Next in Tech | Ep. 274: Asia Pacific Data Center Trends

View Full Transcript

[00:00:02] Eric Hanselman: Welcome to Next in Tech, an S&P Global podcast where the world of emerging tech lives. I'm your host, Eric Hanselman, chief analyst for industry research at S&P Global, and today we're looking at the latest developments in the Asia Pacific data center markets. Joining me to talk about them are analysts Tsun-Chen Kang and Stephanie Williams. Welcome to the podcast, you both.

[00:00:21] Soonchen Kang: Thanks for having me, Eric.

[00:00:22] Stefanie Williams: Thanks, Eric.

[00:00:24] Eric Hanselman: Tt's great to have you on. You’ve both been doing research in terms of what's been evolving in the markets, of course, the impacts of that little thing we refer to as AI, all the different things that have been going on in this market. and you're both actually just recently back from some conference work there. Can you give us a little background in terms of what that market looks like and what you're looking into as far as the research goes?

[00:00:48] Soonchen Kang: Yeah, I think as far as how the market is evolving, so if you just look back at 2024 when I attended the DCD APAC conference in Bali and towards, fast-forward two years, I think there's a lot of, sentiment, a lot of positive sentiment from the initial, optimism. So, when I was there in 2024, there was still a lot of questions as in how AI will really impact demand in this part of the world.

[00:01:16] It was still very much early stage, because Asia is always lagging North America in terms of, how, cloud infrastructure started in North America, and we saw that trend, with AI as well. But I think two years on, the conversations have instead shifted to whether there's really power to support all this demand. The demand has actually materialized, but not, not quite evenly. Some markets are having more, seeing more demand, not necessarily domestic demand, but also to service regional compute. We are seeing that in Southeast Asia, especially for a few markets or a few hubs, second-tier metros. Johor, there's a data center hub, that's very close to Singapore. It's growing so tremendously starting from 2022, and now it's a 600 megawatt, live capacity market currently from just 10 megawatts, just three years ago. So, it's an amazing growth story, and we are seeing that being replicated in other second-tier metros like in Bangkok, like in Jakarta. But like I said, it's mostly to support regional compute. those, could be new clouds, and those could be Chinese hyperscalers that are expanding overseas, to access AI chips. So, these are the trends, but again, It's very fragmented. We are seeing these, Southeast Asia, while these are second-tier metros are catching up. But again, India is a different story. India, you have so many US hyperscalers. they are committing to investments in different metros all across India. And India is a very large market by itself, even without AI, even before pandemic. So, it's a huge growth story, large population, fast-growing economy, high tech adoption. So, they are moving at different pace. we can say that across APAC, North Asia is led by Japan, is led by South Korea. But in Southeast Asia, there are these three main economies that are benefiting from the AI trend. And again, Australia is also moving at a different pace. Stephanie will be familiar with that.

[00:03:25] Eric Hanselman: This is something where we reiterate the discussion of we talk about Asia-Pacific markets and they are very distinct elements within the market itself that you, you treat, as one larger whole at your peril, because as you're pointing out, there are such significant dynamics, and such differences in the dynamics in each of these different markets. These are areas where, there's, you really have to look at much more focused geographies in terms of those areas to see where they're going. Although, also as you were saying, that one unifying piece, which is where do we get enough energy to be able to fuel all of these drives and to meet this AI demand, that's something that has been a global concern that really seems to be planet-wide in terms of some of its concerns. Interesting to see that level of increase in Johor. That is a dramatic increase. is that primarily driven by the proximity to Singapore? is that a market adjacency that's starting to fuel that? or is that something where there are independent drivers that are running for that as well?

[00:04:31] Soonchen Kang: I think it's a confluence of a few factors. Singapore played-- Well, Singapore was an impetus, for companies to expand beyond Singapore. There was a moratorium in Singapore for development of new data centers and it was enforced in 2019, and until now we could call that a de facto moratorium because you couldn't really get power easily to, to build new data centers in Singapore. There was only 80 megawatt that was distributed in 2023, and there was a ongoing tender currently for 200 megawatt. But it's very difficult for companies to get power allocation. You have to prove your strategic value to the economy. It has to use 50% of renewable power for these new data centers. So, it's going to drive up costs and whether customers are willing to pay for such higher costs is also a different issue. So, for workloads that do not have to be in Singapore, they could be exploring other locations, especially for training workloads, AI workloads, to metros with lower power costs, friendly government policies for data centers. And some of these developing economies, they're very welcoming towards data center investments as a form of FDI. So, these are the drivers. I think as well as proximity to, to China is also a factor. So Chinese hyperscalers have been very early movers in, in Thailand, in Malaysia, so established relationship partnerships with the assisting providers in, the market also play a role.

[00:06:06] Eric Hanselman: Oh, makes sense. A lot that happens to be going on. Stephanie, I'm curious about the things that you're looking into in these markets, and what do you see?

[00:06:16] Stefanie Williams: Yeah. So, I primarily focus on the Australia market, as Soonchen said, and so what I'm looking at there is a shift. most of the capacity sat in Sydney for the longest time with just, a little bit of capacity sitting in some of the secondary, tertiary cities, like Melbourne and Brisbane and Perth. With new subsea cables coming in and hitting other parts of the coast, we're seeing some growth along those coastal cities, but we're also seeing some drivers in terms of AI in, even the smallest markets like Adelaide and Canberra are starting to see some growth where we never saw growth before. So, just watching as that's coming online. We're also seeing some homegrown, neo clouds, based out of Australia that are coming up and taking out capacity in the secondary cities as well. So, a lot of growth there. New Zealand is also something I look at. It's a slow growth market. Primarily New Zealand-based companies are seeing a lot of success there, serving the local population of entities looking for compute in those areas. and then of course, like we're seeing everywhere, some community sentiment and a little bit of pushback on data centers is starting to crop up. But nothing like what we're seeing in the US at this point.

[00:07:34] Eric Hanselman: I'm curious... a couple different things. One, looking at some of the expansion, it sounds like Australia winds up being, a similar kind of growth story in that subsea cable landings, wind up driving a certain amount of concentration in that, you, you got, you've got connectivity and having compute right next to the connectivity is always good. Interesting to see that Canberra is starting to pick up. be curious if that's government driven, if there's more focus in terms of building out capacity, in, in major, political headquarter kinds of environments. curious about what in some of that. But yeah, we should definitely get into some of the broader concerns and some of the headwinds some of them are facing. But I'm curious about the Australian market where you see that.

[00:08:16] Stefanie Williams: Yeah. So, like Canberra's growth is more government-oriented, and a lot of what we see in Australia is that, the technology adoption follows the pace of the government. So, one of the things that we saw was that there was not a broad adoption of cloud, like we saw across the US, until the Australian government really picked up, put a program and framework in place, and started adopting that cloud technology, the enterprises began to follow. We're starting to see that as well, with some of the government entities picking up AI, as a broader adoption. We’re seeing some framework around that coming out. So, Canberra, highly focused on government, and then we're starting to see those enterprises picking up the AI as well, and adopting those technologies to support their growth. In terms of headwinds, Australia has always been fairly particular about how data centers can build in any of the states. So, there's a federal framework in place, but also states have some governance over how capacity is built out. And they take into account a lot of considerations around how it impacts not just the local community, but also, the ecological impact of data centers. So, there's a lot of framework around keeping green space around those data centers, ensuring there's no impact to specific waterways or any particular endangered species or anything like that. So, a lot of rules for data centers there. We're still seeing that. We're seeing, more focus these days on, how it's impacting very localized communities. So one of the things we see in New South Wales, for example, is data centers tend to locate near, the train, lines around Sydney. There’s a lot of community pushback coming saying that industries that have higher employment rates than data centers should be, given first choice along those train routes as well as residential areas to give the most accessibility to people, for those public transportation opportunities. So seeing some new headwinds emerging for data centers, and we're going to see how that plays out in terms of where data centers can build in the states across Australia and how they can build out those facilities.

[00:10:38] Eric Hanselman: Yeah, interesting to hear some of those slight differences. We, in North America, we're hearing community pushback at a number of different angles. you mentioned water, though. That's one of those areas that, especially depending upon where you are, in the Asia-Pacific region, there are some areas where water concerns aren't a major issue, but many in which they are.

[00:10:58] Soonchen Kang: I would think that community pushback in North Asia, especially in South Korea. Dozens and dozens of projects have been delayed, canceled because of public backlash against data centers, and these are due to some... It could be a misconception or rather that some communities, they don't want to live near the high magnetic power lines. This is one of the major challenges in South Korea, and many have resorted to just building within the industrial estates. And in Japan, for instance, they are worried that-- it's a valid concern across different markets, as in your property value would drop if it's located close to data centers. And for Japan, the aesthetics is super important. You can't have the buildings with no windows blocking the view around your residential areas. So, these are different factors or different, I wouldn't say misconceptions, but these are the different beliefs that are driving public backlash against, data centers that we are seeing in North Asia.

[00:12:01] Eric Hanselman: Yeah, makes sense. I'm curious about the impacts of supply chain. Of course, there are just simply nowhere near enough GPUs to be able to meet everyone's demand. We've seen a bunch of different interesting market responses in terms of where that's happening from a global perspective. I'm curious whether or not you're seeing similar kinds of transitions in the market. We're seeing new providers pop up, the Neo clouds or, the alternative clouds as some of the Neo cloud providers like to call themselves. I'm curious about the growth of Neo clouds and how you see those as being part of some of that mix i- in terms of meeting demand.

[00:12:35] Soonchen Kang: Yeah, because the neo clouds are also servicing the hyperscalers as in other markets, in North America. Hyperscalers are also renting from neo clouds in order to access the chips. And we are seeing similar trends in APAC, especially with the Chinese hyperscalers working with these, many of them regional new cloud providers.

[00:12:55] Eric Hanselman: They are fairly newly established entities, many of them headquartered in Singapore and servicing, because of the regulations as well, because of the export controls, Chinese entities, they couldn't really access NVIDIA chips in mainland China and in Hong Kong. So, it's just, it's just driving this, wave of demand from Chinese, hyperscalers or Chinese entities to expand overseas, especially in Southeast Asia Yeah, it is that challenge of looking, of basically trying to gain capacity, especially as we look at, cutting edge GPU designs. these are areas that we're seeing similar scrambles all over the world, but of course the geopolitical impacts, from the Chinese market demand, I guess have a, an outsized impact in terms of some of those consumption drivers. Basically because you've got one particular market mover that's looking for, significant levels of capacity. But yep, it's, an interesting dynamic to, to be in play. I'm curious about other parts of, being able to meet some of this demand. I mean, one of the challenges we've seen globally also are issues in build out and some of the challenges with, ensuring that we've actually got, a labor force that can help, manage that. Is that something that's also taking place, across Asia Pacific?

[00:14:12] Soonchen Kang: Yes. In Japan particularly, it's very difficult to get, general contractors. Japan is also known for the aging population, aging workforce. So, it's a challenge especially for new entities or foreign companies to engage, the historic, Japanese contractors. And they have-- In Japan, there's these first-tier contractors, second-tier contractors. So, if you couldn't get the first-tier contractors, you have to work with the second-tier contractors. I believe they are all equally good. It's just the hierarchy in the Japanese, corporate culture. And so even for Japan itself, there's a cap on foreign, overtime hours for construction labor, so it really lengthens the development cycle for data centers, by as much as, by a year or two for many of these, projects that are under construction.

[00:15:05] Eric Hanselman: We see similar kinds of challenges ensuring that it's not only the material pipeline, but also the labor pipeline that is a big part of that whole process. So, a set of challenges in terms of being able to meet that on so many different fronts.

[00:15:19] Stefanie Williams: Absolutely. One of the things that we have seen in some of the Asia-Pacific markets is just the investment from some of the data center operators into programs locally so that they can actually build out their own workforce. So, they're contributing to college programs in the trades locally in order to develop their workforce, as the industry continues to grow. And so it's something that I know Soonchen has seen in some of her markets, but also in Australia. There’s been a shortage of trades, electricians, plumbers especially, which mimics what we see all over the world for data center builds. And so, we're continuing to see some of the local data center operators, that are based in Australia kind of investing in those trades programs.

[00:16:11] Eric Hanselman: Yeah. Because it's something we've seen in other parts of the planet as well. Again, where you don't have sufficient labor and then skills trades, you got to train to be able to be able to meet that need, and that's, which is, both a short-term and a long-term challenge. I'm curious about w- the other big piece that we see, affecting s- growth and some of the market dynamics in this, which winds up being financing. We've talked, I think, a little bit about the North American market, with Kelly Morgan and Tony Lenoir about what's happening there. Are there similar kinds of things going on, within the Asia Pacific market?

[00:16:49] Soonchen Kang: Yeah, we are seeing a lot of private equity money going into these data centers, especially newly set up platforms. So, these are a few of them, Singapore-based companies like Princeton Digital Group, even private equity KKR, they have just acquired City GDC. So, it's a Singapore-based provider with a regional footprint. And we have seen as well AirTrunk, the prime example of the Blackstone acquisition was such a really high valuation. So, a lot of interest into the investments into data centers supporting growth in Asia, especially from global private equity. As well as we are seeing recently there was a Chinese-backed fund in supporting the development of a new cloud-based provider in Johor. So, I think this is very, this is in line with their customer, where their customers are heading. We have seen a lot of Chinese companies moving into Southeast Asia. Now we are also seeing Chinese funds going into Southeast Asia to support these projects.

[00:18:02] Eric Hanselman: Yeah, it seems like the private funding of a lot of these environments, especially when you look at some of the asset-backed, financial arrangements where we're actually... the assets are the GPUs themselves, we start getting into some really interesting dynamics. but again, that's something that we're seeing the world around. Given that the value of GPUs is as high as they happen to be, the fact that they are such a critical infrastructure component, and that the demand is so large, if, looking at just the kind of numbers we see globally, it is i- impressive the extent to which some of these neo clouds, GPUs as service providers, you look at some of the expectations about, utilization and, the kind of revenue they're generating. These are... we're living in very different times, from the traditional data center world.

[00:18:52] Soonchen Kang: Yeah, there's also not a lot of transparency as in which are using GPU-based financing and which is really being funded by different kinds of private credit, and a lot of them are still relying on raising debt in order to support their build out. And these are-- I think this has cut down speculative building for many. If you l- just look at Johor alone, many of them, they just managed to raise debt after getting customers. So, the appetite for speculative building has really dampened, I think, because there are also so many competitors on the ground as well.

[00:19:30] Eric Hanselman: Oh, interesting. I- is that something where i- is the speculative build also being, I guess constrained by, by power? Is that... Because, w- we see that in other locales as well, th- that there is that concern that, the build it and they will come, also has to come with power connectivity and that winds up being done.Or do you see that dynamic in play?

[00:19:52] Soonchen Kang: In the initial days, you could build speculatively, especially in Johor. You can build and just prepare for the supply and ByteDance is leasing from everyone else. But because it's harder to get power, it's harder to get the transmission grid into your data centers. So, I think for even to get approval for data centers, even to secure customers, you need to have the, just to secure the grid line, grid access. So, power generation and transmission are really two different issues, right? So, these are-- Many of these economies, they have surplus power generation and very high reserve margins. It's just the local grids that are really the problem. So, I think it's still a lack of transparency as in how much, how full is getting the transmission and who's able to really talk to the utilities. There's not a lot of transparency to that yet in, in many of these emerging markets. That also contributes to a lot of the inflated numbers that you're seeing all across the media for those who are not really on the ground, it's really hard to sift through the noise and know that who is really building on the ground.

[00:21:01] Eric Hanselman: Figuring out which, which are press releases and which are actual real build-outs. But it sounds like to your point that the market is maturing, that the level of speculative build may be getting to more, reasonable levels, as both those markets, on the data center consumer side, as well as on the financial side, are becoming more sophisticated and start to gain an understanding about what's really in play. and Stephanie, I'm curious, do you see similar kinds of things, in the Australia, New Zealand market? similar dynamics? where do you see those headed?

[00:21:32] Stefanie Williams: To, to some degree, yes. So, we're not seeing as much in the way of speculative builds. we never really did. just tend to be more conservative in the Australian market in terms of how they build out and how they finance, the data center world. And so, we're continuing to see more just-in-time approach. Because of that, we're not really seeing as many challenges around the financing portion of it. The really, challenging part of financing is around the neo clouds because there aren't the same assurances with the assets of the facilities that you get elsewhere. or in more traditional data center builds, I should say. It's definitely a different world than when I started fifteen years ago as an analyst here. so changing landscape, just keeping an eye on what's going on and watching to see where this world will go.

[00:22:22] Eric Hanselman: That really is the real question in a lot of this. I'm curious, what should we be looking for, as we head through the rest of the year, i- in terms of thoughts about market directionality? Or what do you think are the big picture directions that, that are, that the market is taking?

[00:22:38] Stefanie Williams: I think one of the things that we're really going to have to pay attention to is the growing public sentiment. I feel like in some markets, like we're already starting to see in the US, we're going to start to see governments responding to that public pushback, and perhaps putting in place some new regulations that will change how and where data centers can build. We're already starting to see that in, in some areas of Australia, like Perth, and Sydney. And so, we're going to keep an eye on how governments and regulations respond to the changing landscape of data centers.

[00:23:14] Eric Hanselman: Soonchen, what about in your area?

[00:23:17] Soonchen Kang: I think for now there's, a lot of, demand going all over the place. And, for me, I'll be interested to know, what is actually being built and delivered, especially in all these very hyped-up markets. in Bangkok, for instance, there are very huge numbers being thrown around, but I'll really be really curious, like what is actually being built out by the end of the year? How much is it really being delivered to customers? I think that’s, that will be the highlight for just throughout the year to see whether it's really, lived up to the hype or it's just an underwhelming story.

[00:23:52] Eric Hanselman: That’s always the question, right? Do the lofty words actually wind up coming true, and does a lot of that, that, frothy expectation actually shake out? this has been great. I appreciate all the perspectives, and the insights. It’s interesting to see the extent to which, the market has got its own, unique character, and also winds up facing a lot of the same challenges we face in other parts of the globe. But this has been great. Thank you both for being on

[00:24:20] Soonchen Kang: Thank you

[00:24:21] Eric Hanselman: And that is it for this episode of Next in Tech. Thanks to our audience for staying with us, and thanks to our production team, including Sophie Carr, Feranmi Adeoshun, and Kyra Smith, and Dylan Scheibel on the marketing events teams. If you liked this episode, please subscribe or like us. I hope you'll join us for our next episode Because there is always something, next in tech.