Malaysia and Indonesia are emerging as the main beneficiaries within ASEAN of the strong growth in global demand for new data centres amid the proliferation of AI, according to research firm CGS-International.
According to DC Byte, the capacity of Asean data centres could be increased more than fourfold, from 1,677 to 1,678. megawatt (MW) in the first quarter of 2024 (1Q24) to reach 7,589 MW by 2028.
This growth trend is supported by a rapid increase in data usage in the region due to the proliferation of internet-connected devices, additional computing demand from increased artificial intelligence (AI) training, and land and energy availability constraints in primary markets.
“We identify Malaysia and Indonesia as the main beneficiaries of increased data centre investments due to their geographical advantage, which makes them the ideal gateway for international connectivity,” the policy note said.
Although Singapore currently has the largest data centre capacity in ASEAN, land and energy constraints have pushed operators to explore alternative locations in Malaysia, Indonesia, Thailand, Vietnam and the Philippines, according to the report, titled “ASEAN Strategy: The Future of Data Centers in ASEAN.”
According to DC Bytes’ projections, data center capacity in Malaysia, Thailand and Indonesia is expected to reach 32-56% Compound annual growth rate (CAGR) between 2023 and 2028, far exceeding the 8% CAGR forecast for Singapore.
“We expect the increase in demand for data centres outside Singapore to be driven by both global hyperscalers (Amazon, Google and Microsoft) and colocation providers, whose customers may need computing resources for AI development and deployment,” the analysts added.
Malaysia is expected to benefit the most from the acceleration of data centre investments in ASEAN
The report also highlighted that Malaysia is emerging as the fastest growing player in the data centre space within the ASEAN region, owing to several strategic advantages, such as superior infrastructure, geographical location and favourable government policies.
“Malaysia has seen a surge in data centre activity since 2019. Good connectivity, reliable power supply and political stability have been key assets, we believe, as demand for data centre capacity in the region has increased,” the report notes.
The Singapore government’s decision to impose a moratorium on electricity and land for data centers in 2019 has provided a further boost to demand for data center capacity in Malaysia, particularly in the state of Johor, which is ranked as the 7th largest data center market in Asia by Cushman & Wakefield in Q1 2024, according to the report.
According to DC Byte, the Malaysian government has supported the data center industry, with the Malaysia Industrial Development Authority (MIDA) and Malaysia Digital Economic Corporation (MDEC) establishing a Digital Investment Office as a single hub to ensure faster processes and approvals.
At the same time, Johor’s proximity to Singapore, with potential dark fibre connectivity, could mean reduced latency and better cost control.
DC Byte also mentioned in its March 24 Global Data Center Report that to streamline electricity approvals, Malaysian authorities launched the Green Lane Pathway initiative in 2023 to reduce the time required to power a data center to just 12 months.
Money is pouring into developing cutting-edge AI models
According to Bloomberg’s consensus forecast, capital expenditures by major tech companies, namely Meta, Microsoft, Amazon and Google, are expected to increase significantly by 29% year-over-year to $177 billion in 2024. The increase in investment is driven by hyperscalers’ development of large-scale proprietary language models (LLMs) for their cloud infrastructure, analysts estimated.
Indonesia – Steady Growth of Data Centers
By the end of 2023, the total capacity of data centers in Indonesia would reach 514 MW, according to the Indonesian Investment Authority (INA).
“We believe this figure will further increase to 1.41 GW by 2029F, driven by Indonesia’s digital economic transformation, the shift towards cloud computing, Internet of Things (IoT) technology and wider use of artificial intelligence,” the report said.
Another driver of Indonesia’s data center potential, according to CGS-International, is its rapidly growing tech-savvy population and the concomitant increase in data usage.
As part of the “Making Indonesia 4.0” strategy, which aims to steer the economy towards advanced digital technologies, the Indonesian government has introduced a series of fiscal and non-fiscal incentives to promote the growth of the data center sector.
These incentives include:
• Up to 10 years of tax and withholding tax exemption on dividends.
• Simplified procedures for repatriating profits.
• Relaxation of restrictions on foreign ownership, including allowing foreign entities to own land for data center projects.
However, the data center market in Indonesia is fragmented, with around 68 data center companies in Indonesia, according to a forecast by market research firm Research and Markets. There are four main cities where most data centers are located in Indonesia, considering their unique advantages in supporting the expansion and efficiency of data center operations in Indonesia.
Notable partnerships and investments in recent years include major initiatives from Google, AWS and Microsoft, as well as collaborations with local companies such as Telkom Indonesia, Indosat Ooredoo and XL Axiata. These efforts aim to improve cloud infrastructure, develop advanced data services and expand data centre capabilities across Indonesia, the report added.
Indonesia’s data center industry is booming, driven by growing demand for digital services and significant investments.
However, CGS-International analysts believe that several key challenges must be addressed to sustain and accelerate this growth.
This includes:
• Energy availability and reliability
One of the main challenges is ensuring a stable and reliable electricity supply. Data centers are very energy intensive and Indonesia’s electricity infrastructure is still developing, in our view.
Furthermore, the development of green data centers is hampered by Indonesia’s relatively low renewable energy mix, which will account for only 13% in 2023. These challenges are compounded by regulatory complexities and the need for cost-effective power generation.
• Regulatory environment and bureaucracy
Bureaucratic inefficiencies often make doing business more costly and difficult. While the government has made progress in improving the regulatory framework, including enacting the Personal Data Protection Act (PDP Act) in 2022, inconsistencies and delays in regulatory processes still pose significant obstacles for data center operators.
• Natural disasters
Indonesia is prone to various natural disasters, such as earthquakes, tsunamis, and volcanic eruptions. These natural hazards pose a significant threat to data center infrastructure. Ensuring that data centers are built to withstand such events (e.g., achieving Tier 4 certification for resilience) is critical, but it also increases the complexity and cost of development.
• Shortage of skilled labor
Indonesia’s data center industry suffers from a notable shortage of skilled labor, when compared to Singapore. Developing and maintaining advanced data center operations requires highly specialized skills that are currently in short supply in the country. This gap requires investment in education and training programs to build a skilled local workforce.
• Infrastructure development
Beyond electricity, other infrastructure components, such as internet connectivity and physical structures, are essential. While projects like the Palapa Ring have improved internet connectivity across Indonesia, areas outside major urban centres still face challenges. Slow infrastructure development in potential data hubs like Batam Island could hamper the sector’s overall growth potential, the report added.
Malaysia to tap Chinese investors to build more data centres
