Shenzhen Calling: The city's datacenter market emerges along with its IT industry

From modest beginnings as a sleepy coastal city, Shenzhen has emerged as one of China's leading cities, particularly for the country's dynamic IT sector. What was once primarily a manufacturing center, and later a financial hub, is now a home for innovation that some have even dubbed the 'Silicon Valley of China.' As Shenzhen develops, so does its datacenter market, with China's biggest providers increasingly concentrating their efforts on new builds in the city. Even some international operators have entered the fray. These developments have changed the nature of the city's relationship with its neighbors, the more mature markets of Hong Kong and Guangzhou.

The 451 Take

The emergence of Shenzhen as an IT-oriented city has major implications for its still-nascent datacenter market. As a relatively immature arena, the city has until now been dominated by China's state-owned carriers, but these behemoths are relatively unaccustomed to providing the levels of density and types of services that customers such as Alibaba, Tencent and others are demanding. Although China Telecom, China Unicom and China Mobile are adjusting their strategies accordingly, the calls for more carrier-neutral options should only grow louder with time. Local private operators are investing in the city, but despite the challenging regulatory environment in China, we expect Shenzhen to become a prime target for regional and even global datacenter providers willing to take the plunge. Considering the relative ease of doing business in the city, it could well start to rival Beijing and Shanghai as a datacenter market.

China's very own Silicon Valley?

Before 1980, Shenzhen was a small, mostly agrarian city nestled in the Pearl River Delta, just over the border from Hong Kong (then UK territory). That year, however, the Chinese government declared the city the country's first 'Special Economic Zone,' and foreign investment quickly began to flow into the region. Factories and manufacturing plants sprung up all over Shenzhen, and migrant workers from all over China poured into town seeking job opportunities in the new regional hub.

A few decades later, and Shenzhen's heavy industry days have, for the most part, already passed on, as manufacturing-intensive businesses have largely moved to nearby developing cities like Huizhou and Shanwei. Shenzhen itself, home to just over 10 million people as of 2015, is instead now a major financial center. The Shenzhen Stock Exchange was located there until recently, and many financial and insurance institutions are headquartered in the city, including Ping An Insurance, one of China's largest insurers and number 41 on Fortune's Global 500.

Shenzhen's remarkable trajectory has been defined by its sheer speed and magnitude, and it appears the city may be entering a new stage of its development yet again. Riding the coattails of China's emergence as a global IT powerhouse, Shenzhen has more recently hosted the central offices of international technology giants Huawei and ZTE, Tencent, WeChat, and leading genomic mapping firm BGI.

While the financial sector continues to serve as the principal pillar holding up the Shenzhen economy, the ground underneath this foundation seems to be gradually shifting. The Shenzhen Stock Exchange, for instance, has relocated to neighboring Dongguan. At the same time, Apple announced recently that it would be setting up a research and development center in the city. In the wake of big names like this, a crowd of new cloud, streaming and gaming companies has followed.

Overall, the message is quite clear: This once-sleepy seaside town has set its sights on becoming the Silicon Valley of China. What that means for the Shenzhen's nascent datacenter market is therefore worth sorting out.

New possibilities for a new city

By square footage, Shenzhen is the third-largest datacenter market in China, and yet it has only one-third of the space of the second-largest market, Shanghai. Of that space, 65% is owned by one of China's 'Big Three' state-owned carriers: China Telecom, China Unicom and China Mobile. These incumbents are recognizing Shenzhen's transformation into a datacenter-hungry IT capital, and are adapting accordingly. China Telecom, for instance, manages 10 facilities in the city, the largest three of which were built after 2012.

China Unicom, traditionally more dominant in Beijing and northern China, is concentrating increasingly more resources in Shenzhen, and has taken on a wholesale approach that caters specifically to large technology customers. Two of the provider's three Shenzhen datacenters are dedicated to Tencent, a member of BAT, China's top-three internet enterprises that now act as key drivers for its datacenter industry. China Telecom also leases out builds in Shenzhen to Tencent and Alibaba.

Shenzhen's IT companies are increasingly voicing a demand for carrier-neutral services, and China's up-and-coming nontelco providers are responding. GDS Services has recently opened a new phase of its Futian District facility, for example, where Alibaba, Tencent, Walmart and Chinese delivery services company SF Express are the firm's biggest clients, in addition to GDS's base of financial customers, including Ping An, China Guangfa Bank and Qianhai Life Insurance.

Apart from ever-increasing demand for colocation, Shenzhen boasts favorable conditions for new datacenter builds on a number of levels. Unlike in Beijing and Shanghai, where the municipal authorities have almost prohibited centrally located new builds due to rising environmental concerns, in Shenzhen power and land are relatively abundant, even if expensive. In particular, the city's suburban Pingshan District is turning into a datacenter hotbed, with lots of firms erecting large-scale structures in the area for both internet and financial customers.

Despite China's immensely challenging regulatory and licensing landscape, these elements, taken together, have enabled Shenzhen to start to catch the eye of international datacenter companies, many of which are considering setting up shop in the city, sometimes even over China's larger markets. These providers hope to take advantage of the growing trend of Chinese IT companies reaching beyond their home nation's shores. Hong Kong-based providers PCCW Solutions and CITIC Telecom CPC are both factoring Shenzhen into their 2017 expansion plans, and global operator Equinix sees the city as a long-term option.

The elephants in the room: Hong Kong and Guangzhou

Considering its geographical proximity, no discussion of Shenzhen would be complete without touching on its relationship with Hong Kong, its economically developed, formerly colonial neighbor to the south. The semi-autonomous city, which the United Kingdom returned to China in 1997, is home to a more mature datacenter market, mainly serving the financial companies that make Hong Kong a regional hub and involving competition among most of the world's top multinational datacenter providers, not to mention a solid collection of homegrown players.

And yet, the growth of Shenzhen's IT industry, along with that of mainland China's as a whole, is already beginning to leave its mark on the Hong Kong market. China Telecom Global reports that more of its customers in Shenzhen are looking to expand into Hong Kong than the other way around. In the financial sector, the decision to position the new GDS facilities right up against the Hong Kong border was made to attract potential Chinese clients seeking low-latency connections between the two cities, a need that has grown over the last few years. On the Hong Kong side, PCCW reports that increasingly more of its international customers are looking to lease space in both locations.

One also cannot afford to ignore the other mega-city in Shenzhen's vicinity, Guangzhou – Guangdong's 15-million-person capital and historical urban center of the entire Pearl Delta River region. A major manufacturing and trade hub, the city hosts a relatively tiny datacenter market, primarily due to the tendency of its resident enterprises to keep their IT in-house. In recent years, however, a rivalry has emerged between Guangzhou and Shenzhen (similar to that which exists between Hong Kong and Singapore, but on a provincial, as opposed to an international, level), with most providers in the two cities agreeing that the latter market is now at least on par with the former, if not leading outright.

But with its very own recent internet boom, Guangzhou is pushing back against its younger cousin. GDS is working on two datacenters in the city, and 21Vianet recently announced a joint venture partnership with Warburg Pincus, whereby the American-based private equity firm will own part of four of the Chinese IT provider's facilities, including one in Guangzhou. PCCW reports that its Guangzhou datacenter (space leased from China Unicom) has recently sold out, although it is primarily targeting financial customers in the city. For the moment, there looks to be enough business for both Shenzhen and Guangzhou to thrive, but competition between the two cities is sure to heat up soon.

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