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Home»Finance»Johor and Malaysia’s Data Center Boom 
Finance

Johor and Malaysia’s Data Center Boom 

October 25, 2024No Comments7 Mins Read
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Johor and Malaysia’s Data Center Boom 
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Due to the ongoing China-U.S. geopolitical tensions, many Chinese big tech companies have looked to expand their digital infrastructure in Southeast Asia given its proximity and relatively affordable land and resources. 

Johor Bahru, the most southern district of Malaysia, borders Singapore with two links connecting to the city-state. Its close proximity and ease of access from the land-scarce lion city has made it the perfect location to build out data centers mostly to support multinational companies with Asia headquarters in Singapore. The quick ramp-up in Johor was also propelled by the fact that Singapore banned data centers in 2019. 

Citing resource site Baxtel, Channel News Asia noted that Johor now has 13 data center facilities covering over 15 hectares (38 acres) of land area. That makes Johor “the largest data center market in Malaysia and ninth-largest in the Asia Pacific.” 

According to CNA’s report, Johor is expected to attract another $3.6 billion in new data center investments this year alone. All these efforts are lauded by the Malaysian government with support in building out industrial parks – Sedenak Tech Park and Nusajaya Tech Park, both over 500 acres in size. 

In the meantime, Singapore is also encouraging multinationals to set up corporate headquarters in the city while leveraging the country’s special economic agreements with its neighbor up north. The Johor-Singapore Special Economic Zone will allow passport-free travel. Talk of a high-speed rail is also in the background, which will all contribute to further free flow of capital and talent.

Open Arms to All – Including China 

Despite the ongoing trade war between China and the United States, Malaysia’s former deputy minister of international trade and industry, Dr. Ong Kian Ming, said that Johor wants to appeal to both sides of the trade war. Whether U.S. or Chinese, Johor is open to any big tech firm looking to set up infrastructure in Asia. 

Johor now hosts data center operations from U.S. firm Nvidia, Australia’s AirTrunk, China’s GDS International, Singapore’s Princeton Digital Group, and Malaysia’s own YTL Power International Bhd. More are coming: Microsoft has purchased land in Johor for a new data center, and China’s ByteDance plans to invest approximately $2.13 billion to establish an AI hub in Malaysia, which includes $320 million for expanding data center facilities in Johor. There are about 50 applications for data centers at present from hyperscalers, according to CNA.

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Together, these investments are significantly contributing to Malaysia’s goal of having its digital economy account for 22.6 percent of GDP by 2025.

Singapore-based Bridge Data Centers – a subsidiary of Nasdaq-listed China Data Group – has existing hyperscale projects currently running and have been ramping up data centers in Johor, according to its investor relations material. Its anchor client has been widely known as ByteDance. Meanwhile its peer GDS Holdings, another Chinese IT management company primarily serving ByteDance, is also a key driver of growth in Johor. 

In fact, during GDS Holding’s most recent quarterly earnings call, the CEO emphasized that Singapore-Johor-Batam is fast emerging as one of the very largest data center markets in the world and the demand is driven by regional expansion and spillover from the U.S., which is mostly AI related. Breaking down its main customers in Southeast Asia specifically, the current client mix is about 70 percent Chinese, from three main players.

The Data Center Ecosystem

Observing the burgeoning ecosystem around such rapid development, it is clear that there are spillover benefits for power generation, engineering firms, IT, power and cooling equipment suppliers, construction companies, facility operators, and more. The overall thrust toward energy and water use efficiency to run data center operations more sustainably is driving research into new techniques, equipment, and operation methods. Since most of these are skilled jobs, it also bodes well for upgrading general skills-based employment in the Johor area.

But no investment can occur without the support of financing. Much like the positive development in financing large scale solar projects in Malaysia since 2016, data centers now offer a new asset class for banks, private equity specialty funds, and insurers. Financial institutions have been keen to offer green financing facilities to data center developers. Multilateral development banks such as the World Bank Group’s International Finance Corporation have lent their support recently. Commercial lenders including regional local banks have been active as well. These include Maybank, UOB (Malaysia), OCBC (Malaysia), Standard Charter, Bank of China, and others. 

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The Malaysian government is also taking action to harness the boom in data centers. In 2021, it launched the Malaysia Digital Economy Blueprint (MyDIGITAL), aimed at transforming the country into a digitally-driven, high-income nation. A key objective is to enhance digital infrastructure, enabling local data centers to specialize in high-end cloud services. The government targets 3.6 billion Malaysian ringgit (around $838 million) in data center revenue by 2025, nearly doubling 2022 figures. To attract investment, the Malaysian Investment Development Authority (MIDA) offers tax incentives, including income tax exemptions and reduced import duties for qualifying operators.

In 2022, the government introduced the Digital Ecosystem Acceleration (DESAC) incentive scheme to bolster the digital ecosystem by attracting technology investments. This initiative focuses on digital infrastructure providers, offering a 100 percent investment tax allowance on qualifying capital expenditures. 

New Industry, Old Problems: Power and Water Shortages

Amid Johor’s digital technology boom, the question is whether the local infrastructure is sophisticated enough to provide stable energy and water to power the sudden surge of data centers, which requires vast amounts of resources. 

Just earlier this year, in April, parts of Johor reportedly experienced water shortages that severely affected the local resident’s daily lives. Parts of the area have also said to have experienced power outages in December last year. These incidents are not being fully addressed, especially in light of the increasing demand for power and water from the data centers. 

Kenanga Investment Bank Research estimated that electricity demand from data centers in Malaysia will hit 5 GW by 2035. The current installed capacity for the whole nation is only about 27 GW, according to Tenaga Nasional Berhad. 

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Johor has long had a history of experiencing both water and power shortages. These problems predate the recent surge in data center developments, and the issues have been influenced by the environmental conditions as well as infrastructure challenges. The region has faced periodic droughts, even to the point of requiring water rationing for residents in 2016. Electricity infrastructure upgrades have been needed for decades too; major blackouts have happened throughout the years, and the problem looks set to worsen with the recent surge of data centers being built locally. Local officials have raised concerns about the livelihood of the local population given the surge in power demand and worries about the current infrastructure.

In the recently announced Budget 2025, the government is allocating 421 billion ringgit  for various initiatives supporting Malaysia’s energy transition, including the National Energy Transition Facilitation Fund (300 million ringgit in fiscal year 2025) and Green Technology Financing Scheme (1 billion ringgit through 2026).

Authorities seem to understand that power is a major bottleneck for its data center dreams, and efforts are being made. The establishment of the Green Lane Pathway initiative in 2023 sought to streamline power approvals and to reduce the lead time to as short as 12 months for data centers.

As investments currently have largely been focused at building out data centers, investors may want to expand their mandate and help improve the foundational infrastructure on a regional and local level. Upgrades to water and energy security are necessary to ensure the data centers in Johor are run effectively and the local residents’ quality of life is improved. This could result in a virtuous cycle: investing in infrastructure needs that have been lagging for decades could improve the standard of living for local residents as well as ensure stable business operations.

boom Center data Johor Malaysias
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