Despite positive spillovers to economic growth and employment, several challenges lie ahead, such as natural resource constraints, limited domestic value added, and questionable impact on long-term employment, the ASEAN+3 Macroeconomic Research Office (AMRO) said Wednesday.
The research house said in a report that the rapid growth in global demand for computing power and data storage has led to a boom in data center constructions, with Malaysia emerging as a major beneficiary in the ASEAN+3 region due to a host of physical and geographic advantages.
As a result, data center capacity in Malaysia is projected to rise from 0.86-1GW as of end-2025 to 3-4GW by 2029, with Klang Valley and Johor as the main hubs.
However, AMRO opined that some of the key challenges for data center development in Malaysia concern the availability of natural resources.
It is noted that as of December 2024, applications for data center power supply had exceeded 11,000MW, equivalent to around 40 percent of Peninsular Malaysia’s capacity of 27,000MW.
“Despite the country’s continued efforts to ramp up electricity generation — 6-8GW of gas-powered capacity is expected to be added by 2030 amid the phasing out of coal—fast-rising demand for electricity may still outstrip these measures,” said the research house.
According to the report, Klang Valley has already experienced occasional but isolated power outages in recent years, while in Johor, around 30 percent of data center applications submitted during June-October 2024 were rejected, largely due to operators not demonstrating sustainable practices in resource utilization.
Water availability presents an equally pressing constraint, it added.
It also said cooling high-performance servers — through methods such as evaporative cooling and cooling towers — is highly water-intensive with every 100MW of data center capacity requires around 4.2 million liters of water per day, equivalent to usage by 10,000 persons.
This demand can strain local water infrastructure in areas already experiencing rapid growth in data center construction, it said.
The report also highlighted that domestic value added from Malaysia’s data center industry stems is relatively limited during the investment stage.
It is noted that most of the equipment used in Malaysian data centers is imported, with foreign manufacturers producing equipment for almost every aspect of data center infrastructure, from power and cooling (e.g., uninterruptible power supplies, generators) to networking (e.g., routers, switches), storage (e.g., storage area networks, network attached storage), computing (e.g., servers, server racks), and security (e.g., access control systems, biometric scanners).
For example, despite the country’s established metal fabrication industry, Malaysia still imports large numbers of integrated server racks for data center investment, although it is worth noting that some of the demand for integrated server racks is met by foreign manufacturers based in Malaysia, supporting demand for local assembly labor.
“At any rate, it is estimated that only around 30 percent of value added from capital expenditure is captured domestically, mostly from construction-related activity, which benefits, for example, producers of cement, steel, and glass,” said AMRO.
However, the research house noted domestic value added is significantly higher during the operational stage of data centers.
The share of domestic value added in data centers’ operating expenses is estimated at around 70 percent, involving mainly leasing and utilities expenses, most of which accrue to domestic entities as local income.
At the same time, data centers can generate information and communications technology (ICT) services exports through cross-border provision of cloud computing, data hosting, and processing services.
“Given that electricity costs are a major component of domestic value added of data centers’ operating expenses, it is vital that Malaysia be equipped to meet the projected electricity demand of data centers in the pipeline with a view to ensuring sustained growth of ICT services exports going forward,” said AMRO.
International experience — most notably in Ireland and Singapore — shows that deepening domestic linkages through encouraging local participation in higher value-added segments, such as software development and enterprise services, can further enhance the contribution of data centers to export earnings and overall economic value added, it added.
While most data centers employ limited numbers of permanent staff on-site, they also create indirect jobs that benefit the local economy, said the report.
Typically, the life cycle of an average data center consists of strategic planning, design, construction, commissioning, and operations, all of which cover a wide range of job domains, such as business support, operations engineering, and network and connectivity.
“The lion’s share of jobs created by data centers takes place at the pre-operational stages; once operations begin, most data centers on average create only 30 to 50 permanent jobs,
“That said, during the operations stage, a variety of indirect jobs are also created, generally through partnerships with external vendors that supply periodic services such as maintenance, repairs, and upgrades,” said AMRO.
Even when full-time employees are needed for data center operations, the research house opined that it is sometimes challenging to meet such demand, particularly for skilled labor.
“Skilled labor shortage has been plaguing Malaysia’s semiconductor industry for years due to insufficient numbers of engineering graduates with applicable knowledge in areas such as integrated circuit (IC) design, device physics, fabrication, and process engineering,” it said.
A similar lack of skilled graduates is also faced by the budding data center industry, which requires specific skill sets related to information technology (IT) infrastructure, hardware management, and environmental controls, it added.
“The shortage is exacerbated by brain drain, particularly to Singapore, home to around 60 percent of the 1.8 million Malaysians working overseas,” said the research house.
As such, AMRO opined that continued government efforts to address the labor shortage by equipping students with industry-relevant skills — such as the AWS Skills to Jobs Tech Alliance, a joint initiative by AWS and Malaysia Digital Economy Corporation (MDEC), and the Data Center Technician Program, a training program developed by the Johor Talent Development Council to enhance technicians’ workforce readiness — will be crucial in safeguarding the future of the country’s data center industry.