Anticipated AI Boom Fails To Drive Up Cloud Services Spending In China

In a surprising turn, the much-anticipated boom in artificial intelligence (AI) has failed to bring about a significant increase in cloud services spending in China.

What Happened: Canalys, a tech market research firm, pointed out that the Chinese cloud market relies heavily on government and state-owned businesses for its growth, CNBC reported on Tuesday. The market had high hopes for AI models like ChatGPT-like services on the cloud to boost its growth, but the reality hasn’t matched the expectations.

Notably, Alibaba BABA, which owns the most significant market share in China’s cloud business at 39%, reported a modest 2% YoY revenue growth for the quarter ending Sept. 30. Furthermore, the company scrapped plans to publicly list its cloud operations in November.

Huawei, the runner-up in the cloud market, and Tencent TCEHY did not disclose their cloud revenues for the third quarter. The three companies maintained their market shares in the third quarter, just as in the previous one.

The sector’s overall growth slowed down to 10% in 2022, a sharp drop from the 45% increase in 2021, according to the Canalys report. Nevertheless, domestic spending on cloud services went up by 18% YoY in the third quarter to $9.2 billion.

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However, the growth rate significantly decreased from 13% to 5.7% in the second quarter, based on CNBC’s analysis of Canalys data. The report also noted that mainland China’s cloud market made up 12% of the global cloud spending in the third quarter.

Why It Matters: Recent developments indicate growing scrutiny of AI technology. For instance, U.S. Commerce Secretary Gina Raimondo revealed in early December that three AI accelerators being created by Nvidia Corp. NVDA for the Chinese market were under examination by the U.S. government.

Concerns have also been raised about the potential misuse of AI by China. The Federal Bureau of Investigation (FBI) has expressed worries about AI being used to facilitate alleged spying efforts by China.

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