Malaysia, once a hotspot for data centre investments, is reining in expansion as it faces power and water constraints and rising geopolitical pressure. The country has attracted major players like Microsoft, Amazon, Google, Tencent, Huawei, and Alibaba, with Johor emerging as a key hub thanks to its proximity to Singapore. According to DC Byte, Malaysia accounts for over two-thirds of Southeast Asia’s data centre capacity under construction, fueled by spillover from costly Singapore.
However, growth has slowed as Malaysia introduces stricter vetting of projects and enforces permits for exports and transits of U.S.-made high-performance chips such as Nvidia’s. These measures follow U.S. concerns that Chinese firms could use Malaysian data centres as backdoors to access restricted AI chips. While Chinese alternatives exist, they remain inferior for training cutting-edge AI models, placing China at a disadvantage compared to U.S. rivals.
China’s “AI Belt and Road” strategy, launched in 2021, encouraged data centre expansion abroad, including in Belt and Road partners like Malaysia. GDS Holdings established a hyperscale campus in Johor, later spinning off its overseas operations into DayOne to reduce exposure to U.S. restrictions. Singapore’s limited new data centre capacity further highlights Johor’s appeal, with 42 projects worth 164.45 billion ringgit ($39.08 billion) approved by mid-2025, representing nearly 79% of Malaysia’s IT capacity.
Yet, Johor authorities have tightened sustainability requirements, rejecting about 30% of applications in 2024 for failing to meet energy and water usage standards. Analysts warn that Southeast Asia may face growing scrutiny and tariffs as U.S.-China trade tensions intensify, potentially curbing the success of Chinese-backed data centre projects in the region.