DCs — too much of a good thing?

WHILE the rapid growth of data centres (DCs) in an increasingly digital world is well and good, Malaysia must tread carefully, as too much of it could lead to negative consequences.

The rapid proliferation of DCs poses significant challenges that could hinder sustainable growth and economic diversification.

A strategic re-evaluation of DC investments is required to ensure they contribute positively to Malaysia’s development, which is already facing power shortages and struggling to accelerate infrastructure projects.

Hyperscale DCs, which can require between 200 and 500MW each, exacerbate the problem. There is currently a 16 to 30-month wait time for industrial parks to develop the necessary infrastructure to meet high demand, especially in states like Johor.

This creates a bottleneck for foreign direct investment (FDI) in other critical sectors like semiconductors, medical devices and biotechnology, which require ready infrastructure for fast-track projects. As a result, these sectors might look to Vietnam or Thailand, leading to lost opportunities and economic diversification challenges for Malaysia.

Furthermore, existing investors face increased costs when power allocations in industrial parks are depleted by DCs. They are forced to pay more for power cabling, costing millions of ringgit that were not originally budgeted for.

Water scarcity is another critical issue. Industries in Malaysia are supplied with potable treated water, which should ideally be reserved for domestic use.

DCs consume significant amounts of water, primarily for cooling purposes, and much of it is lost to evaporation. This inefficiency diverts water resources from more sustainable industrial and domestic uses, creating further strain on the nation’s water supply.

The projected FDI benefits of DCs are often overstated, many of which are built as empty shells, awaiting tenants. If they remain unoccupied, they risk becoming financial liabilities rather than assets, akin to uninhabited condominiums.

The long-term economic benefits of DCs, therefore, are uncertain. FDI figures touted at the beginning of projects frequently fail to materialise fully or take decades to do so. This slow realisation of promised investments means that the anticipated economic boost often remains theoretical.

DCs are not significant job creators. They require minimal manpower for operation, resulting in few job opportunities and limited talent development. Consequently, there is little to no revenue generation for the government through income taxes.

In contrast, other high-tech industries, such as semiconductor manufacturing, offer substantial employment opportunities and foster skill development among the local workforce.

For instance, a semiconductor fabrication plant might employ over 1,000 people, significantly boosting local employment and contributing to the development of a skilled workforce that can drive economic growth.

DCs contribute negligibly to GDP, unlike the manufacturing sector that produces goods for export.

DCs offer storage and processing capabilities whose revenue typically benefits corporate headquarters, which are typically located in the United States or Singapore. This set-up results in minimal tax income and foreign money inflow for Malaysia.

For example, even if Google or Facebook store and process their data in Malaysia, their revenues from advertisements and user fees are recognised in their home countries. As a result, Malaysia bears the costs of hosting DCs without reaping the benefits.

DCs consume enormous amounts of power (e.g. 500MW), but employ very few people and contribute very little to the GDP, whereas semiconductor fabrication plants might consume only 30MW, but employ over 1,000 people, significantly boosting GDP.

This disparity highlights the potential lost opportunities if resources are disproportionately allocated to DCs over high-tech manufacturing that generate significant secondary economic activities, including supply chain development and R&D investments. These activities not only enhance GDP but also position Malaysia as a hub for innovation and industrial growth.

Malaysia should prioritise investments in sectors that promise higher revenue generation, job creation and GDP contribution.

DCs should only be approved with mechanisms in place to ensure they provide substantial economic benefits, such as special taxes, enforce local content and investment in infrastructure development at the local community level.

Industrial parks must adopt sustainable energy generation and management systems. Establishing co-generation or tri-generation plants can help utilise waste heat from DCs for other industrial needs, promoting energy efficiency.

Investing in renewable energy sources, like biomass power plants and cooling technologies such as absorption chillers, could mitigate the environmental impact of DCs.

Proactive infrastructure development is crucial. Malaysia should enhance its power and water infrastructure to support diverse industrial needs without compromising on sustainability. This includes investing in smart grid technologies and water recovery systems to optimise resource use.

While the importance of DCs in the digital age cannot be denied, their development in Malaysia must be carefully balanced with the nation’s broader economic and environmental needs.

Strategic planning and sustainable practices can help ensure that DCs contribute positively without overshadowing other critical industries vital for Malaysia’s long-term prosperity and harmonised with the needs of its people and the environment.

This article first appeared in Star Biz7 weekly edition.