As we step into 2023, the landscape of China's Internet Data Center (IDC) market is undergoing significant changesA clear trend of oversupply is emerging, particularly pronounced in the western regions of the countryIn certain cities, the occupancy rates of data centers have plummeted to below 50%. This shift presents serious challenges for domestic IDC providers, forcing them to adapt to a market that is becoming increasingly competitive.

Moreover, the prices for renting cabinet space have been declining steadily year-on-yearCurrently, the average rental price for cabinets stands around 2000 yuan per month for each kilowatt, but this figure has dropped to approximately 1300 yuan over the past couple of years, with some areas seeing prices fall below the 1000 yuan thresholdThis deflationary trend in rental prices adds to the pressure on IDC companies to seek new avenues for growth.

Given this backdrop, a growing number of Chinese IDC enterprises are turning their sights overseas in hopes of uncovering new growth potential

The operational models for IDC services differ greatly between domestic and international markets, creating a complex juxtaposition that these companies must navigate as they venture abroad.

Initially, it’s important to note how domestic third-party IDC providers operateCompared to their international counterparts, they generally default to a model of fulfilling basic “property management” responsibilitiesThey design and construct the data centers but primarily offer services akin to those provided by residential property management, such as ensuring the fundamental operations of the data center, maintaining communal areas, and overseeing security services.

In sharp contrast, international IDC players not only engage in the design and construction of data centers but often expand their service offerings significantlyFor instance, companies such as Equinix stand out as global leaders in digital infrastructure

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Established in 1998, Equinix operates in 14 countries across the Americas, Asia-Pacific, Europe, and the Middle East, maintaining a presence in 31 markets through 94 International Business Exchange (IBX) data centersTheir suite of services ranges from simple data center access to extensive network connectivity and a robust multi-cloud ecosystem.

Equinix’s multi-cloud ecosystem connects over 10,000 enterprises and service providers through its Equinix Marketplace, forming a bustling and dynamic network that enhances business collaboration and data exchangeThe company also provides high-performance, low-latency hosting solutions alongside virtual hosting services.

According to Equinix's third-quarter report for 2024, the company has expanded capacity by leasing an additional 20 megawatts at its Seoul locationThis growth is indicative of a broader trend, as Equinix has previously announced additional projects in Istanbul and Johannesburg, and made a strategic entry into New York and Tokyo with their latest data center expansions.

International giants like Digital Realty Trust are also noteworthy

They deliver neutral data center services, branching out into various verticals including cloud IT services, communications, and healthcareThis diversification allows them to cater to a wide array of industry-specific clients, which is less common among their domestic peers.

When we examine the operational models, domestic IDC providers tend to follow one of two primary strategiesOne approach revolves around serving major clients capable of taking on entire industrial park leases, wherein the IDC designs and constructs the facility but leaves operational management entirely to the clientThe second model finds IDC providers independently managing their data centers, often catering to customized, wholesale, and retail customers simultaneously, with ownership typically centralized under a single enterprise.

In contrast, international providers have gained significant experience in operating under Real Estate Investment Trusts (REITs), a scenario less prevalent in China as of now

Numerous data center REITs, such as Equinix and Digital Realty Trust, have successfully gone public, reaping substantial returns for investors through acquisitions and new constructions.

For instance, Equinix has effectively demonstrated the potential of transitioning to a REIT model, with its shift becoming official in 2015 and resulting in considerable growth in market capitalization, revenue, and EBITDAConversely, in China, the evolution toward REITs has been more gradualWhile in November 2024, CenturyLink partnered with a subsidiary of a leading insurance group to establish a Pre-REITs fund focusing on data center investments, the larger industry remains tethered to traditional operational frameworks.

The roadmap towards REITs in China has seen its challengesAlthough the government has introduced policies to encourage REITs, the practical results have not met expectations

Currently, only a handful of domestic IDC operators, including Runze Technology and CenturyLink, have ventured down this path.

Amid rising domestic challenges, including the oversupply of data centers and declining pricing, IDC providers are increasingly looking beyond borders for opportunitiesAn intriguing aspect is the rising demand for data centers in Southeast AsiaMulti-national firms have begun investing heavily in this evolving market, and the region's need for digital infrastructure is explosive, paralleling the region's growing digital economy.

Regional proximity and cultural familiarity with China lend Southeast Asia an advantageous position for IDC projectsFor example, companies like Qinhuai Data and GDS have begun establishing a foothold in countries such as Malaysia and Thailand, addressing the booming internet and cloud computing market catalyzed by rapid digitalization.

Indeed, as noted by Wang Hongtao, Deputy General Manager of Product Innovation at China Telecom International, the surge in the Asia-Pacific region's data center market is powered by the explosive growth of the internet and cloud services over recent years

Internet penetration rates in Southeast Asia have reached 75%, creating fertile ground for companies venturing out to find success.

Looking ahead, the implications of these trends could significantly impact Chinese IDC companies eyeing opportunities abroadCompanies like Equinix have begun enhancing their presence in Southeast Asia, with new data center developments signaling intense competition in the regionIn particular, markets such as Thailand and Indonesia present promising environments for future expansion as cloud adoption grows rapidly.

However, potential hurdles also loomFor instance, the Malaysian government has indicated future restrictions on foreign investments in data centers to mitigate the pressure on local energy and water suppliesThis regulatory environment necessitates a nuanced understanding of local laws and practices for Chinese IDC firms entering the market.

In summary, as Chinese IDC companies navigate their overseas expansion, there are valuable lessons to be gleaned from international players' strategies around site selection and operational models