Local DC landscape: a few cans of worms to open

For all the growth we have seen in areas of social media, IT consumerisation and big data output, Malaysia’s data centre industry seems to have surprisingly very little of it, translated to actual business.
According to AIMS Group (AIMS) COO, Mohammad Azman Abdul Rahman, there are two conflicting trends in the market – an explosion of data usage in Malaysia mainly because of the smartphones factor, but still very thin margins for local IT and data service providers.
This is a situation that may worsen in 18 to 24 months, and other issues currently ˜afflicting’ the industry are drawing its attention away from the potential threats at its door.
Foreign players
Azman opined that the Malaysian government may be looking at the data centre landscape, in isolation instead holistically. “They don’t engage the local data centre industry players or try to find out the possible impact of their policies.”
For the past 2 years, Malaysia has been very vocal about aspiring to capture a part of the lucrative USD 10.9 billion data centre pie in Southeast Asia, and be the preferred destination for regional investors.
The reality of this has become more possible in recent years as go-to data centre destinations like Singapore and Hong Kong start to lose appeal.
One good example is of Iskandar in Johor being touted as a potential low-cost alternative to Singapore for foreign investors, what with incentives being offered by Malaysia and more. For quite some time, Singapore has been the regional hub when it comes to data centre players and connectivity. But rising cost and lack of data centre sites makes Singapore not as good a proposition as it used to be.
Azman opined that this fact is essentially opening the flood gates to a certain extent.
“The local players at this point of time are not in position to set up base in Iskandar, Johor. The money is just not there, they are not earning enough. And banks are reluctant because of the state of things, to start financing local data centres’ expansion into Iskandar,” he shared.
Not only is there lack of resources to compete with bigger international data centre players and prevent them from taking over their turf, the local industry on the whole is actually just struggling to survive.
Money (and more) to grow to maturity
The Malaysian Data Centre Alliance (MDCA) which launched last year, have identified main areas to work on as an industry. “Some of the things we are trying to address as an industry today, are just utility challenges like power and the rising cost of power,” described Azman.
There is a common industry voice now with MDCA,  but he opined much more needs to be addressed if Malaysia’s local industry is to not only survive but compete and thrive.
Azman summed up the local competitiveness against competition that is coming from beyond our borders.
“If you look at the local DC industry, it is very much more into the physical infrastructure side of the business. Whereas companies like Google have moved up the layers to offer value add like services and applications.”
As services like Amazon Web Services (AWS) start to make their offerings available via cloud computing, customers would have choice of going to the web services layer, for example with AWS based in Singapore, instead of running their own services and infrastructure from local data centres.
Azman said, “We haven’t reached that level of maturity (to offer web services) yet. We are still just struggling with space, power, and connectivity!”
One can of worms – almost Snowden-esque proportions
Malaysian businesses turning towards foreign data centre service providers also opens a can of worms with regards to where they should be hosting their data in the first place. Regulated industries like financial services are mandated to keep data in the country.
But what is the minimum due diligence from other local industries when it comes to hosting data outside of the country?
Azman posed the hypothetical question, “Do I (as a local business) host my data in a local jurisdiction, where I know what the regulatory frameworks and policies are? Or do I take the risk with AWS for example, where I don’t know where my data is really being hosted, or who has access to it?
“I would like the local government to take a standpoint and say, for example ˜Hey Malaysian companies, you are not allowed to host personal data about Malaysian citizens or nation-sensitive data, overseas where we will have no control over what happens to it!” he said, while also citing the example of Brazil’s ˜outrage’ over NSA spying on its president, her inner circle and Brazil’s national oil company, Petrobras.
This was to extent that Brazil now plans to isolate its Brazil-Europe network from United States’ ˜jurisdictions’, via a USD185 million subsea cable.
Azman pointed out Malaysia’s slippery slope scenario, that once our sensitive data leaves our borders, we essentially give up our right and control over that data.
“Depending on where it is hosted, we are also exposed to that country’s regulation and law. So, if we don’t set up policies and frameworks about how data is stored and transmitted, we are opening ourselves up to business risk as well,” he said, adding that Malaysia’s Personal Data Protection Act (PDPA) is not comprehensive enough and does not cover how data should be handled outside our borders.
Data classification and privacy are just two concerns in a long list that needs more industry attention, thorough dialogue and action.
Electricity
The 15 percent increase in electricity tariffs this year, couldn’t have come at a worse time.
“The announcement came late last year, and its execution 2 months after that, had immediate impact on our business,” shared Azman. “When you are a data centre with over 600 customers, you need more than 2 months’ notice to pass through those costs (to customers).”
This is due to electricity making up a whopping 40 percent of total cost of data centre services.
Margins which could be used to grow the business by moving up the value chain or expanding, takes a hit.
“We were just learning to walk and got pushed over, in essence. That’s what the MDCA is struggling with right now.”
The industry understands the need to revert back to market-based or non-subsidised electricity pricing, but Azman described the way it was implemented as “¦an extremely hard punch to take.”
The inevitable visible impact on margins could also cause shareholders to ask the very hard question of whether the local data centre business, in the longer term, is going to be a viable business to invest in, given all the potential threats in the horizon.
This is a shame as local data centres should be viewed as a vital sector of the economy, opined Azman.
Azman shared, “From our point of view, this (data centres) is the digital economy. Data is being produced and manufactured out of our data centres.
“A lot of incentives are being given to traditional manufacturing, so they do have a lower tariff class for electricity. That’s what we are looking for, as an industry. We are the new manufacturers. Put us in the tariff class of the traditional manufacturer!”
Slowly choking to death
Also, why should Malaysian data have to leave our shores when we have a working data centre industry?
According to Azman, because of Entry Point Project 3 (EPP3) which has national interests around the local data centre industry, “..we are being asked to make investments in this area.
“But we can’t continue making these sorts of investments without some considerations of the threats to our business, which is foreign service providers coming in (physically or via cloud services) and absolutely commoditising our service offerings, before we even have the chance to regain our investments.”
To compound the matter, our government views these service providers as opportunities and are crafting all sorts of incentives like tax and electricity, for them.
“These incentives are not available to the local players, by the way,” Azman pointed out.
With Singapore becoming a less preferred destination, these incentives for foreign players could cause real and huge impact on Malaysia’s local data centre industry within the next 2 years.
The shape of things to come
It’s not all doom and gloom. Local DC players are slowly starting to move up the value chain in terms of types of services and cloud for example.
Azman opined that incentives are there, but they are not good enough.
“Competition (from foreign players) is good to push us to another level of innovation, and maybe consolidation because the strongest will survive. Ultimately the nation does want the consumer to benefit.”
According to Azman, despite this, the ˜powers that be’ need to have a thought for the other side of the coin.
“(They should) talk to all the stakeholders about what is the bad effect of foreign investors hosting massive facilities in Iskandar, for example.  (They should ask) ˜What impact will that have on local businesses, businesses who have invested some millions in this space ? When we ask them to do so, what is the impact on their business?’
Unfortunately, Azman has observed that this all-important dialogue is not taking place with the government or even amongst industry players yet.

~ Interview by Cat Yong. Published in Enterprise News IT. June 3, 2014.~

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