Asia’s data centre landscape is red hot but increasingly complex

The rise of artificial intelligence is fuelling massive demand for data centres in Asia, but multinational companies face a dilemma when it comes to settling on their locations.

It makes economic sense to build a consolidated facility in one country that can serve multiple markets, but governments in the region are increasingly restricting cross-border data flows.

China and Vietnam in particular have tightened their data regulations in the name of national security.

Although China’s top internet regulator in September proposed waiving data export security assessments for certain activities that do not involve personal information or “important data”, it did not say what qualifies as important. This lack of clarity has raised concerns among businesses about the ramifications of transferring data out of the country.

Meanwhile, Vietnam’s first consolidated Personal Data Protection Decree took effect in July. It requires companies to prepare an impact assessment if they wish to transfer the personal data of Vietnamese citizens abroad.

“We were scrambling to help clients navigate Vietnam’s new security assessment process, which appears to have drawn some inspiration from China’s,” said Mark Parsons, a Hong Kong-based lawyer who heads Hogan Lovells’ Asia-Pacific region regulatory practice.

Still, most of the firm’s Asia-Pacific clients are seeking to consolidate data, Parsons said. That means instead of local storage for each market, teams on the ground remotely access servers in one particular location through security interfaces, making for more efficiency and security.

Parsons said because of the increasingly strict data and cyber security laws, China is not the typical choice for regional consolidation. Singapore, Hong Kong and Australia still head the list of popular jurisdictions.

The huge and growing demand for data centres in Asia is fuelled primarily by the rapid advancement of technologies such as artificial intelligence and augmented reality. Other factors, such as China’s transition towards a cashless society, the development of 5G and 6G networks and increasing demands for digital sovereignty, are also adding to growth.

The Asia-Pacific market for data centres is expected to expand at a compound annual growth rate of 12 per cent from 2023 to 2027 and will reach $48bn by 2027, according to consultancy Renub Research.

There were 449 data centres in China as of the end of 2023, the most by far in the Asia-Pacific region, followed by Australia, Japan and India, according to Cloudscene, a connectivity directory for co-location data centres, or facilities that rent out space to house servers.

“The explosive growth of data has brought much attention to data centres, and their number is only going to increase,” said Larry Liu, who leads the communication, media, and technology business at insurance broker Marsh Asia in Shanghai.

This rapid growth is starting to push the industry beyond its usual hubs and into more countries, he added. For example, demand for data centres is very strong across south-east Asia, where societies are quickly going digital.

“Some companies still have their regional or global headquarters in Singapore, but they are expanding their data centre portfolio into countries like Malaysia, Indonesia, Vietnam, Thailand and even the Philippines, due to cost considerations,” Liu said.

But the growth is a double-edged sword, he added. While more data centres will mean improved back-up and redundancy, the subsequent increase in the usage of endpoint devices such as phones and tablets, as well as more interconnected facilities, also will mean more points that can be targeted by hackers.

US-China tensions are another complication. In October, Washington updated its export controls to require companies to apply for a licence if they want to ship cutting-edge AI chips to clients in China and certain other markets. These tighter controls expand the already sweeping export restrictions introduced in 2022 that aimed to curtail Beijing’s ambitions in the chip manufacturing sector.

Experts say these restrictions will add another layer to the complexity of building data centres in China, particularly for some sectors.

“If technology is localised in addition to data, it gets even messier,” Parsons said. “If, for example, a US company wishes to use AI technology in its Chinese businesses, it will probably need to be able to take data from China to train and maintain that AI.”

But despite the rising risks and complexity, Mark Bennett, technology and real estate counsel at Hogan Lovells in Sydney, says companies building data centres will be guided first and foremost by return on investment.

“A very good friend of mine who’s in the area ran through all the risks and challenges about where to set up his company’s data centre site,” Bennett said. “At the end of the day, he turned to me and said that it’s wherever they can get the biggest return. That’s the reality.”

A version of this article was first published by Nikkei Asia on January 4. ©2023 Nikkei Inc. All rights reserved.

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