Google Scrapped Cloud Initiative in China, Other Markets

Ryan Gallagher and Mark Bergen (Bloomberg) -- Google abandoned plans to offer a major new cloud service in China and other politically sensitive countries due in part to concerns over geopolitical tensions and the pandemic, according to two employees familiar with the matter, revealing the challenges for U.S. tech giants to secure business in those markets.

In May, the search giant shut down the initiative, known as “Isolated Region” and which sought to address nations’ desires to control data within their borders, the employees said. The action was considered a “massive strategy shift,” according to one of the employees, who said Isolated Region had involved hundreds of workers scattered around the world.

Alphabet Inc.’s Google is pouring money into cloud computing, part of a broader effort to find new sources of growth beyond search advertising. Google Cloud generated $8.9 billion in revenue in 2019 -- a 53% increase over the previous year -- as it has pushed into sectors such as finance and government that require special security clearance and features that shield confidential data. Rivals Microsoft Corp. and Amazon.com Inc. already offer these capabilities via their cloud units.

Google’s recent decision to nix the Isolated Region project was made partly because of global political divisions, which were exacerbated by the Covid-19 pandemic, according to the two employees, who requested anonymity because the project hasn’t previously been made public. The geopolitical issues placed demands on Isolated Region that it couldn’t deliver, according to one of the employees. Documents provided to workers also detailed global tensions and their influence on Isolated Region’s closure, the employee said.

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The initiative would have allowed Google to set up cloud services controlled by a third party, such as a locally owned company or a government agency. The result would be a business sequestered from Google’s existing cloud computing services, which include data centers and computer networks.

In January 2019, amid growing tensions between the U.S. and China, Google decided to pause its plans for Isolated Region in China and instead began to prioritize potential customers in Europe, the Middle East and Africa, according to the two employees. But the project was scrapped entirely this May, the two employees said. Google has since weighed a pared back cloud offering to enter China, according to the two employees.

‘Other Approaches’

A Google spokeswoman, speaking after the story was published, said Isolated Region wasn’t shut down over geopolitical concerns or the pandemic. She also said the company isn’t weighing options to offer the Google Cloud Platform in China.

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Isolated Region was shelved because “other approaches we were actively pursuing offered better outcomes,” she said, declining to detail those approaches. “We have a comprehensive approach to addressing these requirements that covers the governance of data, operational practices and survivability of software,” the spokeswoman said. “Isolated Region was just one of the paths we explored to address these requirements.”

“What we learned from customer conversations and input from government stakeholders in Europe and elsewhere is that other approaches we were actively pursuing offered better outcomes,” the spokeswoman said. “Google does not offer and has not offered cloud platform services inside China.”

According to one of the employees, the plan involved selling cloud services in what Google calls “sovereignty sensitive markets,” such as China and the E.U., where there are strict laws for companies offering services that involve the collection or processing of people’s data.

The project, which began in early 2018, sought to address rules in China that require Western companies to form a joint venture with a Chinese partner company when they provide data or networking services, one of the employees said. In such a relationship, the partner company would have retained both physical and administrative control over user data. The arrangement was intended to satisfy Chinese authorities while also providing a barrier between Google’s Isolated Region cloud services and the rest of its data center network, which stores and processes emails, documents, photographs and other data from its users, the employee said.

By handing over control of user data to third party companies in foreign countries, Isolated Region also aimed to appease privacy concerns about the U.S. government’s potential ability to carry out covert surveillance of Google’s Cloud services, the employee said. Those concerns increased in March 2018, following the passing of the Clarifying Lawful Overseas Use of Data Act, better known as the CLOUD Act, a federal law that granted U.S. law enforcement agencies more power to request personal data stored by American technology companies even if the data is stored on servers located outside of the U.S., the employee said.

Data Sovereignty

Some employees expressed concern about the Cloud project in China and questioned their superiors about it, according to one of the employees. But it’s not known if employee opposition was a factor in Google’s decision to stop the initiative in China or elsewhere.

Isolated Region was part of a larger Google project known as “Sharded Google,” which has sought to develop new data storage and processing facilities, known as “shards,” that are walled off from the rest of the company’s systems, according to the employees.

Major cloud providers are all racing to develop data centers that are either physically separated or rely on complex software to keep information flows apart.

It’s a costly process, driven by rising demand on two fronts. One is from firms in specific industries, such as finance, that want isolated machinery for security reasons. Another comes from laws that require data reaped inside the country to stay there, with China being perhaps the most stringent example.

Both trends are accelerating. More than 100 countries have some sort of data sovereignty laws in place, according to David Gilmore, chief executive officer of DataFleets Ltd., an enterprise software firm. In the U.S., state policies, such as California’s new consumer privacy law, provide further restrictions on how cloud companies handle data. “It’s just the tip of the iceberg,” he said.

France and Germany recently started Gaia-X, an effort to build the continent’s own data storage systems over the internet without relying on U.S. technology giants.

Cloud Regions

Protectionism is a major force in these calls for data localization, said Trey Herr, director for the cyber statecraft initiative at the Atlantic Council. “Part of it is security,” he said. “A lot of it is economic.”

Google’s competitors in this space, such as Amazon Web Services and Microsoft Azure, have dominated the market in recent years. Cloud regions let companies offer the horsepower and security of multiple data centers. Microsoft has more than 60 cloud regions globally, more than double AWS and Google. The Google spokeswoman said the company defines regions differently.

In 2018, Google considered building an isolated version of its systems to support a classified U.S. government computer network. The system, known as “air gap,” would have been disconnected from the internet and from Google’s existing servers, and was designed to be used only on high-security government networks that store secret information.

But the air gap project was shelved after internal opposition. Some employees said they feared the system would lead to work with the U.S. military, which they opposed for ethical reasons. Other employees opposed it on technical grounds and thought it would be too hard to deliver.

In China, Google has long been eyeing ways to access the country’s lucrative marketplace, where there are approximately 900 million internet users. While Amazon and Microsoft sell their cloud services in mainland China, Google hasn’t. But about three years ago, the company began talks with Chinese firms about providing its main data storage service in the nation through a joint venture, as Amazon and Microsoft do. Google also provided some of its free machine learning tools in China, and the company started working on projects to provide more software tools to developers there.

Most of those efforts, however, were shut down by Google Cloud Chief Executive Officer Thomas Kurian, shortly after he took over the division in January 2019, according to one person involved in the plans. At that time, political and economic tensions between the U.S. and China were rising. In addition, Google’s actions in the country had come under increased scrutiny, following leaks about a plan for a censored Chinese version of its search engine.

Isolation Region was conceived as another potential product for Google to offer in China, according to one of the Google employees. But key political impediments contributed to the decline of the project in China and elsewhere, including the U.S. national security orders against China telecommunications giant Huawei Technologies Co. and the fallout from the pandemic, according to the employee; Google disputes that the pandemic or geopolitical issues were factors.

Kurian didn’t scrap all of Google Cloud’s China-related work. According to one of the Google employees, and another person familiar with Google’s cloud operations, the company has continued to explore the possibility of rolling out a service called Anthos in the country. Launched in 2019, Anthos lets companies using one cloud provider easily add on another. Businesses across the globe have adapted this strategy as a way to hedge financial and infrastructure risk. The Google spokeswoman said the company has no plans to provide Anthos in China.

In a September 2019 interview with CNBC, Kurian said that Google’s cloud business was seeing “enormous growth” and hadn’t been affected by the U.S. trade war with China. He pointed to the company’s large presence in Hong Kong and Taiwan and didn’t rule out expanding into China’s cloud market. “We continue to monitor the demand for our technology from Chinese customers,” he said.