ISPI - Istituto per gli Studi di Politica Internazionale

08/06/2024 | Press release | Distributed by Public on 08/06/2024 08:53

Data Centers: The Indo-Pacific’s Hottest Trend

In the digital era, artificial intelligence (AI) is reshaping the global economy, driving many countries to strive for a leading position in the tech race rather than simply adopting innovations. At the core of this transition are data centers, facilities equipped with powerful computational capacity that store, process, and distribute data, enabling the digital transition. Data and AI are intrinsically interconnected, as it is through the former that it is possible to develop systems upon which the latter is based. Therefore, the rise of data centers is indispensable for managing the increasing amount of data needed in the current AI race.

Although the United States currently leads in the number of facilities (2,868 in 2024), the Asian continent is experiencing a rapid increase in investments aimed at building centers to support the growing demand for digital services, cloud computing, and AI applications.China currently dominates the regional market, with 449 facilities and an additional 143 in Hong Kong.

According to estimates, the data center market in the Indo-Pacific region is set to expand at an annual growth rate of 12.6% between 2024 and 2032, potentially reaching a value of $71.7 billion by 2032. Moreover, a recent assessment from Moody's Ratings states that as of 2028, the region's infrastructure capacity is predicted to double from its current level of 10,500 to 24,800 Megawatts (MW), at an overall annual average rate of about 20%.

The Chinese Forward-Looking Investments

In recent years, the People's Republic of China has made significant strides in the development of domestic data centers, resulting in the establishment of a wide-ranging ecosystem. Driving the surge in investment has been, above all, technological innovation and the rapid adoption of cloud computing services. At the end of 2023, revenues of the local data center market attained the level of $80 billion, with a potential increase in volume of 56% by 2027 (around $125 billion). This significant increase is due to a compound annual growth rate (CAGR) of 8.97% calculated for the period 2024-2029. Indeed, the Chinese market represents a melting pot of public and private, local and foreign operators. China Telecom Corporation - one of the largest state-owned telecommunications providers - along with IT giants Tencent and Alibaba Cloud play key roles in the expansion of infrastructural offerings.

The industry's current growth aligns with the long-standing objectives of digital transformation pursued by the Chinese government. To cope with a significant digitization trend and with the legal constraints on the localization of Chinese data within the country, the demand for greater data storage capacity has become a technological driver for a country that generated more than 32 zettabytes of data (around 32 trillion gigabytes) in 2023 alone. This growing interest is stimulated by the 14th Five-Year Plan (2021-2025), which prioritizes innovation and the growth of the local digital industry and its infrastructure.

One key element in the development process of China's data ecosystem is the so-called Eastern Data, Western Computingstrategy. This ambitious plan - first proposed in 2020 and formally launched in February 2022 - aims to balance the demand for data processing between the country's densely populated eastern regions and its less developed but resource-rich western regions. This initiative includes the construction of 8 computing hubs and 10 clusters of national data centers. In doing so, the Chinese government seeks to optimize its computing capacity, increase energy efficiency, and alleviate pressure on densely populated regions while exploiting inland resources.

The Rise of K-Data Centers

Similarly, the South Korean market is moving quite fast, having witnessed rapid growth over the past two years fueled by the high use of the Internet and next-generation technologies. This push towards a digitized society has positioned South Korea as a fertile hub for the industry.

With 43 data centers currently in operation, the Korean market is expected to grow from $4.5 billion in 2023 to $7.2 billion by 2029. Several projections hint at a possible overtaking of Singapore within the next seven years, making South Korea the fifth-largest market in the region.

In this context, national regulations have played an equally crucial role, setting high guarantees for operators in data management and thus driving the demand for the local data center industry with investment following suit. The Personal Information Protection Act (PIPA) of 2011 (amended in 2023) represents one of the most stringent data protection laws. Moreover, South Korea has often adopted international standards, including the decision to participate in the Asia-Pacific Economic Cooperationcross-border privacy regulation system (APEC CBPR). Besides, the PIPA and the European General Data Protection Regulation (GDPR) present a similar approach to data protection.

According to the latest Research and Markets report, the Korean market is currently dominated by major domestic companies, accounting for more than 70% of the market's storage capacity. However, the presence of foreign investors in the local market is also strengthening: over the past two years, several joint ventures have been announced between major players in the sector - such as CPP Investments, Equinix, and Actis - to develop local infrastructures.

Concerning government strategy, President Yoon Suk-yeolannounced the intention to turn Gangwon Province into Korea's "Data Valley" back in March. The plan envisages the construction of an ad-hoc hub designed to host up to 50 data centers. As part of his "decentralization policy," the Yoon government has introduced incentives to encourage the construction of such facilities in areas outside the Seoul metropolitan area, which is currently home to 77% of the national infrastructure. The purpose of such initiatives is to promote the development of more marginal regions - like Pohang and Sejong - while tackling imbalances in public demand for energy and avoiding the high cost of land acquisition in the capital.

Japan Trusts Market Forces

Compared to South Korea, Japan lags considerably behind other developed countries in digital transition and the spread of artificial intelligence. According to data published by the government, only 9.1% of its citizens make use of generative AI. This delay in digitization is not only due to the population being "less familiar" with IT but also to a still timid business environment and unreceptive legislation.

Nevertheless, or perhaps precisely because of these reasons, Tokyo's government has undertaken ambitious policies over the past two years aimed at revitalizing its high-tech industry, including the data center segment. Two factors are enabling the sector's growth in Japan: the worldwide boom in AI development, which Tokyo intends to exploit for its own economic and technological benefit, and the growing geopolitical rivalry between China and the US, which makes Japan an increasingly attractive alternative for many companies.

Tokyo intends to ride this wave of economic activity. Since the beginning of the year, major companies in the sector have announced substantial projects in Japan, with Amazon Web Services (AWS), Microsoft, and Oracle planning investments totaling more than $26 billion. Given its desire to attract capital into data center development and promote its digital ecosystem, the Japanese leadership appears inclined not to impose overly strict domestic regulations on the AI sector, as these would entail legal costs and constraints for investors. Rather, Kishida's government is committed to advancing AI development guidelines at the international level and supporting companies investing in the country, such as the provision of abundant and cheap clean energy. Indeed, this is going to be a major challenge for an energy-poor country like Japan, where high electricity costs are a significant obstacle for the development of an energy-intensive sector like data centers.

Burgeoning India

As a result of rapid digital growth over the last decade, India has established itself as a major regional player in data center development. Under the umbrella of the "Digital India" program, the government led by Narendra Modi has adopted policies since 2015 aimed at aggressively promoting the digital transition and expects to surpass the $1 trillion mark for its digital economy by 2027-2028. India has great potential, with more than 700 million online users and low internet costs that are enabling the spread of digital technologies even outside large urban centers. The country is building a digital base for its AI development. Policies on data localization have given a strong initial push to the advancement of national data centers, thus attracting major industry players to the country.

Although regulations have changed and, as of 2023, the Digital Personal Data Protection Act allows the transfer of data to third countries unsanctioned by the government, Indian legislation continues to encourage investment that push the data center ecosystem to establish itself in the country. Furthermore, while the draft Data Centre Policy proposed in 2020 has not yet been approved, several regional governments have incorporated its contents and adopted incentive packages supporting investments from a material or regulatory point of view, offering subsidies concerning energy costs and bureaucratic constraints. At the same time, even with light regulation of both data centers and AI, the Indian leadership is trying to promote responsible development of the sector.

In this context, tech giants - both domestic and international - have found a business-friendly environment. AWS has announced plans to invest around $12.7 billion by 2030, while Microsoft is preparing to build one of its most important digital infrastructure hubs outside the US. By using their energy consumption as an indicator, Indian data centers are projected to expand dramatically: while consumption at the end of 2023 was equivalent to 950 MW, some estimates predict a doubling of this figure within three years. In the investment race, Indian conglomerates such as Adani Enterprises and Reliance Industries, as well as Asian companies such as NTT and ST Telemedia (linked to the governments of Japan and Singapore respectively), are aiming to play an ambitious role.

The Rising Players

The rapid growth in the use of data in the day-to-day activities of businesses and individuals has pushed the industry to extend beyond the more "traditional" hubs to new audiences, particularly in some Southeast Asian countries. Driven by their growing digital potential, data center companies have begun to look beyond Singapore and take an interest in other countries in the region.

Indonesia is one example of this growth. The country has established itself on the back of its vibrant digital economy and a growing community of developers. These characteristics have convinced an industry giant like Microsoft to invest $1.7 billion in the country, even if doubts remain over the integrity of the country's digital ecosystem. The US company is betting heavily on Southeast Asia, as is evident in the case of Thailand, where Microsoft in May announced its first investment in the country's data center ecosystem for a value (yet official unconfirmed) of around $1 billion. Thailand's digital infrastructure, still heavily concentrated in Bangkok, shows the need for investments that spread data centers more evenly across the territory.

Asia's online growth is also benefiting Australia's data centers, as the country is already established in the sector and aims to consolidate its presence through AI. Through the connection between the government and the scientific research field, Australia intends to attract major investments and trigger a new growth cycle. However, the current geopolitical context could favor the development of new technological geographies. One example is Vietnam, which has become very popular among Western companies interested in pursuing diversification strategies from China. The country's recently adopted regulatory review of data centers has opened up the sector to foreign investment, as local players have been struggling to meet the domestic demand of Vietnam's growing digital market.

In this time of expansion for the data center industry, regulation is one of the central issues alongside resource availability. A striking case is that of Singapore, a regionally relevant hub for IT. The city-state has had to contend with some structural limitations, such as the high cost of electricity and the limited availability of land, as well as some political constraints, such as a halt on constructions imposed by the government based on environmental concerns related to energy and water consumption. However, the city government recently announced that it would revert its stance on the industry, focusing instead on improving the energy efficiency of plants and increasing the supply of environmentally friendly energy. Yet it is precisely the curb imposed by the city authority that has been a driving force for the development of neighboring Malaysia, whose southern territory facing Singapore has quickly become an alternative hub for investment. Today, its growing IT capacity is making Malaysia one of the most attractive destinations for digital giants, both Western and Chinese. Thanks to its careful middle-ground positioning in the confrontation between Beijing and Washington, the Southeast Asian nation has accredited itself as a country on which data center companies can fall back to avoid geopolitical tensions affecting their operations in the Indo-Pacific.

The region is gaining momentum in the data center sector, partly influenced by rapid developments in AI. Although countries in the region have adopted different regulatory policies in the past, a strong investment push aimed at increasing the IT carrying capacity of the local market has been consolidating in recent years. The goal is to keep pace with the United States in the race for the leadership in a sector that is growing and whose potential has not yet been fully expressed. Monitoring this trend will be essential not only for understanding developments in the digital economy but also for the fallout in terms of national security and technological sovereignty. In the current global geopolitical scenario, control of data has become an element of growing strategic importance.