Amazon to Sell Part of Its Cloud Business in China -- Update

Amazon.com Inc.'s cloud-computing service is throwing in the towel in China.

Beijing Sinnet Technology Co., Amazon's Chinese partner, said in a stock-exchange statement late Monday that it will buy Amazon Web Services' China business for as much as 2 billion yuan ($300 million).

The buyout was an attempt to "comply with our country's laws and rules and further improve the security and the service quality of the AWS cloud-computing service operated by the company," Beijing Sinnet said.

AWS couldn't immediately be reached for comment.

Amazon and other U.S. companies, including Apple Inc., have faced pressure in China to comply with the government's desire to further tighten the screws on its already heavily policed internet.

AWS customers in China were this year sent emails by Beijing Sinnet asking them to delete tools enabling them to circumvent the country's vast system of internet filters. Some of the tools that clients use include virtual private networks, or VPNs.

Beijing Sinnet cited requests from China's public security ministry and the industry and information technology ministry in making the demands on its customers.

"Sinnet is responsible for ensuring that its customers in China comply with local laws and their notice was intended to remind customers of their obligations," an Amazon spokeswoman said via email at the time.

In the past, some U.S. firms have also spoken out about the uneven playing field for overseas providers in China's cloud-computing industry.

Yang Jie in Beijing and Liza Lin in Shanghai contributed to this article.

Amazon.com Inc.'s cloud-computing service is throwing in the towel in China.

AWS couldn't immediately be reached for comment.

Amazon and other U.S. companies, including Apple Inc., have faced pressure in China to comply with the government's desire to further tighten the screws on its already heavily policed internet.

Beijing Sinnet cited requests from China's public security ministry and the industry and information technology ministry in making the demands on its customers.

In the past, some U.S. firms have also spoken out about the uneven playing field for overseas providers in China's cloud-computing industry.

Yang Jie in Beijing and Liza Lin in Shanghai contributed to this article.

Amazon is selling cloud-computing equipment to its local partner and said Chinese customers would continue to receive its cloud services. "Amazon to Sell Its China Cloud-Computing Business" at 3:21 GMT, incorrectly stated Amazon was selling its cloud-computing business in its entirety in China, in the first, second and third paragraphs. Headlines also indicated that the cloud-computing business was being sold in its entirety. (Nov. 14)

Amazon.com Inc. said it would sell computing equipment used for its cloud services in China to its local partner, Beijing Sinnet Technology Co., in a move analysts said underscores the increasingly chilly atmosphere for foreign companies here.

In a statement Tuesday, Amazon Web Services said the move was to comply with new Chinese regulations.

"Chinese law forbids non-Chinese companies from owning or operating certain technology for the provision of cloud services," AWS said. "As a result, in order to comply with Chinese law, AWS sold certain physical infrastructure assets to Sinnet, its longtime Chinese partner."

The company said it was committed to China and customers would continue to receive AWS cloud services. It also said the deal didn't involve any transfer of intellectual property.

Peter Fuhrman, chairman of technology investment bank China First Capital, said Amazon's decision illustrates China's tightened grip on companies providing internet services.

"The key policy brickwork is now done," Mr. Fuhrman said. "The Chinese internet, in its broad entirety, will become even more comprehensively managed by the Chinese state."

At the same time, Mr. Fuhrman added, such protectionist moves ultimately limit China's access to the latest technology and could hurt its competitiveness over the long term.

Jim McGregor, chairman of APCO Worldwide's Greater China region, said the move should be viewed in light of China's Made in China 2025 plan to push domestic enterprises and technologies.

"China has a different plan and it has the power," Mr. McGregor said. U.S. tech companies in China are dealing with a different world, he added, "and it would be corporate suicide not to acknowledge it."

Beijing Sinnet, in a regulatory filing late Monday, said it would pay up to 2 billion yuan ($300.8 million) for the assets to "comply with our country's laws and rules and further improve the security and the service quality of the AWS cloud-computing service operated by the company."

Early this year, China's Ministry of Industry and Information Technology informed foreign companies with cloud ventures that new operating licenses must be applied by the end of this year. Amazon's deal with Sinnet could clear the final obstacles for AWS to get such licenses, analysts from Citic Securities said in a note Tuesday.

China's MIIT had also put out draft measures calling for tighter technical cooperation between foreign cloud operators and their local partners in December. The rule change triggered complaints from more than 50 U.S. lawmakers, who protested in a letter to China's ambassador to the U.S., Cui Tiankai, in March that it would force U.S. companies to essentially transfer ownership and operations of their cloud systems to Chinese partners.

Officials with the MIIT had no immediate comment.

Amazon and other U.S. companies here, including Apple Inc., have faced increased pressure in recent months in the face of the Chinese government's desire to control cyberspace.

In July, Apple said it would begin storing cloud data for its Chinese customers on a server run by a government-owned company, to comply with Chinese law. The data include photos, documents, messages and videos uploaded by mainland China users of Apple's iCloud service.

Since a new cybersecurity law came into effect in June, U.S. tech companies have been constrained in their efforts to operate as they normally would outside of China, and this has led to inefficiency and a higher risk of cyberthreats, said the U.S.-China Business Council in a statement Tuesday.

In August, AWS was caught up in a Chinese government clampdown on tools that allow internet users to circumvent the country's vast system of internet filters. In that instance, AWS customers were sent emails by Beijing Sinnet asking them to delete tools enabling them to bypass the filters. Some of the tools that clients use include virtual private networks, or VPNs.

Cloud platforms provide data storage, computing and networking resources over the internet, reducing the need for on-site servers. China's $2 billion public cloud market is set to grow to a $16 billion market by 2020, according to estimates by Morgan Stanley analysts. A government policy push for enterprises to migrate to the cloud, better vendor offerings and falling costs will boost demand for such services, Morgan Stanley said.

In China, AWS faces strong local competition in the form of Alibaba Group Holding Ltd. and China Telecom Corp. Alibaba's cloud unit held 40% of the infrastructure-as-a-service market, the bulk of the public cloud offering in China, according to International Data Corp. research. Microsoft Corp., the largest foreign provider in China, had 5%, AWS has 3.8%.

Still, China's market is in its nascent stage, and it is too early to crown industry champions, said Kevin Ji, a research director at Gartner. With their strong product offerings, AWS and Microsoft are likely to prove formidable competitors to Alibaba in the longer run, Mr. Ji added.

--Yang Jie in Beijing and Liza Lin in Shanghai contributed to this article.

(END) Dow Jones Newswires

November 14, 2017 08:30 ET (13:30 GMT)