Establishing a Data Center in China
By Gidon Gautel
China’s data center market is poised to see increasing activity following the implementation of new regulations. To comply with China’s controversial new Cybersecurity Law, US tech giant Apple recently announced plans to build a data center in Guizhou designed to store cloud data for Chinese users as part of a US$1 billion regional investment. Apple made the move due to data localization requirements in the law requiring critical information infrastructure (CII) providers to store personal information within mainland China.
Many more firms without China-based data facilities will likely follow Apple’s lead in order to comply with the Cybersecurity Law, which stipulates that even businesses not providing CII services are encouraged to host servers in China. Others, however, are relocating for practical business reasons. Hosting servers within China can help avoid network bottlenecks and provide better and more reliable service within the country, regardless of the industry.
Foreign businesses establishing a data center presence in China have two main options. They can either build their own facility under a joint venture, or they can lease data center services and co-locate. The latter option makes more sense for most SMEs due primarily to the high costs of setting up a data center. Regardless of the route, market entry considerations unique to data centers, as well as the sector’s complex regulatory framework, demand that foreign investors carefully plan their China data storage strategy.
Considerations for establishing a data center
Foreign investors establishing a data center in China must review a variety of considerations, ranging from the local climate to infrastructure quality and tax incentives.
Traditionally, China has four main data center hubs: Beijing, Shanghai, Guangzhou, and Shenzhen. However, these cities are becoming less convenient for establishing new facilities due to rising costs and reluctance from local governments to grant the required land.
Other cities such as Hangzhou, Tianjin, Chongqing, and Chengdu are becoming credible alternatives, both for those looking to co-locate and those looking to establish their own center. Guizhou province, Apple’s location of choice, is also a rising star for data services. The province’s capital held the Guiyang Big Data Expo in May this year, which is the world’s largest big data-themed expo. Guizhou’s Gui’an New Area has received strong government support to become a key region for data center development.
Local authorities in lower tier cities are generally more open to establishing new centers and often provide tax and land incentives. Data centers within China’s tech parks also enjoy more favourable government policies and better amenities.
China Mobile, China Telecom, and China Unicom, all SOEs, dominate China’s national telecommunications infrastructure. Companies looking to establish their own center will have to approach one of these “big three” telecoms providers to negotiate network connectivity.
Location also factors into network services. China is roughly divided territorially between the big three state owned providers. China Unicom dominates the North, while China Telecom is better established in the South. China Mobile, though having a smaller market share, also provides more geographically widespread network services.
Beijing, Shanghai, and Guangzhou are China’s largest network hubs. Foreign companies should choose a data center in a city that is well integrated and connected to the national network, and well situated for routing optimization.
Security considerations for data centers in China take multiple forms. Companies should ensure that the facilities they plan to use are shielded from weather and climate related risks, as data centers are sensitive to issues such as overheating and water damage. Further, data centers should have robust physical security to protect against unauthorized access, both internally and externally.
Cybersecurity is also a concern. Apple has had to be vocal in its public statements about storing data in China, assuring users that there will be no government back doors to data stored in the country. Yahoo was criticized in the mid 2000’s for handing the Chinese government user data of various online dissidents, resulting in their arrest.
It remains to be seen whether Chinese authorities will involve themselves more readily in foreign data operations following the release of the new Cybersecurity Law.
Some foreign investors may also have qualms about China’s Internet controls, known as the Great Firewall. However, given that most businesses will choose a data center in China to serve Chinese users, this should not be a pressing issue.
Reliability and performance
In terms of reliability, most Chinese data centers situated in a first tier city will be rated at least tier III (T3), meaning they will have uptime figures of 99.982 percent (1.6 hours of interruption per year). So long as they choose their partner or provider carefully, foreign firms should have no issues in this respect.
Infrastructure quality and uptime figures are far more variable across the rest of the country. However, businesses with price considerations can consider co-locating in a second tier city where power costs, and other expenses, are lower.
Reasonable options include second tier cities close to one of the big four data center hubs, for example Suzhou or Wuxi for Shanghai and Tianjin or Shijiazhuang for Beijing. Other second tier cities not located near the four largest hubs, but with a reputation for data center services, will also have T3+ centers. This includes those cities previously mentioned in this article.
Power Usage Effectiveness (PUE) also varies significantly across the country. Beijing, for example, has laws in place stipulating that all data centers must be at most PUE 1.5, while the national average is far higher at around 2.2-3.0. Again, most well-known locations will see reasonable PUE performance. Additionally, standards elsewhere are rapidly improving.
China’s demand for online services still has plenty of room for growth, particularly in the cloud computing sector. It therefore makes sense for foreign firms who are planning to expand their operations further in China to ensure they have a plan in place to expand their data center capacity beyond their initial investment.
Businesses should make sure that, if they are planning to expand, their data center service provider allows for this. Co-locating with a provider unable to allow for expansion, or with questionable expansionary options, could at best result in confusion regarding upgrades, or at worst in the regulatory and financial headache of having to relocate.
Legal and regulatory considerations
Navigating data center-related regulations in China is a strenuous process.
Any business providing value-added data services through a data center in China, including cloud services, has to apply for an Internet Data Center (IDC) license. Any foreign company operating under such a license in China is limited to 50 percent co-ownership alongside a Chinese firm in a joint venture. Licenses can be either region-specific or national. However, even with a national license foreign businesses still may not be able to set up shop in certain areas.
Any company hosting a domain within China is also required to apply for an Internet Content Provider (ICP) license.
Regulatory navigation can get exceedingly complex, and compliance considerations do not end once businesses establish data center operations. Once a data center is operational, businesses still have to take note of tax considerations, as well as regulations regarding security, permissible information, equipment specifications, and more.
Investors should conduct careful due diligence when identifying a Chinese partner for a joint venture. Firms are advised to go for well known established companies rather than younger ones eager to quickly rise in data center service provision.
Microsoft, for example, partnered with 21vianet in 2014 to provide its Azure cloud services in China. Other reputable third party data center service providers include Centrin, GDS, and SDS. Apple chose to partner with a local government-backed firm, Guizhou-Cloud Big Data Industry co.
Foreign firms looking to co-locate have a wide selection of companies to choose from. China Telecom and China Mobile, for example, provide extensive IDC services. Carrier neutral centers are generally more expensive, and, with some exceptions such as DrPeng and Sinnet, tend to be more local and not have facilities in more than a couple of cities. However, they can also provide a more tailored approach concerning co-location services.
Which service provider small- to medium-sized foreign firms should go for rests on a variety of factors dependent on the range, nature, and requirements of their business.
Those establishing servers within China are faced with a range of hurdles, from regulatory compliance to logistics problems. Businesses are encouraged to find a trusted third party to ease the transition, and carefully study successful examples of foreign firms locating servers in China for best practices.
China Briefing is published by Asia Briefing, a subsidiary of Dezan Shira & Associates. We produce material for foreign investors throughout Asia, including ASEAN, India, Indonesia, Russia, the Silk Road, and Vietnam. For editorial matters please contact us here, and for a complimentary subscription to our products, please click here.
Dezan Shira & Associates is a full service practice in China, providing business intelligence, due diligence, legal, tax, IT, HR, payroll, and advisory services throughout the China and Asian region. For assistance with China business issues or investments into China, please contact us at firstname.lastname@example.org or visit us at www.dezshira.com
Dezan Shira & Associates is a pan-Asia, multi-disciplinary professional services firm, providing legal, tax and operational advisory to international corporate investors. Operational throughout China, ASEAN and India, our mission is to guide foreign companies through Asia’s complex regulatory environment and assist them with all aspects of establishing, maintaining and growing their business operations in the region. This brochure provides an overview of the services and expertise Dezan Shira & Associates can provide.
This Dezan Shira & Associates 2017 China guide provides a comprehensive background and details of all aspects of setting up and operating an American business in China, including due diligence and compliance issues, IP protection, corporate establishment options, calculating tax liabilities, as well as discussing on-going operational issues such as managing bookkeeping, accounts, banking, HR, Payroll, annual license renewals, audit, FCPA compliance and consolidation with US standards and Head Office reporting.
In this issue of China Briefing magazine, we lay out the challenges presented by China’s payroll landscape, including its peculiar Dang An and Hu Kou systems. We then explore how companies of all sizes are leveraging IT-enabled solutions to meet their HR and payroll needs, and why outsourcing payroll is the answer for certain company structures. Finally, we consider the potential for China to emerge as Asia’s premier payroll processing center.