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Chinese giant to open first cloud computing hub in the U.S. Wednesday.

By Reuters and Fortune Editors
March 4, 2015

Alibaba Group Holding Ltd BABA is launching a cloud computing hub in Silicon Valley on Wednesday, the e-commerce giant’s first outside of China, underscoring its global ambitions in the face of stiff and entrenched competition.

The new California data center marks the Chinese company’s latest measured expansion onto American soil, and into a hotly contested U.S. market now dominated by Amazon.com Inc AMZN , Microsoft Corp MSFT and Google Inc. GOOG

Alibaba’s Aliyun cloud division intends the new data center to cater initially to Chinese companies with operations in the U.S., including retail, Internet and gaming firms. It will later target U.S. businesses seeking a presence in both countries, Ethan Yu, a vice president at Alibaba who runs the international cloud business, told Reuters.

“This is a very strategic move for us,” Yu said, declining to say how much Alibaba invested in the data center or disclose its location for security reasons. “International expansion is actually a company strategy in the coming few years.”

“Eventually we may expand to other regions, for example the East Coast or middle part of the U.S., if our customers have the demand for that.”

Aliyun, which has been likened to a budding version of Amazon Web Services, began as part of the company’s in-house technical infrastructure but has since expanded to lease processing and storage space for small and medium Internet businesses in China.

While Alibaba dominates e-commerce in China, Aliyun, also known as AlibabaCloud Computing, holds about a 23% market share in its home market. It faces both Chinese and foreign competitors, from carriers like China Telecom to Microsoft and Amazon. Its existing data centers span the Chinese cities of Hangzhou, Qingdao, Beijing, Shenzhen and Hong Kong.

Alibaba is kicking off its U.S. cloud business as American corporations and politicians are protesting what they see as Beijing’s efforts to curb foreign technology at home.

Chinese government controls have limited foreign competition and disrupted many online services, including Google’s and Amazon Web Services’, according to censorship watchdogs.

This week, U.S. President Barack Obama sharply criticized new Chinese counter-terrorism regulations that subject overseas companies to arduous measures regarding data management. The official Chinese news agency Xinhua responded Wednesday by calling Obama’s criticisms “utterly groundless and another piece of evidence of arrogance and hypocrisy of the U.S. foreign policy.”

A more immediate concern may be how Alibaba intends to vie with the likes of Amazon, Microsoft and Google, which are slashing prices on cloud services to try and sustain double-digit growth. They’re battling over a public cloud services market that could grow into an $100 billion industry by 2017, according to researcher IDC.

U.S. customers are not expected to be bothered by the service’s Chinese ownership if pricing is competitive.

Alibaba has big plans for Aliyun, which now accounts for about 1% of its revenue but supports its core e-commerce operation and will also play a pivotal role in the long run. Alibaba sees cloud computing as key to its plans to aggregate and analyze the vast quantities of data it collects, including on consumer behavior.

The company also needs to find ways to sustain so-far stunning growth. Shares in the company fell to their lowest levels since their debut on Tuesday, after rival JD.com’s JD better-than-expected quarterly results revived concerns that Alibaba’s expansion is slowing.

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Cloud computing and infrastructure was the company’s fastest-growing business segment in the December quarter, increasing sales 85% to $58 million.

Alibaba now derives the vast majority of its revenue from China. In recent months it has made headway in emerging markets from Russia to Brazil, but the company has taken a cautious, calculated approach to the U.S. market.

The northern California data node would serve internal Alibaba businesses, like AliExpress, its online B2C platform for buyers outside of China, as well as external public cloud clients, Yu said.

He declined to disclose details about potential clients. But cash-strapped startups generally rely heavily on cloud service providers to power their services. Alibaba has invested in several U.S. firms including messaging app Tango, online retailers 11Main.com, Fanatics.com and Shoprunner, but it’s unclear if they would avail themselves of Aliyun’s services.

Separately, it has also tied up with LendingClub to provide financing to online buyers in the U.S.

Ahead of Wednesday’s launch, Aliyun ran an invitation-only trial period for customers inChina with international expansion plans, he said. The company began selling U.S. cloud services on Tuesday.

“Gradually we will start to attract international customers,” Yu said. “There are actually lots of U.S. customers, U.S. enterprises who look forward to setting up lots of data centers inChina to serve their Chinese-based customers.”

“I do see there is big demand for U.S. customers who look for balanced presence of their IT infrastructure across the world, including China.”

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