Dragoman Digest

Data centre investments flourish in Southeast Asia

Southeast Asian countries will need to build out energy grids and make renewables more accessible

Southeast Asia has emerged as a growth destination for data centre projects. Last month, Google committed US$1 billion towards a data centre project in Chonburi, Thailand, and infrastructure supporting cloud projects in Bangkok. This comes only months after Microsoft announced a US$2.2 billion investment in Malaysia to build a data centre, cloud infrastructure and a technical college for AI and cybersecurity. Data centre investment has also been pouring into the Philippines and Indonesia, which have attracted the likes of Singapore’s STT and South Korea’s LG, respectively. Data centres are a group of connected computers typically used to remotely store information that can be accessed via the internet. The proliferation of data centres in these countries is due to a combination of the region’s relatively affordable energy and land prices, technically adept labour forces, and the wider adoption of AI.

While Southeast Asia has attracted burgeoning data centre investment, there are challenges ahead. Chief among these is energy supply. In Malaysia, utility company TNB has received applications for over 11,000MW of energy supply from data centre companies, over 40 percent of Peninsular Malaysia’s current installed energy capacity. To meet the needs of data centre companies, countries like Malaysia will need to build new energy projects and both upgrade and build out their transmission infrastructure. Another complication is tech companies’ stringent requirements for renewable energy supply, amid market pressure to reduce carbon emissions. Google, Microsoft, Samsung and Apple are just some of the companies that have committed to sourcing 100 percent of their electricity from renewables by 2040 or earlier. However, the ASEAN countries are already falling short of their own goal for renewables to make up just 23 percent of the region’s installed capacity by the end of 2025. Current projections suggest that ASEAN will only reach 19 percent green energy by the target date.

South Korea targets US for future growth

The Biden Administration’s green subsidies and tech policies are key incentives

South Korean companies are stepping up investment in the US, as their global sales are negatively impacted by fierce Chinese competition. Last year, South Korean companies committed US$21.5 billion to US projects, making them the largest foreign investors in the US for the first time in over ten years. Additionally, over half of South Korea’s outbound investment in 2023 went to the US. Washington’s green industrial subsidies under the US$369 billion Inflation Reduction Act (IRA) and the US$52 billion CHIPS and Science Act have played a large part in attracting South Korean companies. South Korea’s world-leading EV battery manufacturers have reaped the rewards of the IRA, taking advantage of tax credits designed to exclude Chinese content. Active South Korean investors include automobile component manufacturer Samkee, which invested US$128 million towards the construction of its inaugural US factory in Alabama. Hyundai and LG Energy Solution announced a joint US$4.3 billion investment in a plant that manufactures EV battery cells in Georgia.

South Korean companies are investing into the US as a hedge against markets affected by Chinese overcapacity. Amid sluggish domestic demand, Chinese producers have flooded international markets and squeezed previously dominating South Korean companies out of the Chinese market. South Korea itself is increasingly being targeted by Chinese exporters. According to a recent survey by the Korea Chamber of Commerce and Industry, around 70 percent of manufacturing companies have been damaged or are expected to be negatively impacted by Chinese exports. However, South Korean companies face uncertainty even in the US. Donald Trump, who has an even chance of becoming US President on Tuesday, has vowed to “terminate” the IRA.

African countries band together to finance fossil fuel projects

Initiative aims to address challenges in sourcing funding for new oil and gas projects

A group of 18 African countries wants to raise US$5 billion to finance oil and gas projects, in an effort to overcome obstacles posed by hesitant Western financers. The Africa Energy Bank (AEB) is seeking US$83 million from each member state, US$1.5 billion from the African Export-Import Bank and US$2 billion from sovereign wealth funds and banks outside Africa. The AEB will begin operating early next year but has not specified which projects it will finance. Its leading proponents include Nigeria, Libya and Angola. Africa has significant potential to exploit its fossil fuel resources. The continent is home to 125 million barrels of oil reserves, over twice the amount in Europe, Asia and Oceania combined.

The establishment of the AEB comes in response to difficulties faced by African countries in attracting fossil fuel investment. Traditional Western financers and development banks have been increasingly reticent to fund projects in recent years due to environmental pressure. The World Bank has not financed any fossil-fuel related projects since 2019. Standard Chartered last year withdrew from a deal to finance a US$5 billion oil pipeline from Uganda to the Tanzanian coast following pressure from activists. Regardless of how Africa sources its energy needs, it will need to rapidly scale up energy supply to facilitate economic growth. The EU consumes 125GJ of energy per capita, while middle-income countries like Indonesia and India use around 30GW per capita. In Sub-Saharan Africa, this number is typically 5GJ.

China shifts outbound investment towards developing countries

The circumvention of Western tariffs is one of several factors driving the changing composition of Chinese FDI

Chinese foreign direct investment (FDI) is reorienting towards greenfield projects in developing economies. In 2023, 72 percent of China’s US$103 billion outbound investment was allocated to projects in the Global South, with Vietnam, Malaysia and Indonesia accounting for about US$1 billion each. In 2016, over 70 percent of Chinese FDI flowed into the EU and North America. The shift reflects tightening controls on Chinese investment in Western countries in an increasing array of sectors that are perceived to be sensitive. Another change has been the growth of greenfield manufacturing and energy projects as opposed to M&A. Large-scale infrastructure projects predominately using Chinese workers and materials are also less prevalent than they once were.  

Circumventing Western tariffs has been a substantial impetus behind manufacturing investments in Asia, Africa, Latin America, and the Middle East. In July, BYD announced plans to build a US$1 billion electric vehicle factory in Turkey. Adding to its facility in Hungary, BYD’s Turkish plant will avoid Turkish tariffs and more crucially, bypass European tariffs on Chinese vehicles. Chinese companies are also building EV plants to serve markets in their own right rather than as an explicit tariff circumvention strategy. BYD has announced factories in countries including Thailand, Brazil and Mexico. Strategies in the solar sector evince a hybrid approach between tariff evasion and targeting local demand. For example, Yingli Solar, the world’s eighth-largest solar panel producer, recently broke ground on a 40:60 joint venture in Thailand with local manufacturer Demeter Corp. Output will be targeted at both local and export markets.

Energy demand from data centre growth prompts nuclear shift

SMRs are emerging as an alternative to conventional nuclear plants

Major data centre providers are increasingly turning to nuclear power to meet energy demand driven by the exponential growth of power-hungry data centres. Current projections indicate that by 2030, data centres could make up to nine percent of total electricity demand in the US. Most major data centre providers have carbon neutrality goals. However, because of renewables’ intermittency, some data centre providers are pursuing nuclear power as a more reliable low carbon energy alternative. Microsoft, for example, has entered into a 20-year power purchase agreement with Constellation Energy. Constellation is investing US$1.6 billion to reopen a unit of the Three Mile Island nuclear plant in Pennsylvania. However, there may be limits to how far conventional nuclear plants can go in supporting burgeoning demand. The US has only built two new nuclear reactors since 1990, with the most recent plant in Georgia commencing operations in May. Plant Vogtle was delivered seven years behind schedule and was US$17 billion overbudget.

Small Modular Reactors (SMRs) have emerged as a potentially more cost-effective and rapidly deployable source of low-carbon power. Prefabricated SMRs are theoretically capable of being assembled on-site and connected directly to power centres – bypassing the need for grid connections and lengthy construction timelines. Last month, Amazon invested US$500 million in SMR developer X-energy to support the development of these technologies. Meanwhile, Google has ordered six SMRs from Kairos Power, with expected delivery by 2030. The hope for SMR proponents is that data centre companies will overcome some of the obstacles that prevented the industry’s proof-of-concept project from coming to fruition. The first US SMR company with a certified design from regulators, NuScale, discontinued plans in November 2023 after struggling to find buyers willing to pay US$89/MWh for power.