Risk in data centre gold rush

A number of new hyperscalers have entered the market, mainly in Johor, putting the planned DC capacity build-out at a massive 1,400MW over the next 10 years or so. — Photo: Image by rorozoa on Freepik

IN a gold rush, sell shovels. This is already evident in the Malaysian data centre (DC) boom.

A number of Malaysian landowners have reaped decent gains by selling land to DC operators, mainly in Johor. Some are winning construction and engineering contracts from DC operators, while others provide electricity-related services, which are much needed by energy-guzzling DCs that want to hook up to the national grid.

Just like during the California gold rush, those who tirelessly searched for specks of gold didn’t come out as well as the suppliers of shovels.

So where are the risks? First, we need to understand that there are generally two types of investors driving the phenomenal growth of DCs in Malaysia.

The more common one is led by local players like YTL and foreign investors like Bridge Data Centres. This group builds DCs to be used by third parties.

Their concept is similar to the older generation of local DC operators such as Telekom Malaysia Bhd (TM), TimedotCom and Basis Bay.

The difference is that the new players fall into the category of “hyperscalers” in industry lingo. They are building significantly larger DCs. YTL’s data centre park in Johor alone will have a 500 megawatt (MW) capacity, which is more than all the existing DC capacity built by the local players.

A number of new hyperscalers have entered the market, mainly in Johor, putting the planned DC capacity build-out at a massive 1,400MW over the next 10 years or so.

The other group of new DC operators coming into Malaysia are the giant cloud computing providers who prefer to build and run their own DCs.

Microsoft, which recently said it would invest over RM10bil in Malaysia, falls into this category. But the size and capital expenditure of Microsoft’s DC remains unclear, as the mentioned sum is generally for cloud and artificial intelligence (AI) infrastructure. Presumably a chunk of that will go towards building its DC here.

Recall that Crescendo Corp Bhd has sold a few pieces of land in Johor to Microsoft for close to RM450mil and presumably this is where one of Microsoft’s own DCs are going to be located.

In Singapore, a significant portion of the existing 1GW of DC capacity has been built by the cloud players themselves, including Google and Amazon Web Services.

For now, it is the former group, the third-party DCs, which is making a larger splash in Malaysia, considering the large number of them buying up land, primarily in Johor, to build their hyperscale DCs.

Who exactly is going to use all that DC capacity? Surely these DC operators need sufficient take-up before they plonk in all that capital expenditure?

We should note, before we move on, that the existing DCs in Malaysia, such as TM and TIME Dotcom Bhd, cater to the needs of Malaysian companies, such as banks and telecommunications companies, as well as some smaller international cloud service providers.

It is unlikely that these users are the ones taking up the new massive DC capacity being built up in Malaysia.

One “off-taker” of the new DCs has already been revealed to be Shopee’s parent company SEA Ltd, which is said to be taking up 48MW of the 500MW DC being put up by YTL. This is a work in progress.

But who is going to be using the other hundreds of MW of new capacity being built by the hyperscalers in Malaysia? This is where the big risk is.

Those who are convinced that there will be no dearth of demand point to one thing — the AI revolution taking the world by storm. According to their thinking, AI will touch almost every aspect of our lives, so there will be a massive demand for data storage, processing, and access. Hence, the third party-run DCs are building up their capacity to tap those opportunities.

Most of the new DC operators coming to Malaysia do not disclose who their clients are. Word on the street in the local DC industry scene points to one Internet giant becoming perhaps the single largest user of the third-party DCs being built in Malaysia — China-based ByteDance, the owner of the popular social media platform TikTok.

If true, it would mean that at least for now, Bytedance and TikTok are single-handedly driving the DC build-up craze in Malaysia. Interestingly, one reason why Bytedance would be so keen to use DCs in Malaysia could be related to the US-China trade war and sanctions.

Recall that YTL’s partner for its DC in Malaysia is none other than US multinational technology company Nvidia Corp. The YTL data centre will be powered by Nvidia’s powerful AI chips and supercomputers.

Chinese companies such as Bytedance are hard-pressed to access such infrastructure due to the trade sanctions which, this week, took another upturn.

However, having one or even two giant companies as the main users of all the DC capacity being built up in Malaysia does pose a risk that we know as the single customer risk. It is important to note, however, that the risk can be decreased if there are more users for the third-party DCs being built up.

This article first appeared in Star Biz7 weekly edition.

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