Written by Amy Shen (Research Lead), Rijul Mahajan (Research Lead), Brendan Furnari, Arjun Tholakapalli, Aryahi Pachpande, Lam Nguyen
KEY POINTS:
Data centers face severe raw material shortages, geopolitical tensions (e.g., U.S.-Taiwan supply dependencies), and rising labor costs, making the management of these interconnected supply chains increasingly complex.
The rapid expansion of AI workloads has driven unprecedented demand for GPUs, advanced cooling systems, and energy resources. By 2027, 40% of AI data centers may face operational limitations due to power shortages.
Prefabricated modular data centers are becoming popular for their scalability, faster deployment times, and cost efficiency, enabling operators to adapt quickly to growing digital demands.
Data centers serve as the foundational infrastructure of the contemporary digital landscape, facilitating the seamless operation of a wide range of services, including online banking, cloud storage, streaming services, and e-commerce. (Reuters) At their core, these specialized facilities are designed to house critical IT infrastructure, encompassing servers, storage systems, and networking equipment. These interconnected systems collaborate to effectively manage, process, and store vast quantities of data, making them indispensable to modern IT operations and business continuity. Furthermore, data centers prioritize ensuring uninterrupted access to data through robust security measures and fail-safes, such as backup power and cooling systems, designed to mitigate downtime and data loss.
The operational efficiency of data centers is underpinned by a sophisticated and multi-layered supply chain. This supply chain extends beyond the delivery of servers and cables, encompassing the orchestration of a comprehensive network of resources, from the physical infrastructure to the software that sustains their operations. The physical infrastructure encompasses the facility, which must be equipped with advanced mechanical, electrical, and plumbing (MEP) systems to maintain optimal operational conditions. On the hardware side, data centers rely on high-performance servers, storage devices, and networking equipment. Concurrently, software systems monitor and manage these physical assets, ensuring seamless operations and prompt responses to any potential issues. (AP News).
The supply chain for data centers operates in distinct stages, each of which is pivotal to its success. Initially, companies conduct demand forecasting, anticipating the future needs of their clients and adjusting their plans accordingly. Subsequently, they procure essential components, often storing hardware in strategically located warehouses until deployment. The execution phase involves the installation and operationalization of equipment. Ongoing capacity management ensures that resources are optimally allocated and prepared to adapt to fluctuations in demand. Finally, older hardware is decommissioned to liberate space and enhance energy efficiency, thereby reducing environmental impact and operational costs.
Each component of a data center, encompassing the physical infrastructure, IT hardware, and management software, plays a pivotal role in delivering reliable and scalable digital services. As the demand for data processing and storage continues to surge, these facilities undergo continuous evolution, incorporating advancements in sustainability, energy efficiency, and resource optimization. Contemporary data centers transcend their traditional role as mere warehouses for servers; they have transformed into dynamic hubs that fuel the digital era, driving innovation and supporting the expanding demands of businesses and consumers globally.
Challenges in Data Center Supply Chain
The growing demand for artificial intelligence (AI) has significantly amplified the need for data centers, resulting in various supply chain challenges. A company at the forefront of Artificial Intelligence is Nvidia, a technology company that designed the H100 Graphic Processing Unit (GPU) and the new Blackwell GPU, both critical components for AI data centers. These chips are manufactured by Taiwan Semiconductor Manufacturing Company (TSMC) in Taiwan and Printed Circuit Assemblies imports increased 48% from 2023 to 2024 (US Census Bureau). Despite large-scale production, Nvidia is struggling to meet the accelerating demand. Moreover, Bain’s 2024 Technology Report predicts that the surge in GPU demand could drive a 30% or more increase in demand for certain upstream components by 2026 (Bain). As a result, the data center industry is experiencing material shortages of key components.
Beyond the trends described in the United States’ reliance on Taiwan for critical materials introduces the risk of supply chain disruptions from growing geopolitical tensions. Printed circuit assemblies make up nearly 20% of 2024 imports from Taiwan and8 Electronic Computers make up 17.7% (US Census Bureau). The potential for Chinese military aggression or economic retaliation could lead to disruptions in the supply chain between the U.S. and Taiwan.
Additionally, U.S. efforts to reduce dependence on China could prompt shifts in trade dynamics, further impacting Taiwanese imports. Despite facing a shortage in critical raw materials and geopolitical uncertainties, the construction of data centers continues to surge, but a few other challenges prohibit the data center industry from meeting demand.
The AI-driven demand for data centers has surged but is met with power and capacity shortages. Gartner forecasts the power required to operate data centers to increase by 160% over the next couple years, as shown in the graph below. In Atlanta, data center construction grew by 76% in the first half of 2024, causing the city council to step in and ban data center construction in certain areas (The Wall Street Journal).
Subsequently, they predict 40% of existing AI data centers will face operational limitations due to power availability by 2027 (Gartner). This power shortage is driving up rental rates, further restricting capacity supply. In 2024, the average asking rates for data centers with a typical 250- to 500-kW requirement across the top four North American markets rose by 20% year-over-year, marking the highest global increase (Global Commercial Real Estate).
Simultaneously, North American data center vacancy rates reached new lows in major markets, driven by high demand. Overall, large corporations are finding it increasingly difficult to secure the necessary power and capacity to meet their growing data center needs.
Another primary challenge in data center supply chains is difficulty acquiring qualified labor. The Uptime Institute Global Data Center Survey revealed operators are struggling to find qualified candidates, with 53% finding it difficult and 42% losing staff to competitors (Uptime Institute). As businesses compete for a limited pool of qualified candidates, this intensifies the demand for skilled workers and drives an upward trajectory in labor costs. Moreover, the scarcity of talent may also lead to longer recruitment cycles, increased turnover, and a potential reduction in overall productivity if positions remain unfilled for extended periods.
Additionally, creating a sustainable framework that aligns with Environmental, Social, and Governance (ESG) standards presents a significant challenge. With an increasing focus on sustainability, ESG standards are tightening every year. A recent analysis by ESG Book found that global ESG regulations have risen by 155% over the past decade, applying additional pressure on data center supply chains to comply with these heightened standards (ESG Book). Failing to make progress in ESG initiatives can result in revenue losses, reputational harm, and reduced investment. Therefore, it is critical for operators to integrate sustainable practices into their operations and ensure accurate reporting of their ESG metrics.
Overall, the data center industry faces a series of interrelated challenges that include raw material shortages, the potential for supply chain disruptions, power and capacity shortages, labor shortages, and increasing pressure to meet ESG standards. Overcoming these challenges will be crucial for the industry to keep pace with the growing demand driven by AI and other technological advancements.
Sustainability in Data Centers
Sustainability has become a top priority for companies across industries, and data centers are no exception. A sustainable data center minimizes its environmental impact while maintaining reliable and secure operations. This is achieved through key practices like prioritizing energy efficiency by using advanced hardware and cooling systems, such as evaporative cooling and outdoor air, to cut electricity consumption. Operations are powered by renewable energy sources like solar and wind, with efforts to decarbonize energy grids. Water conservation is another focus, achieved through water recycling, efficient irrigation, and native plant use to reduce consumption and promote biodiversity. Waste reduction also plays a vital role, with circular strategies that repurpose, recycle, or reuse materials to keep waste out of landfills. Finally, certifications like LEED ensure sustainable design and construction standards are met. Together, these measures enable data centers to operate effectively while significantly reducing their environmental footprint.
Data centers consume around 2-3% of global electricity and are responsible for about 1% of global carbon emissions, and electricity costs account for 45-60% of their operating expenses (IDC). The projected energy use for a typical 1 MW data center could nearly double by 2028, highlighting the need for energy-efficient practices. Leading companies like Google, Amazon, and Meta are working towards carbon neutrality, focusing on energy efficiency and renewable energy procurement (S&P Global).
This is split into direct carbon emissions (Scope 1) and indirect emissions from purchased electricity (Scope 2). Under the market-based accounting method, which considers factors such as specific renewable energy contracts, emissions related to power usage among leading U.S. tech companies have remained stable since 2019, despite a significant increase in power demand.
As data centers continue to grow in both size and energy demand, renewable energy and advanced nuclear power technologies are becoming integral to their sustainability strategies. Industry leaders such as Google, Amazon, and Meta are at the forefront of these initiatives, exploring innovative approaches to reduce carbon footprints and ensure reliable power for their operations. Meta specifically is one company who has been making strides.
Meta has achieved 100% renewable energy for its global operations and aims to reach net-zero greenhouse gas emissions across its value chain by 2030 (US Chamber). The company has contracted over 7 gigawatts (GW) of solar and wind energy projects to support its data centers. These projects not only fulfill energy needs but also contribute to local economies, generating billions in GDP and thousands of jobs during their development phase. Meta has also recently signed Power Purchase Agreements (PPAs) in Oregon, Indiana, and other states, securing over 1.2 GW of renewable energy in 2024 alone (Data Center Dynamics). These projects integrate clean energy directly into the grids powering Meta's operations, showing how innovative solutions can efficiently reduce carbon emissions.
Innovations in Data Center Supply Chain
The increasing demand for digital services has put tremendous strain on traditional data center supply chains. To solve this issue, industry leaders are implementing innovative approaches that emphasize sustainability, efficiency, and scalability.
Cloud platforms have improved data center supply chains' visibility, flexibility, and sustainability. Real-time inventory and shipping tracking allows operators to respond swiftly to disturbances and optimize operations. According to Accenture, cloud usage has raised demand forecasting accuracy by 26%, cut operating costs by 16%, and strengthened supply chain resilience. In addition to operational advantages, cloud platforms minimize energy consumption. The movement of supply chains to cloud-based systems has the potential to reduce IT energy consumption by up to 87%, demonstrating cloud technology's transformative impact on sustainability.
Innovations in data center technologies, particularly AI, ML, and IoT, are improving energy efficiency and optimizing Power Usage Effectiveness (PUE). Furthermore, AI and ML are rapidly being used to optimize operations, ranging from predictive maintenance to dynamic energy management, decreasing downtime and waste. IoT devices improve this integration by enabling real-time monitoring of environmental conditions, allowing for fast modifications to power distribution and cooling systems. These innovations not only reduce energy usage but also contribute to overall data center sustainability by aligning with global environmental goals and increasing the stability and performance of cloud-based services.
Energy advances, such as liquid cooling, are critical in meeting the high energy demands of data centers. Microsoft pioneered two-phase liquid immersion cooling technologies, which allow for denser server configurations in smaller places, reducing overheating and increasing processing efficiency while leaving a lower carbon footprint. Integration of renewable energy sources is another crucial area. Companies such as Google are investing in renewable energy projects and aiming to achieve 100% carbon-free electricity by 2030. These efforts are supplemented by developments in battery storage systems and grid optimization, which ensure the power supply's reliability and sustainability.
Prefabricated modular data centers (PMDCs) are an appealing option for enterprises seeking speedy, scalable, and environmentally friendly data center development. PMDCs, which are built in regulated factory settings, provide substantial advantages over traditional construction methods. Their prefabricated form expedites deployment by avoiding delays caused by inclement weather or workforce constraints. Furthermore, PMDCs are highly scalable, allowing for incremental growth as demand increases. Traditional data centers cannot offer this level of flexibility. Furthermore, the prefabrication method improves sustainability by reducing waste and maximizing resource utilization. As a result, PMDCs offer an effective and environmentally conscientious solution for enterprises looking to quickly expand their IT infrastructure while also preparing for future expansion.
Despite these advances, challenges persist in integrating modern technologies and reaching sustainability targets. However, these challenges provide opportunity for collaboration and creativity. Edge computing and smaller, decentralized data centers, for example, are driving the demand for flexible supply chain solutions. Collaborative efforts, such as Microsoft's Circular Centers, which repurpose decommissioned hardware to extend its lifecycle, show the potential for sustainable practices.
Economic Impact, Growth and the Future of Data Centers
The data center sector is a key driver of economic growth globally. Beyond providing IT infrastructure, it creates jobs, stimulates local economies, and attracts ancillary industries. For instance, Microsoft's recently launched data center region in Mexico is projected to create 300,000 jobs across sectors like professional services, manufacturing, and finance (Microsoft).
Moreover, data centers contribute to economic resilience in regions that house them, as they require significant investments in construction, real estate, and long-term operations. This has led governments and private entities to prioritize data center investments as a part of economic development strategies.
Demand for data center capacity is surging, fueled by the growth of AI, the Internet of Things (IoT), and digital transformation across industries. The U.S. data center power use is expected to roughly triple between 2023 and 2030 and will require about 47 gigawatts of new generation capacity (Reuters). This expansion aligns with a broader global trend, where the digitalization of services is pushing data centers to enhance their scalability and operational efficiency.
AI-specific workloads, such as machine learning models, are particularly power-intensive, requiring specialized hardware and infrastructure. Consequently, hyperscale data centers—facilities designed to handle such massive workloads—are seeing unprecedented demand. According to a report by the US Trade Census Bureau, the value of private construction put in place has increased from $110 million in 2020 to $241 million in 2024 so far. Such an exponential increase clearly highlights the shift of industry trends and heavy demand and reliance on data centers.
Data center development reflects distinct regional trends, with each market presenting unique opportunities and challenges:
Asia-Pacific: The region is witnessing aggressive investment in data center infrastructure. Countries like India, Singapore, and Japan are seeing a surge in projects to meet the increasing demand for cloud services and AI (Reuters). Notably, private equity investors are paying high premiums to acquire stakes in data center operators, showcasing the sector's lucrative potential.
United States: The U.S. continues to lead in data center capacity, driven by technological innovation and a mature cloud services market. However, as AI applications grow, the demand for electricity is expected to make data centers account for 8% of U.S. power consumption by 2030 (Reuters).
Europe: Sustainability regulations in the EU are pushing operators to adopt green data centers. Innovations in energy efficiency and renewable energy integration are becoming a hallmark of European data center projects.
Building and operating data centers is capital-intensive, requiring substantial upfront investments. Traditional financing mechanisms are being augmented by innovative models, including:
Securitization: Securitization has become a critical tool for financing data centers. By bundling operational assets such as servers or high-value equipment, companies can issue securities to raise funds while maintaining cash flow. This strategy not only supports large-scale projects but also attracts institutional investors seeking high-yield returns. Such financial innovations are enabling the rapid scaling of data center operations to meet market demands. Asset-backed securities are gaining traction as a funding source. Vantage Data Centers, for instance, refinanced its debt using securitization, reflecting its growing appeal within the industry (WSJ).
Private Equity and ETFs: Data centers are also attracting private equity investments and exchange-traded funds (ETFs) that track securitized debt, allowing investors to tap into this lucrative market (Reuters).
Direct Lending: This approach involves non-bank institutions providing substantial loans, often secured by valuable assets, to fund expansion and operational needs. CoreWeave, a specialized cloud provider focusing on GPU-accelerated workloads, exemplifies the innovative use of direct lending in the data center industry. In August 2023, the company secured a $2.3 billion debt financing facility led by Magnetar Capital and Blackstone. This facility was notably collateralized by NVIDIA's H100 GPUs, underscoring the high value and demand for such hardware in AI computing (Blackstone).
Emerging Trends
With all the advancements happening today, many trends are emerging regarding data centers. The rapid rise of AI workloads presents opportunities across the data center value chain. As AI applications demand large levels of computational power, data centers are evolving to accommodate these requirements of these workloads. This includes the adoption of high-performance GPUs, advanced cooling systems like liquid immersion, and innovative power distribution technologies. As of 2024, Nvidia, a leading GPU manufacturer, reports a surge in demand for GPUs designed specifically for AI and deep learning applications. Liquid cooling technologies are also becoming necessary to manage heat generated by AI servers, and new power architectures like 48-volt systems are being explored to reduce energy loss (McKinsey).
Edge computing is being utilized alongside larger, more powerful systems to improve efficiency and performance. Essentially data centers will get larger, while more processing will move closer to the edge. This increasing demand for computing power is driven by artificial intelligence. It will lead to significant expansion in data centers, growing from the current range of 50-200 megawatts to over a gigawatt. As AI computing demands grow, the resources, labor, and time required for data center construction will increase significantly as shown in the graph below. These demands impose strains on resources and limit how many data centers can be built and how quickly. Electricity demand has remained relatively stable over the past 15 to 20 years, but there will need to be significant investments in expanding and upgrading the power grid.
Source: (Bain)
While data centers bring jobs and tax revenue to local governments, they also cause complaints from residents about noise, power lines, and obstructed views. For example, Raj Chintala, a Loudoun County resident, saw his view of the sunrise disappear when an Amazon data center was built near his home. Local community groups argue that investments in the grid to support data centers, funded by all customers, are unfair, comparing it to paying for an expensive meal when you only ordered a salad. Despite this, Amazon claims to be a leader in renewable energy, having enabled 19 solar farms in Virginia (Wall Street Journal).
Increased focus on AI workloads and their implications for supply chains.
Edge computing as a complement to hyperscale data centers.
Regional policies and community responses to data center expansions.
Conclusion
In conclusion, the data center supply chain currently faces a series of challenges while simultaneously embracing transformative innovations. The exponential growth of AI-driven technologies has surged demand to unprecedented levels, exerting significant pressure on the availability of critical resources such as power, skilled labor, and essential components. Geopolitical uncertainties, particularly concerning the U.S.-Taiwan supply chain, further exacerbate the situation, underscoring the industry’s inability to rely on conventional methods to meet its expanding requirements.
Despite these obstacles, innovation is paving the way for a more resilient future. Cloud-based platforms are revolutionizing supply chain visibility and efficiency, while cutting-edge cooling systems, such as liquid immersion technologies, are reducing energy consumption and operational costs. The emergence of prefabricated modular data centers offers a faster and more sustainable alternative to traditional construction, facilitating companies’ scalability while minimizing their environmental footprint. These advancements transcend mere technological innovations; they are fundamentally reshaping the industry’s approach to growth, efficiency, and sustainability.
Looking ahead, sustainability has transcended its status as a desirable option and become an indispensable imperative. Given that data centers account for a substantial portion of global energy consumption, companies are compelled to adopt renewable energy sources and prioritize energy-efficient practices. Pioneering organizations such as Google, Amazon, and Meta have set ambitious goals for carbon neutrality, demonstrating that it is feasible to satisfy growing digital demands while reducing environmental impact. However, this progress is merely the initial phase. The industry must transcend isolated initiatives and collaborate collectively to establish a framework that harmonizes technological advancement with environmental responsibility.
This is a pivotal juncture for the data center industry. The decisions made today will determine the digital infrastructure of tomorrow. It is a call to action for all stakeholders, including manufacturers, operators, policymakers, and investors, to collaborate in finding innovative solutions that not only meet the demands of the digital age but also protect our planet for future generations. By embracing sustainable practices and fostering a culture of innovation, the industry can continue to thrive while making a positive impact on the world.
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