Data Centres: Johor’s Next Frontier

Johor’s economy is rocketing ahead, with the state raking in RM31 billion (US$7 billion) in foreign direct investment last year. A good proportion of this was invested in its latest economic frontier: data centres. Even as this new venture takes off, it is underwritten by an asset that other ventures have been built upon: land. The state must decide if it wants to risk using this all up for a sector that may not deliver much beyond the initial rush of investment.

Johor has long been a motor of the Malaysian economy. The state’s interior was initially set up for pepper and gambier plantations, giving way to rubber and oil palm at the turn of the last century. From the mid-1980s, Johor housed expansive consumer electronics and plastics production facilities. Over the past three years, the state has come to host a growing number of data centres. And while these activities have become increasingly sophisticated, they all leverage Johor’s ample stock of flat land.

Before the latest wave of investment, Malaysia already had a presence in the data centre sector. However, the facilities were clustered in Cyberjaya and Putrajaya, and tended to focus on local needs.

Over the past three years, Johor has pulled in an estimated 50 data centres, with at least 13 already up and running. Big names are setting up shop, including private operators based in Singapore, such as Sea Ltd and Princeton Group, and government-linked companies like Nxera (Singtel), ST Telemedia GDC and Keppel. Major US players such as Equinix and Microsoft have also invested, as have Chinese operators like Bridge Data Centre (ByteDance) and GDS Holdings.

What is behind the sudden emergence of Johor in the data centre sector?

Data centres are large facilities with servers, processors and layers of security for customers seeking cloud services, data storage and backup. Cloud computing, along with the use of artificial intelligence, has generated more demand for storage services and access to faster processing power. Many companies now outsource cloud storage to third parties — called colocation — as this is seen as more efficient and secure. Numerous large firms, particularly in the technology space, also want to have their own facilities for redundancy and processing power, and establish hyperscale data centres for this purpose.

In addition, countries like Malaysia and Singapore benefit from evolving corporate strategies in response to US-China tensions. Firms worldwide are looking for neutral locations to locate mission-critical facilities. This includes firms from China that want to establish facilities outside the country for security and redundancy purposes. Malaysia is an attractive location, given its established reputation for good infrastructure and a track record in the electronics sector.

Finally, Singapore is itself a global hub for data centres, housing some 100 such facilities along with a supporting ecosystem. However, data centres consume vast amounts of water and electricity. This led the country to declare a moratorium on new investments. In place from 2019-2022, this was subsequently relaxed but accompanied by commitments for new players to adopt green energy standards.

This pause proved the catalyst for the sector’s boom in Johor. The state offers lower set-up costs than Singapore due to cheaper land and construction costs. In addition, running costs are also cheaper, as costs for water and electricity are among Southeast Asia’s lowest. Lastly, the proximity to Singapore means good fibre connectivity to operations in the city-state.

However, there is more to Johor than just low costs. Malaysia has experienced construction firms such as YTL, Sunway and Gamuda that have taken the lead in rolling out high-end industrial parks. The YTL Green Data Center Park is a sprawling 275-acre facility with solar power connectivity. MN Holdings, a local player in the infrastructure and utilities space, has partnered with Shanghai DC-Science on a US$600 million facility.

There are also questions about demand for power and water, and the degree to which data centres generate demand for local products and services.

Johor’s state government is also extremely investor-focused and has extensive experience managing industrial parks. One of its firms, TPM Technopark, has a network of 34 industrial parks across the state, including the 745-acre Sedenak Tech Park, which houses Princeton Digital Group and ByteDance’s Bridge Data Centre. Another subsidiary, JLG is partnering with Mitsui on a data centre and solar power farm.

Nonetheless, as with all new business ventures, there are risks as well as rewards. The first concerns overcapacity. There are concerns that players are moving ahead of demand, with new builds being commissioned without firm commitments from clients. In addition, as Singapore has signalled, the sector’s water and power requirements are formidable, which the mayor of Johor Bahru has also acknowledged as a challenge.

There are also questions about demand for power and water, and the degree to which data centres generate demand for local products and services. Many of the servers, cabling and equipment are highly specialised and must be imported. Once in operation, data centres can be run remotely, requiring relatively little labour. One likely model is a facility with security guards trained in basic maintenance tasks for on-site emergencies. Though intriguing, this means that data centres may not generate significant demand for skilled workers.

And, while visually impressive, data centres swallow up vast amounts of real estate. Centrally located, fully serviced plots in industrial parks are valuable and some thought needs to be placed on reserving some for other sectors. Indeed, while Johor’s land is bountiful, it is not infinite.

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