Five trends for data center transformation in Southeast Asia

7 minute read 3 Oct 2023

Data centers in the region must evolve to meet changing demands and stakeholder expectations as the digital economy grows.

Authors
Joongshik Wang

EY-Parthenon Asean Leader; EY Asean Technology, Media & Entertainment and Telecommunications Sector Market Segment Leader

Extensive experience as a strategy and M&A consultant in Southeast Asia, China and South Korea. Commercial tech advisor to private equity firms and large corporates.

Seng Leong Teh

EY Global Real Estate, Hospitality & Construction M&A Leader

Experienced in deal advisory. Enjoys reading military history, long walks, fast cars and meeting people of different backgrounds.

7 minute read 3 Oct 2023
Related topics Strategy by EY-Parthenon Technology Telecommunications Digital TMT
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Data centers in the region must evolve to meet changing demands and stakeholder expectations as the digital economy grows.

In brief
  • Southeast Asia is seeing a wave of investments into digital infrastructure as an emerging asset class due to steady growth of the digital economy.
  • The data center sector will need to adapt to likely scenarios in the near future as demand growth continues.
  • Some of these include the impact of generative AI on future data center deployments and greater “localization” of data centers.

Steady growth of the digital economy has led to a wave of investments into digital infrastructure as an emerging asset class in Southeast Asia. Increasing demand for digital services and connectivity in the region as well as the rapid development and adoption of technologies — such as 5G, artificial intelligence (AI) and cloud computing — are driving this trend.

Telcos are also divesting their capex-heavy assets, which include data centers and other digital infrastructure assets. These assets can be attractive as investments to experienced data center operators and infrastructure investors. Given the rapid growth and increasing competitiveness of the data center sector, operators and investors must continually find new ways to differentiate, compete and drive value.

Across Southeast Asia, strong demand continues to drive rapid growth of the data center market. As demand continues to expand, the data center sector will need to transform, with the following scenarios likely to play out in the near future.  

Generative AI expected to change format and location of future data center deployments 

Generative AI has attracted a lot of hype recently due to its capacity to create realistic and creative content. According to an EY-Parthenon analysis, the growth of AI is expected to cause a surge in demand for computing resources and drive demand for data centers.

Today, generative AI engines need hundreds of megawatts to be trained. Yet, many data centers are not well equipped to handle such higher rack densities and the heat generated by AI workloads. AI workloads leverage graphic processing units instead of standard central processing units, which will drastically accelerate the pace of rack densification.

While racks in Southeast Asia today typically only utilize a smaller energy supply — between three kilovolt-amperes (kVAs) and 10kVAs — tomorrow’s AI-enabled racks may need to support rack densities as high as 30kVAs to 50kVAs. This increase will present downstream implications and requirements for stable and secure power and more advanced cooling systems.

Specifically, this will impact the site selection process; instead of central locations, data center site consideration criteria will favor locations with access to stable and secure supplies of electricity and water. This may likely drive future AI-focused data centers’ locations to move from traditional tier-one cities to tier-two cities and city outskirts. 

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Greater “localization” of data centers expected

Data center hubs first concentrated in Asia-Pacific cities that have major local economies and a high density of submarine cables. As the business landscape in Southeast Asia matures, demand has started to extend beyond the traditional hub markets and new data centers have started to be more “localized”, i.e., sited nearer to their users. While the demand for data center capacity is still largely driven by tier-one or capital cities today, there is growing demand for data center capacity in edge locations in tier-two or tier-three cities that are closer to end users.

Across Southeast Asia, there are three main segments of data center users that drive data center utilization, namely cloud operators, content and gaming companies, and other enterprises. These three different customer segments drive localization at different rates.

Content and gaming companies play a large role in driving localization, with an increasing presence near their end consumers in tier-two and tier-three cities.

Cloud operators are starting to deploy cloud production regions in emerging markets. However, beyond the capital cities of these emerging markets, cloud operator demand for data center capacity is still lagging.

Demand for data center capacity from other enterprises continues to grow with public cloud penetration driving their digitization. Currently, small- and medium-sized enterprises and large enterprises (including finance-related firms) remain largely focused on increasing their data center usage within capital cities. While there are immediate roadblocks to localization, it is inevitable given emerging trends, such as Internet of Things and autonomous vehicles.

Continued evolution of retail colocation business models

There is currently little consensus on what a winning data center business model looks like within the retail colocation market, where data center operators serve organizations with smaller rack capacity demand.

Currently, local data center operators in Southeast Asia still retain a high market share within their local markets, leveraging their local connections and know-how, lower prices, and low overhead to serve their users. They consider premium managed services as optional “nice-to-haves” and primarily provide network and “remote hands” services.

Regional data center platforms continue to grow with a focus on innovation and providing services to local branches of global enterprises. Network services are positioned as gateway products to attract new customers. Premium managed services, such as managed cloud, private cloud creation and cybersecurity, are positioned as differentiators that can create stickiness and help improve customer retention.

Both local and regional retail colocation-focused data center platforms remain successful by solving the unique pain points of different customer segments. The question on whether there will be a convergence toward a single winning business model remains to be answered.

Increasing importance of sustainability in attracting hyperscaler customers and increasing funding liquidity 

Sustainability as well as environmental, social and governance (ESG) concerns are imperative to hyperscaler customers as they strive to meet their RE100 global sustainability targets. Today, hyperscalers are not only evaluating operators on the technical design and efficiency of their power systems but also the sustainability of backup systems, which are traditionally fueled by less environmentally friendly diesel generators.

From a macro perspective, hyperscalers also consider sustainability when deciding where to deploy regional workloads, which would negatively impact their demand for data center capacity in locations with limited renewable power generation capabilities, such as Singapore. As a result of hyperscalers’ focus on sustainability, financial investors and analysts are measuring the carbon footprints and initiatives of data center operators.

Green and sustainability-focused funding vehicles are growing as a new avenue for funding as sustainability becomes increasingly important for liquidity. Even among equity investors, contractual terms relating to the improvement of power usage effectiveness and sourcing of renewable energy are increasingly common as a prerequisite for funding.

While Southeast Asia is traditionally behind Europe and the US in terms of ESG expectations, the consideration of sustainability has significant competitive implications for data center operators.

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To attract hyperscaler customers, data center operators must also meet their expectations on the sustainability of backup systems.

Potential threat of immersion cooling technologies to competitiveness of traditional data centers

The lifecycles of active data center assets, which include servers, network hardware, and storage drives, continue to shorten. According to industry experts in Southeast Asia, the average life span of most active assets in the region has decreased from 5–7 years to 3–4 years.

However, most data center operators consider themselves immune to technology obsolescence risks as the onus of maintaining active assets remains with the end tenant. The passive assets owned by data center operators, such as the electrical and mechanical systems, have been traditionally immune to disruption. However, this could change in the future with further adoption of new liquid immersion cooling technologies.

To cope with higher rack densities, data center operators are gradually shifting from evaporative cooling to immersion cooling. This will likely accelerate given the increasing heat generated from AI workloads. While the need for complex and redundant electrical systems will remain, immersion cooling could eliminate the need for complex cooling systems. This could trigger a domino effect that will reduce entry barriers for future data center operators. As all the patents and intellectual property surrounding cooling systems become increasingly obsolete, this could threaten the competitiveness of traditional data centers.

Data centers are the bedrock of a resilient and interconnected digital infrastructure and their ability to grow steadily and sustainably is critical to the growth of the digital economy in Southeast Asia. As data centers continue to evolve to meet demands, there are opportunities ahead for investment and for data center operators to consider as they move toward a digital future that is efficient, secure and sustainable. 

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This article includes contributions from EY-Parthenon Directors, Philip Bai and Nick Lam, both from EY Corporate Advisors Pte. Ltd.

Summary

The growing digital economy has triggered a wave of investments into digital infrastructure as an emerging asset class in Southeast Asia. Data center operators and investors must continually find new ways to differentiate, compete and drive value as they respond to potential scenarios, such as the impact of generative AI on future data center deployments.

About this article

Authors
Joongshik Wang

EY-Parthenon Asean Leader; EY Asean Technology, Media & Entertainment and Telecommunications Sector Market Segment Leader

Extensive experience as a strategy and M&A consultant in Southeast Asia, China and South Korea. Commercial tech advisor to private equity firms and large corporates.

Seng Leong Teh

EY Global Real Estate, Hospitality & Construction M&A Leader

Experienced in deal advisory. Enjoys reading military history, long walks, fast cars and meeting people of different backgrounds.

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