Article

Why data centers are moving onshore

Data centers are being built in emerging markets to meet local demand and abide by data privacy laws

October 21, 2022

Data centers, the buildings that sit at the center of the world’s boundless computing needs, have long been located in countries far from end users.

But stricter data privacy regulations and rising demand are drawing data center operators to set up facilities onshore, particularly in emerging markets.

Concerns over privacy have sparked a wave of new legislation to govern sensitive data, essentially requiring companies to have data centers locally to serve the market in which they operate.

Take Vietnam, which enacted a law in August mandating service providers to domestically store personal data, including individual identities, financial records, digital footprints, and online connections. A similar personal data protection law in Indonesia calls for electronic system operators that manage public data to process and store electronic data within the country.

“The rise of regulations in markets, especially those where data related to local citizens must remain onshore for privacy protection, is helping to supercharge demand for data centers,” says Chris Street, Managing Director of Data Centers, Asia Pacific, JLL, during a recent interview with Mingtiandi.

But legislation is far from the only push factor. “The trend of content localization is also energizing the data center and digital infrastructure industry,” says Street.

In countries like Thailand, for instance, high domestic consumption is fueling a robust homegrown media and content ecosystem.

“The content needs a home to sit in, so the data center becomes that home,” says Street. “Serving consumers locally and being closer to the end user can also address latency and performance issues that may affect streaming of the content.”

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From offshore to onshore

The trend of data centers moving onshore is already happening in emerging markets within Southeast Asia and North Asia, and is expected to accelerate in the next two to three years, JLL data shows.

One such project commencing next month is the construction of a 32-megawatt data center operated by Philippine digital infrastructure provider YCO Cloud Centers in the south of Manila, Philippines, says its chief executive Nik de Ynchausti during a joint interview with Street on Mingtiandi.

Filipinos’ heavy use of internet and social media platforms, as well as the popularity of video streaming services such as Netflix and Amazon Prime Video, are driving the need for server hosting facilities in the country, but there are “inherent difficulties” for foreign operators entering a market like the Philippines, according to de Ynchausti.

The process of setting up in a new market, especially an unfamiliar one, is fraught with challenges for data center operators.

Due diligence is necessary to understand the network topology, the internet architecture such as fiber routes before mapping it against the local utility infrastructure like electricity and water.

“There’s a need to select a local business partner that has access to land plots that are suitable for data center development or has the local knowhow to navigate the regulatory environment to get the project off the ground,” says Street.

“Governments are typically very willing to invest and work with local and foreign operators to increase their digital infrastructure, so having somebody who knows their way around the ecosystem can help facilitate the permitting and incentive issues for market entry.”

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The right skillset

Skilled labor in the digital infrastructure industry, however, remains scarce even in established markets though there are encouraging signs.

“Many industry players have reached out to institutes of higher learning to develop programs in collaboration with local government agencies,” says Street. “The goal is to build a workforce with the right skillsets and technical background to staff data center facilities.”

Despite these challenges, on top of the macroeconomic headwinds amid the pandemic, investment continues to pour into the specialized asset class, bolstered by government regulations and local demand.

“The interest and the ambitions that investors have to enter the sector and develop projects has been exhilarating,” says Street.

“There’s been incremental investment and early movers for many years now, but the pace of investors entering the data center space has really accelerated globally within the past two years and looks set to continue growing.”