Malaysia is betting on data centers to boost its economy. But experts warn they come at a price.

[February 19, 2025]  By ANIRUDDHA GHOSAL and VINCENT THIAN

JOHOR BAHRU, Malaysia (AP) — Winson Lau has always had contingency plans. But he wasn't prepared for data centers.

Lau relies on water and electricity to operate his thriving export business in Malaysia’s Johor province, where he raises a kaleidoscope of tropical fish in rows of aquariums, including albino fish with red spots that can fetch up to $10,000 from collectors. His contingency plans in the event of an outage involve an intricate system of purifying wastewater through friendly bacteria and an alarm system to quickly switch to backup power.

But these measures can’t compete with the gigantic, power-guzzling and thirsty data centers being built in Johor. The province is on track to have at least 1.6 gigawatts of data centers at any given moment from nearly nothing in 2019, making it the fastest-growing data center market in Southeast Asia, according to a report published in April.

Data centers are large, windowless buildings filled with racks of computers that need lots of electricity. To prevent overheating, they rely on energy-intensive air conditioning systems using pumped water. Increasingly used by tech companies for running artificial intelligence systems, the power demand from future facilities in Malaysia may rise to over 5 gigawatts by 2035, according to researchers at Malaysia’s Kenanga Investment Bank. This is more than half of Malaysia’s entire renewable capacity in 2023.

Over 95% of the energy available to Malaysia in 2022 was from fossil fuels, according to the International Energy Agency. The country is now fifth-largest exporter of liquefied natural gas globally. And with planned renewable projects, Prime Minister Anwar Ibrahim said in September that the country was “confident of a surplus of energy” to fuel large projects and keep exporting.

But Lau doesn't fancy the chances of his homegrown business competing against the foreign-funded behemoths for energy. Even without data centers, Malaysia is susceptible to power interruptions because of storms, including one that lasted 30 minutes last year and killed 300,000 fish, costing Lau over $1 million. He worries that data centers would result in longer outages.

To survive, he is moving to Thailand and already scouting potential locations for a new fish farm.

“Big data center is coming and there is shortage of power," he said. "It’ll be crazy.”

Costs versus benefits

Malaysia is betting that potential economic growth from data centers justifies the risk. Once touted as an Asian tiger on the cusp of becoming rich, its industries shrunk in the late 1990s after the Asian financial crisis. It has since languished in the middle-income trap. Data centers, the government hopes, will modernize its economy and indirectly create thousands of high-paying jobs.

But experts worry that Malaysia, and others like Vietnam, Indonesia and India vying for billion-dollar investments from tech giants, may be overstating data centers' transformative capabilities that also come at a price: Data centers gobble up land, water and electricity while creating far fewer jobs than they promise. Most data centers provide 30 to 50 permanent jobs while the larger ones create 200 jobs at most, according to a report by the American nonprofit Good Jobs First.

Add to this the rapid increase in power and water use and some experts like Sofia Scasserra, who researches digital economies at the Amsterdam-based think tank Transnational Institute, said that tech companies exploiting resources in poorer countries while extracting data from their populations to get rich is akin to “digital colonialism.” She compared data extraction to silver mining in Bolivia, which enriched colonial Spain but left nothing behind for Latin America.

“They are extracting data in the same way. Data doesn’t even leave (behind) taxes,” she said.

Indeed, only a small portion of Malaysia's data center capacity is actually for Malaysian users. Through a network of submarine cables that fans out into the world, they service East Asia, China and Europe. And the data centers themselves are run by foreign companies like America’s Equinix and Microsoft as well as Chinese competitor GDS Holdings that works with tech giants like Alibaba.

These data centers are also on the front lines of AI competition between the U.S. and China. Shortly before he left office, U.S. President Joe Biden’s administration proposed new rules that would limit exports of advanced AI chips made by U.S. companies like Nvidia, part of a strategy to deprive China and other U.S. adversaries from gaining access to AI technology through data centers in places likes Southeast Asia and the Middle East. Although it’s unclear if the Trump administration will retain the policy, which hasn’t yet taken effect, GDS Holdings saw its stock drop more than 18% on the day of the announcement.

Filling the void

For now, artificial intelligence is driving the hunger for even more data centers, with tech companies seeking out bigger — and cheaper — sites worldwide as a part of a “global strategy,” said Rangu Salgame, chairman and CEO of Singapore’s Princeton Digital Group, which is building a 170-megawatt site in Johor. Data centers larger than 40 megawatt typically need land the size of seven football fields — about enough power for 36,000 American homes, according to data center service provider Stream Data Centers.

Construction workers walk outside a data center building under construction in Johor Bahru town at Johor state, Saturday, Sept. 28, 2024. (AP Photo/Vincent Thian)

That’s costly to build in rich nations like the U.S., which over time has built more data centers than any other country but where land comes at a high price. Enter Malaysia, with its inexpensive land, excess power capacity and tax incentives. The country was the fastest growing data center market in Asia Pacific in the first half of 2024, according to global real estate firm Cushman and Wakefield. This makes Malaysia the eighth-largest data center market in terms of operations and the fifth-largest behind China, India, Japan and Australia when accounting for projects already in the pipeline.

Globally Malaysia ranks 14th in terms of operational capacity — still smaller than Frankfurt, London, Amsterdam, Paris and Dublin — but it is on track to be among the top 10 markets in five to seven years, according to Pritesh Swamy, who heads research on data centers in Asia for the real estate firm Cushman & Wakefield.

“We are talking about a region that really grew at a pace that nowhere in the world has seen,” Salgame said.

Next door to Malaysia is Singapore, which paused the construction of new data centers in 2019. The moratorium was over concerns that the energy-guzzling infrastructure was straining the tiny country’s limited resources. In 2019, data centers consumed 7% of the total electricity in the city-state that imports both power and water while aiming to reach net-zero emissions by 2050. They have been trying to build data centers sustainably since 2022, when the moratorium ended.

In the meantime, Malaysia has stepped in to fill the void, attracting investments of over $31 billion — three times the investments for 2023 — in the first 10 months of 2024, according to research by real estate firm Knight Frank. Johor already has 22 mostly foreign data centers spanning over 21 hectares, according to the research firm Baxtel. That's the equivalent of nearly 40 football fields, although not all of the data centers are operational.

Concerns over power and water shortages

The data centers that are running look anonymous from the outside. But they can be identified by the tell-tale signs of barbed wire fences, CCTV cameras and patrolling security guards. Elsewhere, a thicket of cranes and workers operating construction machinery is transforming the landscape in the sleepy province.

Salgame said that he hoped data centers could accelerate clean energy growth and experts like Putra Adhiguna of the Jakarta-based think tank Energy Shift Institute agreed that this could happen, but warned that the sheer volume of unforeseen, future demand complicates the transition.

“Add data centers on top of that, it just becomes much more challenging,” he said.

Tropical Malaysia is warmer than the countries that were initially preferred by data centers, including Ireland, and would require more water and power for cooling, said Alex de Vries, the founder of Digiconomist, a research company studying the unintended consequences of digital trends. He said that these companies are moving to new countries after their promises of economic growth were found to be “empty." And while new solar or wind farms can be built faster than other forms of energy, data centers need a lot of electricity from the get-go.

“These big tech companies are trying to distract you from the really simple math,” he said.

Malaysia acknowledges that the energy demand from data centers is “substantial” but believes that Johor’s rise as a “data center powerhouse” will make it a “key player in Southeast Asia’s digital ecosystem,” said Malaysian Investment, Trade and Industry minister Tengku Zafrul Aziz in an email. He added that Malaysia was writing efficiency guidelines for data centers and has a policy to let them buy clean energy directly from producers.

But concerns are rising among residents about potential water shortages in the future — echoing the concerns of other developing countries like Chile. Malaysia, like much of Southeast Asia, is at risk of extreme weather including drought, according to a 2022 U.N. climate change report. Francis Hutchinson, an analyst at Singapore’s ISEAS-Yusof Ishak Institute, said that Johor has faced recent disruptions and new stressors, like a growing population and water parks to boost tourism, could exacerbate the crisis.

“Water, more than power, is a potential issue,” he said.

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AP writer Eileen Ng contributed from Kuala Lumpur, Malaysia and Matt O'Brien in Providence, Rhode Island contributed to this report..

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