U.S. and Chinese cloud companies are accelerating their penetration into the Korean market as they expand infrastructure, including the establishment of data centers in the country. Domestic cloud companies are struggling to find breakthroughs, pioneering projects in the public sector, which the foreign companies cannot enter due to security restrictions.
According to industry sources on the 20th, Amazon Web Services (AWS) from the U.S. is investing 7 trillion won in collaboration with SK Group to build an AI-exclusive data center in Ulsan. The Ulsan AI data center, which will be equipped with 60,000 graphic processing units (GPUs), is expected to operate at the largest scale in the country. It will be first constructed to a capacity of 41 megawatts (MW) by 2027 and will be finally completed at a scale of 103 MW by early 2029. Since last year, AWS has been building a data center in Incheon with a capacity of up to 100 MW.
China's Alibaba Cloud has also completed the construction of its second data center in Korea and will start operations by the end of this month. This expansion comes three years after the establishment of its first data center in the country in 2022.
The background to the rush of foreign companies to expand data centers domestically and broaden infrastructure is attributed to the growth potential of the Korean market. According to market research firm IDC, the size of the domestic cloud market is forecasted to grow by 68.4%, from approximately 14.6 trillion won in 2024 to about 24.6 trillion won in 2028. Notably, the government’s active push for the private cloud transition in the public sector has made investing in domestic firms more attractive to foreign companies. The government plans to transition 70% of major systems of public institutions to a private cloud-native environment by 2026. According to the Digital Service Utilization Support System, the contract size for cloud orders in public institutions last year was 576.9 billion won. The government's fourth basic cloud plan suggests that by 2027, the contract size is expected to increase to the 1 trillion won range.
The problem is that the position of domestic companies is becoming increasingly narrow. According to the Ministry of Science and ICT, foreign companies already occupy more than 80% of the domestic private cloud market. The public cloud market, which was previously guaranteed to the domestic companies, also allowed entries from foreign companies starting last December. For public institutions to provide cloud services, they must obtain 'Cloud Service Security Certification (CSAP),' which has been restricted for foreign companies. However, the government opened the doors for foreign companies to the 'low' grade category of cloud security certification divided into three levels (high, medium, low) in 2023. Last December, Microsoft became the first foreign company to receive the 'low' grade certification, and earlier this year, Google and AWS followed suit, preparing to enter the public cloud market.
Domestic companies appear to be striving to enter public cloud markets above the 'medium' grade security certification, which is inaccessible to foreign companies, in search of breakthroughs. Recently, KT Cloud and Samsung SDS became the first among private cloud companies to pass the National Intelligence Service's 'high grade' security verification. Until now, high-priority services like Government 24 could only use the internal computing facilities of public institutions due to the absence of private clouds meeting the National Intelligence Service's high-grade security requirements. With this certification, KT Cloud and Samsung SDS can now provide cloud services for crucial digital administrative services in the public sector requiring security above the 'medium' grade. The high-grade security verification for NHN Cloud is also underway.
Among domestic companies, there is a growing consensus that defending the market solely through price is becoming difficult. Although their advantage was a price 20-30% lower than foreign companies, this is now being challenged by the cost-effective marketing strategies of China's Alibaba Cloud. Seo Seong-il, vice president of the Korea Software Industry Association, noted, "As domestic companies struggle against foreign companies in the private sector, they are also competing with foreign entities in the 'low' grade public market. This indicates their efforts to find breakthroughs through the development of the public sector market that is inaccessible to foreign firms due to security restrictions like the 'medium' grade or higher."