Enterprise IT leaders are facing a double-whammy of uncertainties complicating their data center building decisions: The ever-changing realities of genAI strategies, and the back-and-forth nature of the current tariff wars pushed by the United States.
“This is obviously a fluid situation. The stated goal of the [US] administration is to bring more development into the US,” said Forrester Senior Analyst Alvin Nguyen. “But with some of these activities, there is the potential that it draws some manufacturing and other capabilities of the data center away from the US.”
Nguyen, who advises enterprises on data center strategies, said the tariffs are adding complexity and uncertainty into the already volatile genAI data center strategies.
“Right now, there’s too much variability. With all of the tariffs, this may be the thing that slows down AI,” Nguyen said. “And if you slow down AI, that will slow down the data centers.”
And with tariff worries coming to the fore at the same time that more capacity is required for AI, one European cloud entity is encouraging governments to exclude cloud and digital services from their tariff squabbles.
“We urge authorities on both sides of the Atlantic to resist dragging cloud and digital services into retaliation and protectionism,” said Francisco Mingorance, secretary general of CISPE (Cloud Infrastructure Service Providers in Europe) in an email. “The cloud is a global resource, and everyone benefits from fair, unrestricted access to the services and providers of their choice. Should cloud services be caught in retaliation, Europe has a duty to ensure that sovereign alternatives are ready if US services become commercially unviable due to tariffs or taxes.”
It’s about timing
The potentially biggest variable affecting data center strategy is timing. Depending on the size of an enterprise data center and its purpose, it could take as little as six months to build, or as much as three years. Planning for a location is daunting when ever-changing tariffs and retaliatory tariffs could send costs soaring.
Another critical element is knowing when those tariffs will take effect, a data point that has also been changing. Some enterprises are trying to sidestep the tariff issues by purchasing components in bulk, in enough quantities to potentially last a few years. The trick is being able to get those components in hand before the relevant tariff kicks in.
However, bulk purchasing of data center components is also tricky, Nguyen said.
“The idea of now trying to frontload the acquisitions and store all of these parts, well, if you are operating at scale, you may not be able to do it,” Nguyen said. “If you have the money, it is the smart play. I just don’t think many organizations will be able to take advantage of it.”
Part of the difficulty in the bulk purchase idea is also timing. If an enterprise has completed its component due diligence and it has a relationship with the manufacturers, it’s possible. But if it is at an earlier stage in the process, it may not have enough time to order and receive those components, especially given some potential component shortages.
Difficult decisions
Forrester’s Nguyen said that, even without tariffs, the data center location issue can be challenging because it forces IT to factor in so many elements.
“It’s not only space, available energy, cooling, and water resources, but it’s also a question of proximity to where the services are going to be used,” Nguyen said.
Finding data center personnel, Nguyen said, is becoming less of an issue, thanks to the efficiencies gained through automation. “The level of automation available means that although personnel costs can be a bit more [in different countries], the efficiencies used means that [hiring people] won’t be the drag that it used to be,” he said.
Given the vast amount of uncertainty, enterprise IT leaders wrestling with data center plans have some difficult decisions to make, mostly because they will have to guess where the tariff wars will be many months or years in the future, a virtually impossible task.
“You are still going to have to plan where and when your launch is going to be impacted,” Nguyen said. “You really have to pay attention to the supply chains and who gets impacted the most, given where you want to build.”
He also sees the tariff situation potentially influencing enterprises to consider reducing the size of their new data centers.
“If it is built near heavy population centers, you are going to be competing with other entities for power, land, water, and people. You need to strike the right balance. How can I coexist with these neighbors?” he said. “That means that not getting the largest data center may make sense.”
Forrester’s bottom line? “Because of the long term planning and all of the potential policy changes, I wouldn’t change my data center plans that much,” Nguyen said.
Confusion reigns
Every day it seems, the tariff situation becomes muddier. For example, according to a fact sheet released Wednesday, the White House has temporarily exempted semiconductors from tariffs, but not the aluminum used to build the servers and racks that house them.
Furthermore, Scott Bickley, advisory fellow at the Info-Tech Research Group, said it is important to note how the various countries match with the various components.
“Just about every major cost center for the buildout of a data center will be severely impacted by the new tariffs. Servers and hardware, including semiconductors, memory, network components, cabling, construction materials are going to see prices rise overnight once the tariffs go into effect,” Bickley said. “Consider that China, which has a 54% full tariff, is a major source of raw materials and rare earth elements essential for manufacturing DC components while Taiwan, at a 32% tariff rate, is the sole-source provider country for most advanced chipsets used in AI, cell phones, and any modern application footprint requiring high performance in a small footprint. South Korea (25% tariff) is a key provider of memory chips, while Japan (24%), Germany (20% EU rate), and the Netherlands (20% EU rate) are providers of sub-components like server racks, cooling systems, and semiconductor equipment.”
But, he continued: “Now factor in the offshore/nearshore contract manufacturers like Mexico and Vietnam (46%) for electronics manufacturing (assembly and distribution) and Malaysia (10%) for semiconductor packaging, and it is clear to see that the complete technology supply chain leading into the data center will be taxed at multiple touchpoints.”
Put all of that together and Info-Tech anticipates a lot of enterprise data center pain.
“It is not unreasonable to estimate the material costs of data center construction to rise about 20%, with the IT hardware components rising 25%, netting out to an overall around 16% increase in DC construction costs,” Bickley said. “Many existing capex plans will need to be revised to reduce planned capacity or acquire additional funds to realize their goals.”
Pausing builds for now
Bickley stressed that more data center difficulties in the trade battle are coming. “Some countries/economic blocks like the EU and China could amplify and intensify the trade war, leading to even higher tariff rates. Buyers should expect and plan for extreme volatility over the short term. I would not be surprised to see some data center capex paused indefinitely as this situation plays out.”
However, Matt Kimball, VP and principal analyst for Moor Insights & Strategy, said he thinks most data center teams can tweak schedules and probably ride the tariff battles out initially.
“Once commissioned, data centers typically have a 20-30 year lifespan. I don’t see a big impact of this trade war, which is temporary, having a significant impact on data center builds or operations over the years,” he said. “Could it have an impact on builds that are in flight today? Yes. However, if I were the lead on such a project, I would pause acquiring materials that could be impacted to see how this all plays out. The construction of a data center is so big and has so many moving parts, it is entirely possible for facilities teams and their contractors to reschedule tasks to continue with productivity while all of this craziness works itself out.”
Source:: Network World