Malaysia is emerging as a data center powerhouse amid booming demand from AI

Malaysia is emerging as a data center powerhouse in Southeast Asia and the continent more broadly as demand surges for cloud computing and artificial intelligence.

Over the past few years, the country has attracted billions of dollars in data center investments, including from tech giants like Google, Nvidia and Microsoft. 

Much of the investments have been in the small city of Johor Bahru, located on the border with Singapore, according to James Murphy, APAC managing director at data center intelligence company DC Byte.

"It looks like in the space of a couple of years, [Johor Bahru] alone will overtake Singapore to become the largest market in Southeast Asia from a base of essentially zero just two years ago," he said. 

Johor Bahru was named as the fastest growing market within Southeast Asia in DC Byte's 2024 Global Data Centre Index. 

The report said the city has 1.6 gigawatts of total data center supply, including projects under construction, committed to or in the early stages of planning. Data center capacity is typically measured by the amount of electricity it consumes.

If all planned capacity comes online across Asia, Malaysia will only be surpassed by the larger countries of Japan and India. Until then, Japan followed by Singapore currently lead the region in terms of live data center capacity. 

The index did not provide a detailed breakdown of data center capacity in China. 

The vast majority of data center infrastructure and storage investments have traditionally gone to the established markets of Japan and Singapore, as well as Hong Kong. 

However, the global pandemic expedited the world's digital transformation and cloud adoption, leading to surges of demand for cloud providers in emerging markets like Malaysia and India, according to a report from global data center provider EdgeConneX.

"Increased demand for video streaming, data storage, and anything done over the internet or on a phone, essentially means that there's going to be more need for data centers," said Murphy. 

Booming demand for AI services also requires specialized data centers to house the large amounts of data and computational power required to train and deploy AI models.

While many of these AI data centers will be built in established markets such as Japan, Murphy said emerging markets will also attract investments due to favorable characteristics. 

AI data centers require a lot of space, energy and water for cooling. Therefore, emerging markets such as Malaysia — where energy and land are cheap — provide advantages over smaller city-states like Hong Kong and Singapore, where such resources are limited.

Thus, a lot of investment and planned capacity has been redirected from Singapore to the bordering Johor Bahru over the years.

Singapore recently changed its tune and laid out a roadmap to grow its data center capacity by 300 MW on the condition more projects meet green-friendly efficiency and renewable energy standards. Such efforts have attracted investments from companies like Microsoft and Google. 

Still, Singapore is too small for wide-scale green power generation, thus there remain a lot of limitations on the market, said DC Byte's Murphy. 

While the boom in data centers has helped lift Malaysia's economy, it's also created concerns about energy and water requirements. 

Kenanga Investment Bank Research estimates that potential electricity demand from data centers in Malaysia will hit a total maximum demand of 5 GW by 2035. The current installed electrical capacity for all of Malaysia is about 27 GW, according to Malaysian electricity company Tenaga Nasional Berhad.

Local officials are increasingly concerned about the extent of this power usage, as quoted in a recent report from The Straits Times.

Johor Bahru city council mayor Mohd Noorazam Osman reportedly said data center investments should not compromise local resource needs, given the city's challenges with its water and power supply.

Meanwhile, a Johor Investment, Trade, and Consumer Affairs Committee official told ST that the state government would implement more guidelines on green energy use for data centers in June.