Germany can confuse. Consider its meticulous economic planning and then shudder at its disastrous pre-Ukraine war energy strategy. Similarly, a reputation for strict regulation jars with a history of accident-prone banks and recent memories of a breath-taking Wirecard fraud. Even today, financial commentators are scratching their heads at headline economic stagnation (measured by GDP) contrasting sharply with all-time-high levels for the nation’s key stock market index, the Dax. In fact, investor enthusiasm could almost be described as giddy.

Check out a 4% gain for the Dax in the past week and a Europe-leading 12% increase year-to-date, and that adds up to a better-than-tech sector performance. And yet, the combined value of Germany’s top 40 Dax constituent companies is less than the market capitalisation of just one AI and cloud computing superstar stock, Nvidia. It really is remarkable that one company’s future in the cloud(AI) could be worth more than the destiny of all of Germany’s biggest companies. However, the cloud is going to be a very big part of Germany’s future too….

May is the month of the Data Centre World conference in Frankfurt and the choice of venue is highly appropriate. Frankfurt is the 6^th biggest data centre market in the world and therefore is a critical part of Europe’s cloud/AI infrastructure story. Indeed, we have previously written about how the rapid acceleration of data centre construction should be viewed as the best indicator of the size of investment piling into AI and the cloud computing required to power this technology:

“….the bigger story according to Schroders’ analysts was “hiding in plain sight”. Nvidia in their call with Wall Street’s analysts explained the uplift to their projections by mentioning ‘data centres’ no less than 56 times. Clearly, the destination for these advanced GPU chips needed to be premium performance, secure and stable data centre environments. The cloud and data centres have become interchangeable proxies for the same growth story, AI.”

If anything, this growth story has accelerated even further. Morgan Stanley research is forecasting cloud infrastructure spending (capital expenditure) to grow by 44% in 2024 compared to a sluggish 2% last year. Goldman Sachs analysts have taken guidance from the recent quarterly results calls of Amazon, Meta, Google and Microsoft and projected capital expenditure from these four alone of almost $200 billion by 2025. The investment numbers are staggering and, for the major cloud infrastructure centres like Frankfurt, the headlines announcing new spend are coming thick and fast. Check out the following in just the past few weeks:

Real estate firm Tishman moves into data centres, plans  Frankfurt campus –   Data Centre Dynamics

Digital Realty investment fund expands stake in Frankfurt data centre – Techerati

Clearly, the Frankfurt Data Centre World event will be busy. However, in reaching for the cloud, Germany and other fast-growing infrastructure centres will be increasingly mindful of other risk  ‘clouds’ on the horizon. The sheer speed of data centre construction runs the risk of outpacing the other critical infrastructure required for cloud computing on a massive scale.

Think of the electricity grid pressures to power the data centres and a recent International Energy Agency report suggesting data centre electricity usage is set to double by 2026. Then consider a recent Financial Times article highlighting the same imminent doubling of electricity power demands and the stunning data point of Microsoft “opening a new data centre globally every three days”. Earlier this month Bob Blue, chief executive of Dominion Energy, one of America’s biggest utilities, said that data-centre developers now frequently ask him for “several gigawatts” of power compared to Dominion’s total installed power base of 34 gigawatts (GW). Strains on global power grids are now a fact of life but there might be an even more basic power being overlooked. Skilled labour.

A recent conversation with a City-based analyst highlighted the plight of the mining sector and the average worker age profile approaching 65 (!). However, it’s not just old economy sectors facing skills crises. A 2023 report from IT consultant, Onnec, stated that 94% of operators experienced a shortage of experienced data centre construction teams. In February Germany’s own Economy Minister, Robert Habeck, flagged 700,000 unfilled vacancies and official estimates of the country losing 7 million skilled workers by 2035. The double-whammy of a power and manpower crunch coming down the tracks is a real challenge which could derail the cloud opportunity. However, there is one encouraging development.

Money is not the solution to all problems but it certainly helps. Clearly, a huge amount of investment capital chasing dreams in the AI cloud will look at the risks and see a need for additional investment in new power grid infrastructure and skills training. However, big tech companies investing on their own can’t carry the entire investment burden. So, what is needed is probably government spend but also another big pool of private money. And there’s some good news.

The reports this week of private equity (PE) giant, Apollo Global, potentially co-investing $11 billion to help build a semiconductor chip factory in Ireland is the latest example of private equity getting involved in cloud infrastructure, in a big way. Also, another PE monster, Blackstone, has just announced the purchase of the abandoned Britishvolt gigafactory as the planned site for a $10 billion data centre campus. The entry of private equity and trillions of investment dollars into the data centre sector is hugely significant. Furthermore, the size of this private investment pool opens up the possibility of addressing the challenges of grid pressures and skills shortages. Or, as the financial markets commentariat might say… “money finds a way.” Germany hopefully will too.