Required by law to open data centres in China, MNCs are beginning to realise the advantages
The past few months have seen a flurry of multinational corporations setting up data centres in China. The most high-profile among these is Apple, which at the end of May announced that its first data centre in China was officially under operation. The centre, dating back to 2017 and operated jointly with a local company in Guizou, was launched under the requirements of China’s Cybersecurity Law, which encourages and in some situations stipulates the collection, use and storage of personal information and important data in China.
In the same week, Tesla also announced the building of a data centre in Shanghai to localise its data storage. According to Reuters, other carmakers like Ford, BMW and Daimler have all revealed that they will take similar steps to comply with the Cybersecurity Law and the newly released draft regulations on Vehicle Data Safety Management.
For Carolyn Bigg, a partner at DLA Piper’s Hong Kong office, these recent moves are in stark contrast to past practice. “It remains really hard for international businesses to set up data centres in China. Lots of companies may have tried to do this five to ten years ago by effectively sub-licensing local data centre’s regulatory licenses to do so, but there's been a real crackdown on that,” says Bigg.
Speaking of the reasoning behind this, one reason is “the very strict licensing requirements in China under the IDC license regime,” Bigg notes. In addition, restrictions on foreign ownership and organisational structures, the high cost of infrastructure, and even liaising with government authorities, all made the establishment of data centres challenging.
According to Bigg’s observation, “many international businesses have been trying to keep the data from mainland China in a data centre in Hong Kong, Singapore or Tokyo”. However, in addition to the regulatory pressure, “nowadays, most international businesses are very open to having Chinese servers or a data centre in China.” Rather than setting up their own data centres, most seek partnerships with local data centre providers like Alibaba Cloud or Tencent Cloud.
Many have raised concerns over building data centres in China and question the independence of the data being processed. For example, a recent New York Times story said that Apple “compromised” to China’s censorship and surveillance in order to maximise its profits. However, from an operational point of view, Bigg believes there are many benefits to MNCs setting up local data centres.
Firstly, a local data centre would allow MNCs to operate within China's regulatory framework, which includes the Cybersecurity Law, the Data Security Law and a myriad of other administrative regulations. “It is great from a compliance management point of view, and it's actually an operational advantage,” Bigg adds.
Secondly, the sheer volume of data produced in China is a big draw for MNCs. “A lot of international businesses with large data sets want to set up data lakes in China to really understand their customers there,” says Bigg. “Some of them also have R&D centres in China, so the data analytics would support product development.”
Additionally, there are real benefits for MNCs to set up separate data centres in China or in Asia. Given the different requirements for data compliance in each region or country, “it can be hard for international businesses to have one global approach to data compliance,” Bigg says.
Take companies that operate in Asia and Europe for example. Bigg points out that the culture towards data privacy in Asia is more pragmatic. It focuses on being transparent and requesting consent in the first place, as well as focusing on the goal of eliminating the worst abuses. In Europe, “data effectively has to be anonymous before you can run complex data analytics, and from a compliance perspective, what you are able to do with that data is very different.”
In contrast, “consumers in China and across Asia are more open to the use of data analytics and AI to provide a customised experience, so companies can use identifiable individual data to offer more tailored services,” Bigg says. “So, if MNCs are willing to adopt a regional approach by segregating data, the opportunities in places like China or Singapore are much greater.”
Will having data centres in China become the norm for MNCs in the future?
Bigg is cautious on this point. Given the high cost of data centre infrastructure (Apple invested $1 billion in its Guizhou data centre) and the strict regulatory hurdles to obtain an IDC license, “I don't think this is going to be an option for most international businesses. But I think there are huge opportunities for those that do take that step,” Bigg notes.
Meanwhile, she notes that many MNCs “are looking to partner with existing China data centres and tech platforms to launch SaaS platforms to host local data.”
“In China, handling data doesn’t only involve one or two laws,” Bigg points out. “There are high-level laws, and many detailed regulations concerning what you need to do in practice in terms of technical standards etc.”
“As lawyers, what we do is help international businesses to assess the operational, contractual risks, as well as the regulatory compliance risks in order to realize the opportunities of building or operating data centres,” Bigg adds.
To contact the editorial team, please email ALBEditor@thomsonreuters.com.