China: Storage Superpower?

Its days as a slumbering giant long over, China is poised to make the same impact on storage that it's had on PCs, wireless, and the Internet. And that impact is likely to be made as both a buyer and seller of storage technology.

It's not news, of course, that the Chinese market is a large one, growing at breakneck pace. But here's some context to put those ideas in sharper relief. China expects to overtake the U.S. in terms of Internet users within the next two years, according to the government, with a slew of technology projects designed to haul the country's 1.3 billion citizens into the 21st century.

Last week, for example, one of the world's first trials of 4G mobile technology went underway in Shanghai, and the country is working on a number of major e-government projects.

Chinese vendors Huawei and Lenovo are driving these efforts forward. This week, Huawei announced global contract sales of $11 billion in 2006, a 34 percent hike on the previous year. (See Huawei Sales Hit $11B.) Some 65 percent of this revenue came from sales outside of China, underlining the vendor's growing status as a global technology player.

These government-led initiatives are expected to foster explosive demand for backup and archiving wares, according to analysts and in-country vendors. This could lead to Chinese interests buying up an existing storage vendor, as Lenovo did in 2004 by buying IBM's PC business. It's a short hop from there to using the growing market clout of China to put even more price pressure on storage products, commodities or not.An IT director at large U.S. Internet company with experience in China told Byte and Switch that he would not be surprised if other vendors follow this lead and snap up commodity storage hardware from U.S. firms. "It's not a bad model," he says. "The Chinese have a sufficiently large market within their country that they could make it work -- it's just the law of large numbers."

Storage is a priority for Huawei, according to the company's spokeswoman Lynn Zhou. "Both storage and security are recognized within Huawei as areas of strategic importance as [telecom] operators move towards an all-IP network environment," she said in an email to Byte & Switch.

Certainly, Chinese technology giants have been fleshing out their storage strategies. Huawei, for example, was teamed up with 3Com, and also forged partnerships with FalconStor, Intransa, iVivity, and Xyratex. (See Huawei Sets Sights on IP SANs, FalconStor Teams With Huawei-3Com, and Intransa Expands in China.) Lenovo has an OEM deal with HDS and server specialist Langchao has teamed with EMC.

Last year Langchao even underwent a name-change to help establish its presence in the global market, rebranding its international operations as Inspur. This, apparently, is a combination of the words "inspire" and "spur."

Continue to Page TwoWith so much storage kit now commoditized, such as disk and tape, it seems perfectly feasible that a cash-rich Chinese vendor could venture into the U.S. storage market. Sun, for example, was recently rumored to be selling off part or all of its storage business, although execs denied this. (See Storage Slows Down Sun and Sun Storage Chief: We're Not for Sale.) "[Chinese firms] could buy their way in," says the American IT director. "If you have the market, the revenue and the costs will work out."

Other potential acquisition targets could be HP's storage division, or CA and its broad menu of storage management products. And with the Chinese bending more toward iSCSI and Ethernet-based storage, smaller fish like Falconstor, Intransa, and Ivivity might prove appealing.

Huawei is the most likely candidate to make this type of acquisition, according to Blaine Kohl, vice president of marketing for chip vendor Tehuti Networks. "Huawei has predominantly been an infrastructure company, but they are looking to expand their presence," says Kohl, who spent a lot of time in China in a previous job, managing Intel's 10-Gbit/s Ethernet business. "It will be interesting to see what happens."

Huawei, for its part, wants to keep its multiple options open. "Huawei has no pre-determined acquisition plans," said Zhou, adding that the vendor "remains open" to forming strategic partnerships. "We work with a variety of partners across international markets as appropriate."

That said, if firms such as Huawei were to approach the storage market in the same way as they have the telecom sector, they could turn the pricing screws on incumbent vendors. Low Chinese labor costs and aggressive marketing have already allowed the likes of Huawei, UTStarcom, and ZTE to set prices for telecom equipment 10 to 15 percent lower than their Western counterparts. (See Insider Analyzes China's Big Three.)China's storage uptick is driven largely by government projects and the rapid development of its telecom and banking industries, according to Beijing-based IDC analyst Reco Li. "The Chinese storage market has fast growth," he said in an email, explaining that it experienced year-over-year revenue growth of 24 percent in the first three quarters of 2006. In the same timeframe, storage shipments grew a whopping 101 percent to just over 55 Pbytes, he added.

Though China is still dwarfed by the U.S. in terms of storage capacity, there is plenty more to come. "China still has an enormous market to develop," he said, adding that the country is about to experience its own data explosion.

A series of government initiatives, which range from emergency response systems to accessing official documents via the Internet, are major drivers, although Gartner analyst Jimmie Chang said that enterprises are also contributors. "In telecoms and banking, the IT infrastructure is almost as advanced as developed countries," he says, noting that energy firms and dot-coms are also big data generators.

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IDC's Li says that disk is the most popular storage medium in China, thanks largely to the relatively short history of tape in the country. There are also, he notes, big opportunities in backup. "A lot of Chinese organizations are building their first backup or remote disaster recovery systems."The U.S. IT director told Byte and Switch that China will likely consume as much storage hardware and software as the U.S. within the next few years. "There's a billion-plus people there -- that means that if they do the same things as everyone else, they are going to require orders of magnitude more storage," he says.

To illustrate his point, the exec used the example of Mofile, which has been described as the Chinese YouTube. The Website, he explained, is already one of the world's largest online storage services.

The sheer scale of the Chinese storage market became apparent last year when HP started work on ChinaGrid, an initiative to link researchers and almost 300 million students across the country, equal to the entire U.S. population. (See HP Extends China Grid and Chinese Gridwork.)

Despite the apparently inexorable rise of the Chinese technology industry, some U.S. vendors such as EMC, IBM, and Panasas have managed to clinch major deals within the country's borders. (See Beijing, EMC Partner , IBM Serves Golden Tax, and Xinjiang Clusters Panasas.) How such ventures will fare and to what degree Chinese storage prices prompt price-cutting in other markets will remain big variables in this global equation.

James Rogers, Senior Editor Byte and Switch