Post by : Raman

Malaysia, long a hotspot for data centre investments in Southeast Asia, has started slowing the pace of new developments. This move comes at a time when the country is playing an important role in global technology and artificial intelligence (AI) growth. Industry experts believe this slowdown may impact China’s efforts to access high-performance AI chips, which are key to developing advanced AI applications.

Over the past few years, Malaysia has attracted major tech companies to build data centres, including US giants like Microsoft, Amazon, and Google, as well as Chinese firms such as Tencent, Huawei, and Alibaba. The country’s appeal lies in its relatively cheap land and electricity costs, as well as strong local demand for digital services. According to data centre consultancy DC Byte, Malaysia accounts for more than two-thirds of all new data centre capacity under construction in Southeast Asia’s five main growth markets. Much of this growth is concentrated in Johor, a Malaysian state near Singapore, where companies have expanded operations due to high costs in Singapore.

However, the data centre boom is beginning to slow. Malaysia faces limitations in power grid capacity and water resources, which are essential for running large-scale data centres. Additionally, Washington has urged Malaysia not to allow Chinese firms to use its facilities to access US-made AI chips that are restricted under export control rules. In July, Malaysia introduced new regulations requiring permits for all exports, trans-shipments, and transit of high-performance chips made in the United States, including Nvidia chips. While Chinese-made chips exist, they are not yet strong enough to support cutting-edge AI applications at the same level as US chips.

China has actively expanded its data centre presence overseas under its Belt and Road Initiative. Chinese companies such as GDS Holdings have built large facilities in Johor, aiming to extend their AI and cloud computing capabilities abroad. However, due to increased US scrutiny and trade tensions, GDS recently reduced its stake in overseas operations and created an independent entity called DayOne to manage its foreign data centres. Experts believe this move is meant to diversify clients and navigate geopolitical challenges.

Johor has emerged as Malaysia’s top hub for data centre investment, with 42 projects approved worth 164.45 billion ringgit ($39.08 billion) as of mid-2025. These facilities make up more than 78% of Malaysia’s operational IT capacity. The state benefits from its proximity to Singapore, providing fast connections to other major data centres in the region.

Despite its success, Johor is implementing stricter controls. A vetting committee introduced in 2024 rejected about 30% of new data centre applications that failed to demonstrate sustainable energy and water usage practices. While the approval rate has improved as companies adjust to regulations, the measures show Malaysia’s commitment to responsible growth and environmental sustainability.

Analysts note that Southeast Asia, particularly Malaysia, has been attractive for Chinese investments because of geographic closeness, lower political friction, and growing digital infrastructure demand. However, rising international scrutiny, particularly from the US, may limit the speed and scale of China-backed data centre projects in the region. This shift could affect China’s ability to advance its AI capabilities using foreign facilities, creating a more complex global tech landscape.

Malaysia’s approach reflects a balancing act between economic growth, environmental responsibility, and geopolitical considerations. By regulating the expansion of data centres and controlling chip access, Malaysia ensures that its growth aligns with global standards while also maintaining its strategic relationships with key global partners.

The country’s measured approach shows that while Southeast Asia remains a digital hub, careful planning and oversight are essential. Malaysia is positioning itself not only as a leader in data centre infrastructure but also as a responsible and influential player in the international AI and technology arena.

Malaysia, data centres, China, AI technology, US-China tensions, Southeast Asia, semiconductor access