This article first appeared in Forum, The Edge Malaysia Weekly on February 24, 2025 - March 2, 2025

Malaysia has emerged as a competitive player in the global data centre industry, attracting significant investments from global tech giants such as Amazon Web Services, Google and Microsoft. Between 2021 and mid-2024, the Malaysian Investment Development Authority reported RM90.2 billion in foreign direct investment from major technology firms such as Nvidia, ByteDance and Singapore Telecommunications. The country’s ambitions are supported by robust government policies, including incentives under the Malaysia Digital tax framework and the Digital Ecosystem Acceleration scheme.

However, the rapid expansion of the country’s data centre industry faces critical challenges, both domestically and internationally. While US policies regulating advanced AI technologies pose immediate hurdles, the recent emergence of DeepSeek, a groundbreaking AI platform from China, adds another dimension to the conversation.

In response, Deputy Minister of Investment, Trade and Industry Liew Chin Tong has indicated that the government will adopt a “wait and see” approach in the light of the lack of clarity in the new US regulations and their cross-border implications, and that the government will take the opportunity to “engage with the incoming administration when it arises”.

Malaysia’s response to these developments will determine its future competitiveness. While the government has signalled a more passive, “wait and see” approach, the strategic decisions made now will shape the nation’s ability to maintain its standing as a data centre hub.

The US Department of Commerce’s Bureau of Industry and Security has introduced the Validated End-User Program and the Framework for Artificial Intelligence Diffusion. These measures impose restrictions on the export of advanced AI chips — components essential for powering Malaysia’s data centres.

As a Tier-2 country under the framework, Malaysia faces caps on the total computing power it can import, significantly impacting its ability to scale AI-driven capabilities. US-based companies can apply for blanket permission to ship chips to data centres worldwide, as long as no more than 25% of their total computing power is located outside of Tier-1 countries and no more than 7% in any single Tier-2 country. This means no more than 7% of AI chips manufactured by a US-based company (for example, Nvidia) can be shipped to a single Tier-2 country at any given time.

Further, data centre operators, particularly in Tier-2 countries, must undergo a rigorous application process to attain National Validated End-User (NVEU) status. Stringent requirements for NVEU status, including on-site inspections and compliance with US security standards, could impose operational and financial burdens on Malaysian data centre operators. This extra-territorial control imposed by the US government on other sovereign states such as Malaysia (by way of export restrictions such as the above) under the guise of “US national security” is an added concern and further highlights the need for Malaysia to remain alert and competitive in overcoming such external hurdles.

The government’s current cautious stance means that businesses must prepare for potential disruptions while waiting for further policy clarifications.

Adding complexity to Malaysia’s data centre ambitions is the emergence of DeepSeek, a Chinese-developed AI platform announced in January this year. This revolutionary technology reduces reliance on high-performance AI chips by enhancing processing efficiencies through advanced software optimisation. The idea is that DeepSeek’s large language models (LLMs) run just as efficiently, and far more cost-effectively, than those of its counterpart (ChatGPT’s OpenAI). DeepSeek purports that its LLMs need far fewer graphics processing units (GPUs) to run effectively. This may trouble data centre operators because a shift to AI models that utilise fewer GPUs and more efficient processing could mean that fewer data centres (or at least large-scale data centres) would be required. Nevertheless, these developments do not appear to be slowing down Malaysia’s data centre plans. In fact, with quick and calculated action, the country may be able to capitalise on these developments to its advantage.

Despite these external and domestic challenges, local data centre developers like Mah Sing Group Bhd (KL:MAHSING) and YTL Power International Bhd (KL:YTLPOWR) have expressed confidence in their growth strategies. These companies believe that Malaysia’s strong fundamentals, including its strategic location and government incentives, will enable the country to weather geopolitical disruptions and maintain its competitive edge.

This optimism is not unfounded. Malaysia’s ability to adapt to emerging technologies like DeepSeek could reinforce its position as a regional leader. However, overconfidence without proactive policy adjustments may leave the industry exposed to unforeseen disruptions. The success of local developers will ultimately depend on how well Malaysia aligns its policies with new AI advancements while managing the risks associated with US restrictions.

The emergence of DeepSeek and the imposition of US export controls underscore the need for Malaysia to recalibrate its data centre strategies. While local developers remain confident, the government must take decisive steps to adapt to these evolving challenges. A cohesive national policy that balances innovation, sustainability and geopolitical considerations will be critical for the country to cement its position as a regional data hub.

Malaysia’s “wait and see” approach to US regulations may buy time but risks leaving the country reactive rather than proactive. As regional competitors like Singapore continue to advance, Malaysia cannot afford to rely solely on past successes, wait for external factors to stabilise nor rely on current policies that were put in place prior to these key global developments. Instead, quick action, innovative thinking and strategic adaptability will be key to ensuring long-term growth and competitiveness in the global data centre industry.

At the same time, Malaysia must navigate the geopolitical tension between the US and China with caution. By fostering transparency and collaboration with all stakeholders, Malaysia can position itself as a neutral yet innovative player in the global data centre landscape.

Raphael Tay Choon Tien is a partner and Shivani Sivanesan is a senior associate at law firm RDS Partnership in Kuala Lumpur

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