Navigating SE Asia’s data center market: What it takes to win

The data center growth in Asia and particularly in SE Asia has attracted substantial investments and has a diverse set of players going after the market.  However, there also deep complexities and challenges with the planning, build and monetization aspects.  So, what does it take to win here?   Darryll Sinnappa (Malaysia Country Leader for STT Global Data Centers) and I deliberated over the issues during a recent conversation and we captured the points in this article.  

The global data center industry is projected to grow at 8% CAGR by 2027, with APAC growing the fastest at 12% (figure 1). Populations across Asia are becoming more connected through broadband, both mobile and fixed, with the region’s vast demographics driving the quantum of data consumption. Corporates in the region have started to pursue digital transformation at scale, even though many still lag their North American counterparts in AI adoption.

Figure 1

90% of the SE Asian data center market is driven by five countries—Indonesia, Thailand, Vietnam, Malaysia, and Singapore (figure 2).

Digital adoption in these countries has been significantly boosted by government initiatives such as Indonesia’s Palapa Ring project, Malaysia’s Jendela plan, and Singapore’s Digital program. The foundation is now well-established for digital infrastructure companies to build on this momentum and incubate the digital ecosystems needed to serve hyperscalers, governments, and enterprises. 

Figure 2

Four distinct archetypes of players are vying for pole position in the market: real estate entities (including Keppel, Sime Darby, Damac, and others); telcos (such as Singtel and TM); hyperscalers (such as AWS, Azure, GC, and Alibaba Cloud); and standalone infracos (including Equinix, Digital Realty, and STT GDC). As each player archetype brings their seasoned playbook to this strategic opportunity, we assess their “right to play” and explore the key attributes the market will value most. 

I recently met with Darryll Sinnappa, Country Head of ST Telemedia Global Data Centers (STT GDC) Malaysia, to explore the competitive dynamics shaping the industry and the major challenges facing its players. Below is the synopsis of our discussion, along with Darryll’s valuable operational insights.

The complexity of data centers

Building and monetizing a data center requires addressing a unique set of challenges. Among the most critical are these four key factors:  

1. Technology selection: Data center economics are closely tied to the underlying technologies. Given the energy intensity associated with data centers, selecting scalable and sustainable power management and cooling technologies helps not only in attracting “green” conscious customers, but also in managing operating costs and constraints effectively. Making bets on emerging technologies, and collaborating with the right partners in relatively smaller markets within the region, can be challenging even for mature and technology-driven companies. 
    
2. Design and technology integration: Building data centers requires careful design, integration, and optimization of large, interconnected systems. While the design of the physical shell itself is relatively straightforward, designing the floor and rack space for maximum capacity, provisioning for convection cooling and dimensioning, and integrating power and cooling equipment add significant complexity to the process. 
    
3. Site selection and supply chain management: Building a data center involves navigating a web of complex logistical challenges. Identifying a suitable location that offers reliable power, an abundant water supply, and proximity to end-users (to minimize latency) is akin to solving a Gordian knot, due to the often-conflicting requirements. Additionally, the process of obtaining permits and approvals entails collaboration with multiple stakeholders, including zoning authorities, environmental agencies, and policymakers. This process can be particularly prolonged and complex in emerging markets. While the construction of the physical structure is relatively straightforward, ensuring the timely supply of power and cooling equipment becomes increasingly challenging amid surging demand for data centers.
    
4. Attracting customers, building ecosystems, and monetizing investments: Data center developers need to ensure that a robust ecosystem is established during the construction phase. Key elements such as network connectivity— with ample capacity network provider options, diverse routing options, and proximity to subsea links, and an ecosystem of services (including cloud migration, cybersecurity, and IaaS/PaaS providers)—are crucial for attracting a larger base of corporate and mid-size customers beyond the anchor tenant.

The data center player competitive landscape

Data center (DC) builders in SE Asia belong to four main archetypes: real estate majors; telco players; hyperscalers; and specialty/pureplay DC providers. Below, we assess their respective strengths and weaknesses as they claim their “right to play”.

It was evident from our discussion that there are no clear winners in this race. However, telco players appear to be at a disadvantage compared to others when it comes to building large-scale data centers. For telcos, this may represent a more defensive play against hyperscalers, who are increasingly encroaching on their position within the enterprise value chain. 

So, what strategies should data center players adopt to address the challenges and navigate this competitive landscape? Darryll and I discussed a few plays: 

Strategy 1: Horses for courses 

Data center economics are closely tied to upfront capex, occupancy, and the range of services offered. Consequently, comprehensive planning and scenario modeling are required before selecting a location and determining the specifications of the data center. This includes developing a select set of data center archetypes based on prospective customer types, their preferences (e.g., multinational corporations may have more stringent sustainability requirements), dominant use cases, and local constraints (such as space, power, water, and physical security). Optimizing upfront capex while ensuring flexibility in the future is a fine balance, achievable only with prior experience. 

Strategy 2: Standardize equipment, consolidate suppliers, and simplify local supply chain

In a seller’s market, established providers of power and cooling technologies often cater to and prioritize large, global data center players. This scenario leaves regional players with no choice but to account for potential supply bottlenecks when planning for critical equipment. Simplifying the local supply chain and streamlining the elements of the overall build-to-cash cycle can help mitigate these constraints. Building deeper relationships with General Contractors (GCs) in the region based on a clear mutual understanding of the value creation sources and “should-cost” principles can further enable the design of an efficient supply chain. 

Strategy 3: Partnerships 

Across many regions of SE Asia, the existing infrastructure is often insufficient to support medium- to large-scale data center builds. Partnerships provide a viable strategy to share gains, mitigate execution risks, and accelerate monetization. State-owned utility providers seeking higher shareholder returns are increasingly open to forming strategic partnerships. An influential local partner for out-of-region builds can help mitigate the risk associated with changes in government policies, to some extent.

Given the capex intensity and associated monetization risks of data centers, partnerships between industry players should be encouraged. Such collaborations can help prevent overcapacity and reduce competition for scarce resources. 
 

Conclusion

With the demand for AI, analytics, and cloud-enabled services continuing to surge in the region, data center providers that quickly learn and strengthen their expertise gain a competitive advantage. Success will belong to the industry players who get location selection, technology implementation, strategic partnerships, and financial engineering right.

About the authors:

Darryll Sinnappa is the Malaysia Country Head for STT Global Data Centers Malaysia. With over 25 years’ experience in the digital infrastructure industry, he contributes thought leadership on the region’s unique challenges and the unlocks needed.

Sai Tunuguntla is the leader of the APAC TMT practice at AlixPartners. With 30 years’ experience in the industry and in serving TMT (including digital infrastructure clients), he brings a growth, operational efficiency and zero-based lens to client issues. 

The authors would like to thank Chow Yi (STT GDC), Albert Xu (AlixPartners), and Jacky Lam (AlixPartners) for the research, conversation facilitation, and synthesis.