Recently I was participating on a panel at the Data Center Summit in San Francisco. The panel consisted of Michael Rechtin, moderator from Baker McKenzie, with additional panelist Jason O’Connell from Infinity SDC, as well as panelists from Equinix and Structure Research. The theme of the panel was to discuss activity outside the U.S. borders. My specialty was in Latin America, specifically in Brazil.

Brazil

Comparative to other regions in the world, Brazil continues to be an active market for data center construction mainly due to the large population and the emerging technology sector there. Brazil is the seventh largest economy, and the third largest emerging technology country in the world. Additionally, Brazil’s power is 77% hydro energy. While hydro energy in North America seems to be cheaper, in Brazil this is not the case. One of the other facts about hydro power is that in the event of a draught, power can be out for days, forcing data center facilities to rely on emergency generators. Also, in the larger cities such as Sao Paolo, in the event of a power outage, traffic becomes gridlocked, and diesel fuel delivery is sporadic at best.

Cloud Providers And Brazil

Over the last couple of years, Microsoft and a few other cloud providers have ventured into the Brazilian markets only finding it to be difficult concerning culture, politics, and construction barriers. Maneuvering through these barriers requires aligning yourself with consultants with local experience. The data center provider Ascenty, which has a local presence in Brazil, teams with cloud providers to build data centers in that region. The combined joint venture has become successful with several installations in Brazil.

Another factor is cost of construction in Brazil. Ascenty claims to be able to build data centers at approximately $6.2M per megawatt, which is much lower than the $8.5M plus in the United States. While most UPS/generator/HVAC manufacturers import their products to Brazil, the cost of labor is the main factor for reduced cost. However, operating costs are higher due to a humid environment in PUE. The weather in Rio De Janiro and Sao Paolo is temperate to Florida, and typically ranges in the 1.6 plus range for PUE.

Investment In Brazil

To date there has not been a lot of history in mergers and acquisitions (M&A) in the Brazilian market. Perhaps the most recent transaction was the purchase of Alog by Equinix. In 2011, Equnix bought 53% of Alog for approximately $83M. After working in the market, Equnix then purchased the remaining 47% of Alog for over $200M. Obviously, Equnix saw an opportunity in the market, and the per share buyout was much higher than originally anticipated. The key was to enter the market with someone already established and to know both the sales side of the business as well as the construction obstacles.

Contraction In Brazil’s Economy

While the opportunities seem good for U.S. cloud providers, as well as other data center buyers, the market prediction for 2016 is a contraction of 2% in the economy. This includes the revenues generated by the up and coming Olympics. However, if you look at the U.S. recession in 2008, data centers were only slightly impacted. The surge that we are currently undergoing (10% CAGR) was spurted in 2010 and has been growing ever since. Therefore, the 2% contraction may have little impact in the data center market. The associated risk is working in the region, and political aspects of Brazil’s new Chinese oil contract for drilling off-shore (as well as other issues that Brazil is going through).

Overall International Market Outlook

While my company is not in the brokerage or real estate advisory business, the panelist offered comments on additional markets in Europe and Asia. As Jason from Infinity SDC stated, most U.S. providers can come into the European market with one or two data centers and serve the majority of European countries due to proximity. Amsterdam seems to be doing the most activity concerning construction, offering lower utility cost and other incentives.

Jabez Tan from Structure Research, who specializes in the data center market in Asia, sees most of the data center activity still within Singapore as well as Hong Kong. Tokyo, due to land limitations and other constraints, is not nearly as active as the other Asian markets.