Building Under Pressure: How Tariffs Are Shaping the Future of Data Center Growth

On April 2, the Trump administration announced a tariff regime aimed at strengthening U.S. manufacturing and countering foreign competition, while reflecting U.S. federal deficit concerns. Despite being paused shortly after, the reprieve is only partial and likely temporary. The updated tariff regime directly affects the data center sector, as it impacts essential equipment such as servers, storage devices, and various critical components to data center infrastructure and data center construction materials. This move is part of a broader economic strategy that intends to strengthen domestic production, but introduces complexities for industries heavily relying on global supply and value chains. Although the final shape of this expansive use of tariffs, potential exemptions, and its economic impacts remain unknown, ABI Research expects these tariffs to accelerate the shift in global data center infrastructure planning, construction, and management, reshaping cost structures, supply chains, partnerships, and location decisions across the industry.

The tariffs’ impact on data center components and construction materials is expected to elevate operational costs and complexities, particularly for smaller players with limited resources. Meanwhile, larger companies with operating leverage might even double down on their Capital Expenditure (CAPEX) commitments, particularly those focused on Artificial Intelligence (AI), as they are seen as efficiency drivers and disruption presents an opportunity to gain competitive ground. The current tit-for-tat retaliation dynamics of tariffs are also likely to create new paint points, like the tariffs on digital services.

The most immediate impact will be on hardware supply chains, which rely heavily on international sourcing for critical components, affecting both new builds and expansions of existing facilities. Hardware suppliers face elevated costs for essential components like servers, networks, and storage devices, thereby increasing the overall cost of equipment acquisition for data center operators. This could either lead to deferred investments or force companies to absorb or pass on higher costs, affecting their profit margins and potentially the demand picture for both data center hardware and services. Building new facilities will become more expensive due to the increasing costs of construction materials—like steel, aluminum, copper, and electrical components. As construction costs increase, data center operators may face longer timelines to meet growing demand, further exacerbating operational delays. This will create additional challenges in site selection, particularly for data centers looking to balance cost-effectiveness with proximity to strategic factors like energy resources, regulatory jurisdictions, skilled labor force, or local tax incentives.

In the broader context, the tariffs are prompting a shift in supply chain dynamics, leading operators to further diversify their component sourcing strategies and possibly invest in more local manufacturing options to mitigate increasing costs, subsequently leading to a new wave of governments and enterprises rethinking their digital sovereignty strategies. While this may foster a sense of national self-reliance in the United States, it could result in more fragmented and less cost-efficient global supply chains and loss of comparative advantages. These combined factors put pressure on data center operators to reevaluate both short-term and long-term strategies, affecting pricing models, investment decisions, and demand forecasts.

While many data center operators have relied heavily on overseas hardware suppliers, particularly from Asia, the tariffs will make it more expensive and uncertain to maintain these relationships. Hardware vendors must seek alternate suppliers, where feasible, within the United States or other regions that may be less impacted by tariffs. While vendors that manufacture domestically in the United States may offer a more stable pricing structure and lower tariff exposure, there are few and they often face challenges in scalability and cost efficiency. Balancing these with the vendors that manufacture abroad but are headquartered and still have significant operations in the United States can provide a buffer against increasing tariffs and provide a balance between cost efficiency and risk mitigation. When sourcing from the largest of vendor tiers, foreign vendors that manufacture outside the United States, the additional cost of tariffs and potential supply chain disruptions are the base case. Considering a mix of the limited U.S.-manufactured products from domestic vendors and U.S. vendors with some level of domestic production may ensure continuity of supply, while hedging against cost increases associated with international sourcing. Forming strategic partnerships with domestic manufacturers or encouraging localized or in-house production for critical components could offer some relief in terms of costs. Negotiating long-term contracts with price adjustment clauses tied to tariff changes will be crucial for managing cost uncertainties across all vendor groups, while building up stockpiles of essential components in anticipation of price hikes and delays may provide a buffer against unforeseen disruptions.

From an operational perspective, companies should consider adjusting their pricing models to reflect increased costs, adjusting pricing structures for both existing customers and new contracts. On the data center construction side, exploring modular designs and prefabricated construction techniques could help mitigate or offset increasing costs or delays. Higher costs for materials and construction may push operators to delay or even focus on secondary markets or regions with lower construction and energy costs, which will have to be carefully evaluated regarding their regulatory environment, growth potential, and long-term viability. This could involve revisiting energy access and sustainability considerations. Governments may also offer incentives for domestic infrastructure development, but the associated costs must be weighed carefully as these opportunities need to be balanced with the higher costs of construction and operations in certain regions. In this environment of heightened market uncertainty and volatility, data center providers and hardware suppliers will need to remain flexible in their long-range strategic planning, nimble in balancing cost, and geographic considerations in their operations and expansion plans by focusing on both short-term agility and long-term resilience with the ultimate impact determined by how higher costs are absorbed. At this point, scenario planning for tariff impacts across multiple, differentiated, and plausible future outcomes of tariff regimes should be the strategic tool of choice for organizations to strategize about the potential future impact of tariffs on digital services and their operations by closely monitoring the evolving regulatory environment, while reassessing expansion strategies accordingly.