Battle hots up for slice of Asean's data centre market

This article was licensed through Dow Jones Direct. The article was originally published on The Straits Times.

US firms leading the charge into sector but Chinese rivals gaining ground, say analysts

Just before the Covid-19 virus emerged in 2019, work began on Facebook owner Meta's data centre in Singapore.

Construction is still under way, but when it is fully operational, the 170,000 sq m facility - costing US$1 billion (S$1.37 billion) - will have a power capacity of 150MW and will be Singapore's largest hyperscale data centre.

Such a facility houses thousands of servers and computer systems that deliver data for everything from cloud computing to smart cars and appliances. Hyperscale data centres typically have a power consumption level of at least 3MW.

Meta's facility will join others in Singapore from American firms including Google and Microsoft.

More than half of the at least 55 foreign-owned data centres in the island nation are owned by US firms, according to the Asean Investment Report released last September by the Asean Secretariat and the United Nations Conference on Trade and Development.

Data centres are becoming a rapidly growing area of investment in Asean countries, and US and Chinese companies are jostling for a slice of the market.

Analysts say American companies are leading the charge in Asean, but Chinese technology firms are gaining ground.

Chinese data centre firm GDS announced last year that it was building hyperscale data centres in Johor (54MW) and Batam (28MW), as part of its strategy to meet increasing demand in the region.

"Data centres are the backbone powering everything that is digital - online services, apps, streaming content, one way or another they are all being routed through a data centre," said Mr Jabez Tan, head of research at Structure Research, which specialises in research on Internet infrastructure.

He pointed out that as data centre markets in the United States and China reach saturation, companies in these countries are looking abroad to expand.

And South-east Asia, a "geopolitically neutral" region of 660 million people, is a natural target, particularly for Chinese firms, he said.

Region a natural target

In some other markets, there are national security risks perceived to be coming from companies like Huawei, Alibaba and Tencent because of their links to the Chinese government. Those markets are not very friendly to Chinese platforms. This is why Chinese companies have doubled down on deploying investments in South-east Asia.

MR JABEZ TAN, head of research at Structure Research.

"In some other markets, there are national security risks perceived to be coming from companies like Huawei, Alibaba and Tencent because of their links to the Chinese government," said Mr Tan.

"Those markets are not very friendly to Chinese platforms. This is why Chinese companies have doubled down on deploying investments in South-east Asia."

The region is projected to be one of the fastest-growing data centre markets in the world, outstripping North America and the rest of the Asia-Pacific region.

Cloud services providers such as Amazon Web Services, Microsoft Azure, Google and Alibaba see huge growth opportunities in emerging markets in South-east Asia, said Mr Todd Olson, head of real estate services firm Cushman and Wakefield's Asia Pacific Data Centre Practice Group.

"Internet penetration and connectivity is rising as infrastructure is built out across the region. Increasing adoption of e-payments, e-commerce and business process digitalisation is driving demand for data centres," he said.

Structure Research projects that revenue from these hyperscale cloud providers will rise from about US$13.2 billion this year to US$55.6 billion in 2026.

Competition is stiff and the stakes are high given that businesses are unlikely to switch cloud platforms once locked in to a hyperscale cloud provider.

"All hyperscalers correctly view the market as a nascent one in its early stages of development and the most important goal is to grab as much real estate as possible," said Mr Tan.

Singapore is by far the largest data centre market in Asean, with about 483MW of critical IT load last year, according to Structure Research, but other markets including Malaysia and Indonesia are also seeing increasing investments.

Singapore had imposed a moratorium on new data centres in 2019 over concerns that these facilities were intensive users of electricity and water. This moratorium is due to be lifted this quarter, but the Singapore Government has said it would be more selective of new data centres and their environmental sustainability.

In the last four years, both US and Chinese technology companies - Google, Amazon, Microsoft, Alibaba and Tencent - have launched or are establishing a data centre presence in countries including Malaysia and Indonesia.

But the size of US investments is typically much larger, usually amounting to hundreds of millions of dollars, according to the Asean Investment Report.

Mr Tan says Chinese hyperscale cloud firms typically operate on a much smaller scale as they usually cater to Chinese businesses and Chinese-speaking users, unlike American firms that have "at least double" the capacity.

"Chinese players are focused on expanding throughout Asia and South-east Asia and are challenging the dominance of these US firms... over time they could gain a little more market share, but the Americans are just so far ahead."