The risks of investing $7tn in AI data centres

0:02Good morning from the Financial Times. Today is Wednesday, August 26th, and this is your FT News briefing. The oil market could be close to a crunch point, and international defense companies are heading to Germany. Plus, we look at the risks of financing data centers. I'm Sonia Hudson, InfoMark Filipino, and here's the news you need to start your day.

0:37Traders and analysts are warning that oil prices could soon hit$100 a barrel again. That's because crude reserves are falling, China's re-entered the market, and it's unclear how much oil will flow from the Gulf going forward. This is all happening as the U.S.-Iran war gets close to the six-month mark. Talks to end the conflict and reopen the critical Strait of Hormuz have stalled. The U.S. earlier this week started applying more economic pressure on Tehran and its trading partners to break the deadlock.

1:17Germany is becoming a magnet for international defense groups. Berlin's in the middle of a military spending boom, and it's prompting companies from around the world to establish a presence in the country. I'm joined now by the FT's Laura Patel to learn more. Hi, Laura. Hi, Sonia. So what types of companies are setting up shop in Germany, and what kind of operations are they running there? Well, we're really seeing interest from a bunch of companies, both from within Europe and beyond. I covered the German defense sector, and it's a trend that I started noticing over the last year that various companies were saying, hey, we're opening a German office.

1:54So you have Kongsberg, which is a Norwegian space group. You've got this Korean defense giant, Hanwa Aerospace, a little Finnish satellite intelligence startup. I mean, I say little, they've run some quite big deals. So a kind of real variety of companies are coming here. And why is this happening now? It's happening because Germany is going to be the biggest defense spender in Europe over the next few years. It's been through an absolute transformation since the start of the full scale war in Ukraine in 2022. Germany used to be seen as a real laggard on defense bending, but Ukraine has prompted this sea change in thinking in Berlin.

2:30So, you know, I think the obvious choice for many, if they want to set up a footprint in Europe or want to try and get a piece of the pie. I think another thing I heard when I was reporting this story is that you're seeing a growing trend worldwide of countries demanding and requiring local production of the products they order happening on their own soil. So essentially, if Germany wanted to buy a product from, say, the Norwegian company Kongsberg, they would want to see at least some operations in Germany. Yeah, and you're seeing that there's been this deal done between ISAI, the Finnish satellite intelligence company I mentioned, and Rheinmetall, the German arms giant.

3:09Together, They formed a joint venture to build satellites for the German armed forces and production is going to start here in Germany. That's the idea, even though it's a Finnish company. Well, Laura, this leads me into my next question, which is what kind of limitations exist? You know, I imagine Germany would not want to create a situation where it's helping to build up competitors to its domestic companies. I think that's absolutely true. And there's a very strong trend that I see of Germany wanting to spend as much of its defense money on German companies as possible. And the people I spoke to for this story said that, you know, if you're a Korean defense company like Hanwha or from Japan or somewhere else, you're probably not going to win like a headline contract for a big platform like a tank or a warship.

3:56These deals always go to German companies. But of course, German industry is struggling with massive capacity and production issues as they ramp up. And I think that's where there's also an opportunity for international companies to be brought into the supply chain, perhaps supply components or technologies, manufacturing processes. So there's also some opportunities for them there. What does this trend mean for Germany's economy overall? You know, we've definitely seen some stagnation over the past few years. Yeah, I mean, Germany's economy has really been in the doldrums. It's had a lot of headwinds, challenges to the car industry, which has been the backbone of the economy for decades, facing a lot of competition from China, struggling with high energy prices, the same with other German industries.

4:41I think the defense industry is definitely being seen by the government as an area of growth and one that can generate jobs. It is generating thousands of jobs, but it's not going to save the tens and tens, even hundreds of thousands of jobs that are being lost by German industry. So I think it can help in some areas, it can help with some companies and suppliers, but it's probably not going to save the German economy. And to be honest, I think if we were in a position where Germany needed tank production on that kind of scale, we would all be in much deeper trouble. Laura Patel is the FT's Berlin correspondent.

5:12Thanks, Laura. Thank you.

5:20Canada is hitting back at U.S. tariffs. The country announced retaliatory duties of up to 50 percent yesterday. They match the ones from the U.S. and will impact$20 billion worth of American goods. Those include steel, dairy products and agricultural equipment. Ottawa said the tariffs will go into effect September 8th. The move comes a day after U.S. President Donald Trump said he would raise levies on Canadian cars and after months of trade talks between Washington and Ottawa. De-escalating tensions come at a difficult time for the Trump administration. It's battling stubborn inflation, and voters are increasingly unhappy with how it's handled the economy just weeks before crucial midterm elections.

6:14The AI revolution has a hefty price tag. 13 figures, in fact. Tech companies are expected to pour$7 trillion into data centers by 2030. But the cost of this boom will also bring risks. The FT's Michelle Chan has been reporting on the challenges of investing in AI infrastructure. She joins me now to discuss. Hi, Michelle. Hello. So we've got hyperscalers like Amazon and Meta spending a lot of money on building data centers for artificial intelligence. How are they financing that? Well, they're actually tapping into every single corner of the financial market. They're going to the bond market. They're going to private credit.

7:00They're going to structured credit. They're going even into insurance and pension and retail money. So basically anything that they could get money from, they are getting money from. All this expenditure obviously creates a lot of risks and you've been reporting on those. What have you found? Well, there are three main types of risks that we're talking about here. So first of all, the main type of risk is the longevity of the AI infrastructure. As we all know, AI is evolving very quickly. And a lot of these financing have the assumption that there will be longstanding and growing demand for AI compute.

7:36And if that doesn't happen in a few years, we have an investor telling us that it's like you're financing a fax machine and then someone invented email. We just don't know what the technology is going to look like in a few years time. So whether the financing that happens in 2026 will actually still hold value in, let's say, 2030 is like a big question mark in the market right now. Okay, so longevity is the biggest risk. What are the other two? The second risk is the local opposition and backlash politically into local communities. A lot of data centers are running into troubles with local politicians and local oppositions.

8:16Blackstone actually canceled a data center plan in Virginia earlier this year because of local legislations. And the third type of risk is insurance. And we're talking about brick and mortar infrastructure there. So there isn't enough appetite to insure that kind of giant asset with concentrated risk. And if something happens, whether it be a catastrophe or a fire or a flooding incident, we don't know what would happen to that kind of infrastructure. Michelle, you mentioned earlier that these hyperscalers are basically getting money wherever they can, and that is spreading risk into the wider financial system.

8:59Have we seen any efforts to offload some of that risk? Well, we are already seeing banks, investors, and insurance companies trying to limit their exposure to the AI ecosystem. For the banks that have lent heavily to AI infrastructure projects, we have seen them using really complicated synthetic risk transfer to like offload that risk to other market participants. We have also seen them doing broader bond deals instead of holding the debt on their balance sheet. For investors, there is decreasing appetite to participate in the new bond deals coming to the market. And if they do, they are requiring more credit protections and they are requiring more yield and risk premium to participate.

9:44Now, all of this investment really rests on this assumption that the AI revolution will produce unprecedented returns. What would it mean if that doesn't happen? For people who participate in these kind of financing in the financial market, they're just taking on the risk that this kind of infrastructure will not yield the return that they expected. For people in the local communities, it means that there will be this giant white elephant infrastructure in their bed yard that becomes a stranded asset a few years later. You know, we have seen complaints about how the existence of data centers have driven up utility bills and data center developers have been supporting a lot of the local infrastructure in terms of putting up the grid in the area.

10:32And if this kind of support is disappearing, it will have huge impact on the local grid and the local communities will no longer have that financial support. Michelle Chan is the FT's U.S. credit correspondent. Thanks so much, Michelle. Thank you.

10:53Before we go, thanks to climate change, this summer has been Europe's hottest on record. And the continent is now looking to the Middle East for new ways to stay cool. Desert nations like the UAE and Qatar use evaporative technology to keep temperatures down. That method uses water evaporation to cool the air outside instead of using air conditioning inside buildings. It's unclear if that'll solve Europe's problem, though. Experts say it only works well in really dry areas.

11:31You can read more on all these stories for free when you click the links in our show notes. This has been your daily FT News Briefing. Check back tomorrow for the latest business news.

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