Key points
- Malaysia, a major Southeast Asian data center hub, is slowing its expansion due to resource constraints and pressure from the US.
- This move is expected to hinder China’s access to crucial US-made AI chips.
- The slowdown affects prominent Chinese tech giants, including Tencent, Huawei, and Alibaba.
- Malaysia is implementing stricter permitting requirements for US-made high-performance chips.
Malaysia’s burgeoning data center industry, a magnet for investment from both US and Chinese tech giants, is experiencing a significant slowdown. This strategic shift, driven by resource limitations and increasing pressure from the United States, is expected to have a significant impact on China’s efforts to enhance its artificial intelligence capabilities.
For years, Malaysia has attracted substantial investment, driven by competitive land and electricity costs, as well as promising growth in AI. Companies like Microsoft, Amazon, Google, Tencent, Huawei, and Alibaba flocked to the nation, with Malaysia boasting over two-thirds of Southeast Asia’s data center capacity under construction. This growth was particularly concentrated in Johor, benefiting from spillover from Singapore’s more expensive market.
However, this rapid expansion has come under scrutiny. Malaysia is grappling with limitations in power grid capacity and water resources, prompting a reassessment of its data center development strategy. Simultaneously, pressure from the US government to prevent Chinese firms from using Malaysia as a backdoor to access US-made AI chips, subject to export controls, has played a crucial role.
In July, Malaysia introduced new permit requirements for all exports, trans-shipments, and transits of high-performance US-made chips, directly impacting China’s access to critical components for its AI advancements. While Chinese-made alternatives exist, they remain inferior to their US counterparts, hindering the development of cutting-edge AI models capable of competing with US technology.
The new regulations allow some leeway for Chinese data centers to import US chips for domestic use, but experts anticipate increased scrutiny. This intensified scrutiny is partly driven by Malaysia’s pursuit of a trade deal with the United States. The US Commerce Department has voiced concerns about the potential use of data centers outside China to train AI models that could support military applications.
This concern stems from the “AI Belt and Road” initiative, wherein China aimed to expand its data center footprint globally, leveraging its Belt and Road Initiative partnerships, including with Malaysia. This initiative received significant investment from Chinese data center operators, such as GDS Holdings, which established a large campus in Johor.
However, amid escalating US-China tensions, GDS has reduced its stake in its Singapore-based subsidiary, highlighting the shifting geopolitical landscape.
Johor, a leading hub for data center investment, has implemented a vetting committee that rejects unsustainable projects, impacting the approval rate for new developments. This cautious approach reflects a broader regional trend, with other Southeast Asian nations also facing increased scrutiny regarding Chinese data center expansion.
While geographic proximity and lower political friction previously made the region attractive, heightened scrutiny and tariffs are expected to reduce the success of future Chinese data center projects in the region.
