Reuters reported that Malaysia, a hotspot for data center investment, is tightening the pace of expansion, a move that industry insiders and analysts believe will hinder China's efforts to obtain high-performance chips that are critical to improving its artificial intelligence capabilities.
In recent years, Malaysia has attracted a large number of data center investments including U.S. technology giants such as Microsoft, Amazon, and Google, as well as Chinese companies such as Tencent, Huawei, and Alibaba, relying on low land and electricity costs and optimism about the development prospects of local AI.
According to data center consulting firm DC Byte, more than two-thirds of the data center capacity under construction in Southeast Asia's five largest growth markets is located in Malaysia. Due to the high costs in Singapore, many companies have shifted their data center layout to the neighboring state of Johor, Malaysia. However, as Malaysia faces pressure on power grid capacity and water resources, as well as pressure from the United States that does not allow Chinese companies to obtain controlled exports of American-made AI chips through the region, this "data center fever" has significantly cooled down.
As China's largest trading partner in Southeast Asia, Malaysia announced in July this year the implementation of a licensing system for all exports, transshipments and transit of US-made high-performance chips (such as Nvidia products). Chinese-made alternative chips are still "unsatisfactory" in terms of supporting and developing China's advanced AI models and applications that can compete with American products.
The new regulations leave policy space for Chinese data centers to import U.S.-made chips for "self-use within the country" in Malaysia. However, industry experts say that as Malaysia strives to reach a trade agreement with the United States, scrutiny of related projects will inevitably become stricter. The U.S. Department of Commerce has expressed concern that data centers outside China may purchase AI chips to train domestic AI models, including for military purposes.
“AI version of One Belt, One Road”
Since China released a three-year "going global" action plan for data center companies in 2021, it has begun to promote overseas expansion, focusing on countries along the "Belt and Road", and Malaysia is also an important member of the "Belt and Road". In April this year, during Xi Jinping's visit to Malaysia, the two countries issued a joint statement promising to strengthen cooperation in "data connectivity", 5G infrastructure and AI, providing political momentum for China to expand its data center capabilities in Malaysia.
GDS Holdings, a large Chinese data center operator, opened a hyperscale data center park in Johor two years ago and the project is still under expansion. However, as the United States continues to suppress China's AI capabilities, GDS has gradually reduced its stake in its Singapore subsidiary and spun it off as an independent entity, DayOne, in January this year. Lee Ting Han, deputy chairman of Johor Data Center Development Coordination, believes that Chinese companies’ move to “change licenses” is to diversify customer risks, “because they are very aware that trade tensions are escalating.”
DayOne CEO Xu Zhiming said at the groundbreaking ceremony of its first data center in Singapore in July that he had long intended to separate the business independently to adapt to different regulatory environments. Singapore ended a three-year ban on new data center construction in January 2022, and announced last year that it would release 300 megawatts of data center capacity "in the near future."
According to a Knight Frank report, as of December 2024, Johor has 12 data centers in operation with a total capacity of approximately 369.9 MW, and another 28 projects are planned, with an expected capacity increase of 898.7 MW. Johor has become Malaysia's largest investment hotspot, with 42 projects approved by the second quarter of 2025, with a total value of 164.45 billion ringgit, accounting for 78.6% of the country's total operating IT capacity.
Johor is adjacent to Singapore and benefits from a cluster of Singapore data centers with low-latency connections. In recent years, the local government has tightened its entry requirements and established a review committee last year to veto about 30% of projects that failed to meet hydropower sustainability standards. Vice Chairman Li Tinghan said the approval rate has improved as applicants become more familiar with the process.
DC Byte senior analyst Huang Simin said that Southeast Asian countries such as Malaysia have become ideal markets for Chinese data centers to expand overseas due to their geographical proximity, low political friction and growing demand for digital infrastructure. "However, as Southeast Asia faces more stringent scrutiny and tariff measures, it is expected that the expansion of Chinese companies in the region will be difficult to return to the trend of the past, especially in markets that have a Chinese background and are of concern to the United States."