Malaysia, a key destination for data center development, is slowing down its expansion rate in what industry experts and analysts believe will impede China's attempts to obtain access to advanced semiconductors essential for enhancing its AI technology.
This Southeast Asian nation has attracted data center investments from major US tech companies such as Microsoft, Amazon, and Google, along with Chinese firms including Tencent, Huawei, and Alibaba over recent years. This growth has been driven by affordable land and energy costs, as well as strong local demand for AI services.
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According to data center consulting firm DC Byte, Malaysia accounts for over two-thirds of the data center capacity currently being built across Southeast Asia's five primary growth markets. Companies have committed to establishing more data centers in Malaysia's Johor state as an alternative to the more costly Singapore market.
However, this data center expansion is beginning to decelerate as Malaysia faces challenges with electrical grid capacity and water supply limitations, along with pressure from the US to prevent Chinese companies from using the region to circumvent restrictions on US-manufactured AI chips.
In July, Malaysia, which serves as China's biggest trading partner in Southeast Asia, declared that permits would be mandatory for all exports, transshipments, and transit activities involving high-performance US-made chips, including those produced by Nvidia.
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Chinese-manufactured substitutes for American semiconductors remain inferior options for maintaining and advancing sophisticated Chinese artificial intelligence systems and programs that could rival those from the US.
The recent regulatory measures provide some flexibility for Chinese data facilities to acquire American semiconductors for domestic operations.
Nevertheless, oversight of such initiatives will likely intensify, according to specialists, as Malaysia works to complete a commercial agreement with the US.
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The US Department of Commerce has expressed worries that computing facilities beyond China's borders might acquire artificial intelligence processors to develop AI systems within China, potentially including for defense purposes, stated Collmann Griffin, an attorney at Miller & Chevalier who formerly worked as a sanctions policy consultant for the US government.