and social networking.  Based on their current offerings, they would appear to be well placed to compete in cloud computing.

 

They call their cloud product "Box Computing"- sounds a bit like Larry Ellison's "Big Red Box".

 

HiSoft

HiSoft is the number 2 software outsourcing company in China.  They were initially funded by American venture capitalists including INTEL Capital.

 

CEO Loh Tiak Koon recently observed that, "Cloud Computing is outsourcing on steroids."  They already possess many of the cloud services pieces.

 

TOMI Technology in the Chinese Cloud

China possesses all the pieces to aggressively compete in cloud computing.  They possess the wired networking, the wireless network, the data centers, the cloud services, and several manufacturers capable of making tablet and other cloud access devices.

 

They might be able to claim market share from the major cloud players like Google and Apple by undercutting on price as Huawei has successfully done for years in switching equipment.

 

Or they could make an attempt at technical and economic domination with a new technology.

 

Cloud server economy is determined by the amount of computing performed per joule of energy. According to Microprocessor Report,

 

"Venray's prototype can deliver 4.6 times the bandwidth of Intel's best server processor ("Gulftown" Xeon) despite using 10-year-old DRAM technology."

 

The Xeon is spec'd at 130watts TDP for six cores. Venray's TOMI™ Aurora is spec'd at 23mw per core. The cloud company with the lowest power consuming computer has a cost advantage.  A large power advantage equals a large operating cost advantage.

 

The little computer of choice will most likely be a tablet, such as the iPad. A key differentiating feature of the iPad is its 10 hour operating time between charges, in large part due to the energy sipping A4 CPU. The A4's specifications have not been made public, but from an analysis of the LCD backlight and other components the A4 power consumption can be inferred to be about 800mw.

 

Apple COO Tim Cook condescendingly divided the iPad competitors into two camps; Windows 7 and Android.  He correctly derived them as being slow and power hungry.

 

Based on power advantage alone TOMI™ Technology offers Chinese entities a dominating power advantage in servers and the only existing fighting chance against Apple tablets, smart phones, and other cloud access devices.