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Business Trends

Data center competition heats up in Southeast Asia

Amazon and Google invest in Indonesia as Jakarta calls for data sovereignty

New investment to build data centers in Indonesia, rather than in an offshore hub such as Singapore, reflects a trend toward localization.

SINGAPORE -- Indonesia is challenging Singapore's dominance in data center investment by attracting industry giants Google, Alibaba and Amazon, with the latter proposing to pour nearly $1 billion into the country.

The U.S. internet giant Google said this month that Indonesia would become its newest Asian hub for cloud services. The plan, which means setting up a data center in the world's fourth most populous nation, will be taking form soon, said Google Asia Pacific Managing Director Rick Harshman, at a recent Google Cloud Summit in Jakarta. The company is making "long-term investments in the infrastructure," he added, without specifying the amount.

Google's move reflects a growing interest in Indonesia as an alternative to Singapore, traditionally the focus of cloud service investment because of its good fiber connectivity.

It follows a similar initiative by Amazon. The e-commerce heavyweight is set to invest 14 trillion rupiah ($924 million) in Indonesia over 10 years, initially focusing on cloud services. Amazon Vice President Werner Vogels pitched the proposal on Sept. 21 to Indonesian President Joko Widodo, said Finance Minister Sri Mulyani Indrawati, who attended the meeting at the presidential palace.

Plans call for introducing cloud computing unit Amazon Web Services to the Indonesian market, the finance minister said. Amazon's investment is also likely to entail the opening of its first data center in the country, because the cloud business "resides" in data centers, according to industry expert Lynus Pook, associate director of real estate service company Cushman & Wakefield.

Amazon has not yet revealed all the details of its plan, but judging from the sheer scale of the investment, there is "no doubt" that it includes a data center, Pook said.

"We were asked to create steps that will enable Amazon to realize their investments," Indrawati said.

Indonesia boasts around 260 million people and a vibrant mobile startup sector, making it attractive for cloud and internet businesses. Cloud services are delivered through the internet to store and process data or run applications on a pay-for-use basis, ridding small companies and startups of the need to invest in their own hardware and software.

Amazon follows Chinese e-commerce leader Alibaba Group Holding, which claims its Alibaba Cloud arm became the first global cloud platform in Indonesia when it opened a data center in the capital, Jakarta, in March.

Alibaba's Indonesia investment is not only aimed at Chinese companies expanding in Southeast Asia, it also wants to penetrate the local market, serving the country's small and midsize enterprises and startups.

Customers are increasingly demanding local data centers. The need for speed propels localization. Low latency -- or delay -- in data transmission becomes more vital as a market matures, and customers demand more content such as high-resolution video streaming or mobile apps that enable online gaming, deliveries or transport.

"Companies will need, by definition, to house the data center closer to end users" instead of using a hub in Singapore, said Jabez Tan, research director of data center-focused think tank Structure Research.

The second driver for local services is data security.

Indonesia, Vietnam and China are among the Asian countries tightening requirements to store citizen and consumer data locally for the purpose of data protection. Many government agencies and other data collectors store confidential information at data centers within their own countries out of hacking or leakage concerns. The details of Indonesia's data regulation remain unclear, but the move appears likely to impact future corporate investment decisions.

"Data sovereignty is one of the driving factors that attract hyperscale cloud providers into Indonesia," said Pook.

This localization trend may worry Singaporean officials and businesses trying to expand the city-state's data center industry. Singapore leads the region in attracting such investment, hosting about 50% of Southeast Asia's data center capacity, research company BroadGroup said.

Singapore's strength lies in long-standing connections with both the Asia-Pacific region and the West, which make up for the small domestic market. The city-state has become a major node for undersea communications cables. Singapore has among "the most robust fiber connectivity in the world," Pook said.

Singapore topped a 2017 ranking of Asian data center locations by Cushman & Wakefield. Connectivity and network infrastructure aside, its high standard of governance and political stability, which translate to greater data security and protection, contribute to the strong reputation.

Facebook broke ground this month in Jurong, in western Singapore, for a site expected to begin operation in 2022 as the American social media company's first data center in Asia. The facility will support the 546 million daily active users in the Asia-Pacific who make the region Facebook's largest market, exceeding North America and Europe combined.

Microsoft's cloud computing unit Azure runs a data center in Singapore, while global co-location data center players -- which provide facilities to third-party corporate clients -- are active as well. American company Equinix runs data centers in Singapore, and London-based Global Switch's facility is under development, offering service to multinationals and local companies.

Singapore's lead in data center investment has benefited from the city state's unique position as a mature, stable country surrounded by developing economies. But as "other countries get smarter and more sophisticated" in digital transformation, Tan said, "you will see more data center investment divert away from Singapore into other countries with more growth potential such as Malaysia, Indonesia and India."

Singapore land prices are also becoming a disadvantage. Land is scarce and expensive in the small, densely populated nation. Facebook built an 11 storey data center to save space. The company is also introducing a new cooling system to cut costs by minimizing the use of water and electricity.

Observers agree that Singapore retains its edge as a regional gateway, supported by the diverse connectivity. But the trend of localization appears set to continue.

"If Singapore's neighboring countries adopt an investment-friendly approach" such as low taxes and cheaper land and utilities, Pook said, "Singapore will be at risk of losing the hub status to store the bulk of the data for such hyperscale cloud providers."

Nikkei staff writer Shotaro Tani contributed to this article.

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