How AI is set to accelerate demand for data centres

We recently visited Japan, South Korea, Singapore and Indonesia to keep pace with the electrifying growth of digital infrastructure in the region, as detailed in the video below.

We found that established operators such as Equinix, NTT and SingTel, are particularly well placed to capitalise on this growth opportunity, through their highly-developed network infrastructure which connects leading Global Cities.

In our proprietary analysis below, we highlight an example of how Equinix has a leading position in the Singapore market, hosting the internet exchanges, network carriers and sub-sea cables that aggregate critical data. The gravitational pull of these key network nodes is evidenced by the number of networks that peer at Equinix’s site. Put simply, the company makes high margin revenue from plugging these tenants into each other, now hosting over 24,000 interconnections between network peers in the Singapore metro alone.

Data centres: the modern-day shovels in the AI gold rush

The mass adoption of generative Artificial Intelligence (AI), marked by the run-away success of ChatGPT since November 2022, has sparked interest akin to the Californian Gold Rush. Investment markets have jumped back on the Silicon Valley bandwagon, rewarding pioneering firms like NVidia, Google and Microsoft, that have gained first mover advantage through extensive R&D efforts. Investors are understandably now looking for the next group of beneficiaries, whilst seeking to avoid speculative or even loss-making companies.

We believe that the answer is hiding in plain sight. NVidia’s Q1 2024 earnings call was a watershed moment for the AI supply chain, highlighting the incredible recent growth in demand for the NVidia’s hardware and leading analysts to upgrade their full year revenue expectations by approximately 40% (source: Refinitiv).

In explaining their upgraded outlook, the company mentioned "Data Centres" no less than 56 times during their earnings call on 24th May 2023. It is clear that their advanced graphics processing units (GPUs), which accelerate the processing of large amounts of data, needed for training and applying AI models, entirely depend upon high-performance, secure and stable data centre environments.

The Evolution of Data Centres from communications exchanges into AI launchpads

Data centres have evolved dramatically from their origin as telecommunications hubs for hosting the internet in the late 90s and early 2000s. Technological and policy advancements have since driven their transformation into larger, more localised, more resilient facilities, boasting state-of-the-art cooling systems, redundant power supplies and advanced security measures.

Over the past two decades in developed markets (outside of Asia), these networking hubs were spun out of telecommunications companies into infrastructure businesses more suited to their long term ownership. These portfolios both host the public internet and also enable enterprises to privately connect to their end customers and partners. Coupled with the smartphone revolution which has led to an unprecedented surge in data generation, the demand for data storage and processing capacity continued to soar.

AI data science has been around since the 1950’s, but with the affordable and widespread availability of advanced AI technology much more recently, adoption has rocketed. This is in no small part due to the cloud computing giants such as Amazon and Microsoft developing their own internal applications and beginning to make these available to businesses of all sizes.

Translating the growth potential into numbers

The potential size of the opportunity remains subject to fierce debate, but forecasters estimate that total demand for data centres, as defined by power consumption, could hit 35GW by 2030 in the US market alone, up from 17 GW in 2022. The US currently holds about 40% of the global market share. Analysts at Evercore ISI estimate that the future power consumption related to AI deployments could increase from approximately 1GW in 2023 to 7GW by 2026, representing a $12 billion revenue opportunity and 15-20% growth versus existing total data centre capacity.

Equinix owns a portfolio of 248 multi-tenant data centres across 32 countries, that host 10,000+ companies, with 450,000+ interconnections between them. Their services have grown beyond offering physical space, power, cooling and connectivity to increasingly focus on network services, growing their competitive advantages.

At their 2023 analyst day, Equinix identified a $21 billion Service Available Market (SAM) target for AI revenue by 2026, based on their current operations and capacity. Whilst they will likely only take a percentage share of this SAM, the incremental demand potential compares favourably to their current revenue run rate, of around $8 billion per annum (source: company, June 2023).

Can our power grids sustainably keep up with AI computing demand?

Supply was already struggling to keep pace with surging demand for data centre space in major metropolitan areas, prior to the mass adoption of AI tools. Supply chain bottlenecks and a lack of distributable power have led to low vacancy rates and significant pricing power for data centre owners in these locations.

AI software is trained on enormous quantities of data in order to return informative responses. For advanced applications such as these, GPUs are used in place of Central Processing Units (CPUs) given their ability to more efficiently process multiple computations simultaneously. Whilst GPUs are more efficient per byte of data processed, total power consumed is likely to increase as new uses cases are introduced, as suggested in the forecasts above.

As data centres begin to host more high power GPUs to support AI, the draw on our electrical grids will only become more acute. Some utility providers are already setting quotas that limit the construction of new facilities, making existing facilities more valuable. Singapore is case-in-point, with new data centre power quotas tightly controlled by the government and disproportionately awarded to incumbents such as SingTel, who can help to arrange novel solutions to renewable power requirements.

The AI supply chain must work hard to derive more efficiency from existing resources. R&D innovations around liquid cooling and optical networking technologies are advancements set to reduce the energy consumption needed to run high performance chips. What’s more, data centre operators and occupiers are working intently to add new large scale renewable energy supplies onto the grid.

AI adds to the unprecedented demand for data centres

Data centres, as the critical infrastructure behind the digital economy, are set to play a key role in delivering new AI tools to consumers and enterprises.

As with any new technology, the ultimate size of the AI market opportunity remains open for debate. Data centre operators will need to carefully manage environmental and regulatory concerns. We believe that companies with long track records of innovation should see their revenue growth augmented by this new wave of applications.

Following an extensive deep-dive into key Asian cities, we believe that the region presents some of the most exciting growth opportunities. Moreover, ‘first movers’ with the most well established digital infrastructure networks are best placed to capture the explosive demand to come.  

Sources:

McKinsey & Company (2023). Investing in the Rising Data Centre Economy. McKinsey & Company.

Evercore ISI (2023), Equity Research Note

Nvidia Q1 Results, May 2023

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