The possibility of tighter restrictions on AI data center construction following the US midterm elections has introduced a new variable for South Korea's electrical equipment industry. The United States is a key market for major Korean electrical equipment manufacturers, including Hyosung Heavy Industries, LS ELECTRIC and HD Hyundai Electric.
According to foreign media reports on November 6, the Democratic Party took control of both the Senate and the House of Representatives in the US midterm elections held on November 3, local time. It also reclaimed major Republican-held states in gubernatorial elections. In particular, victories in Texas, Georgia and Ohio by candidates who pledged restrictions on new data center projects have raised concerns that AI infrastructure expansion could face obstacles.
One figure attracting attention is Texas Governor-elect Gina Hinojosa. During the campaign, Hinojosa pledged to suspend approvals for new data center projects until legislation protecting residents was in place. The pledge reflected the view that data centers' substantial electricity and water consumption was imposing burdens on local residents.
Hinojosa reaffirmed that position after the election. According to Reuters, Hinojosa said in a CNN interview on November 5 that data center development should be halted until legal safeguards for residents were established. Hinojosa particularly highlighted the lack of protections for residents as data centers were being built in rural areas.
There have also been forecasts of potential disruption to data center expansion. On November 4, Reuters reported, citing Goldman Sachs analysis, that about 45% of planned US data center expansion capacity could be affected by measures including temporary construction suspensions. However, whether restrictions will actually be implemented remains uncertain, and the possibility that some projects could move elsewhere has also been raised.
Uncertainty surrounding US data center construction is also of interest to Korean electrical equipment manufacturers. Rising electricity demand associated with the growth of the AI industry has been viewed as a driver of growth in the transformer and circuit breaker markets.
Aging grid replacement and renewable energy demand support growth
However, data centers are not the only basis for growth in the US electrical equipment market. Replacement of aging grids and expansion of renewable energy generation facilities are also driving demand for transformers and circuit breakers. Industry participants say these sources of demand, rather than AI data centers, still account for the core market.
A representative of an electrical equipment manufacturer explained: “The main markets for Korean electrical equipment manufacturers are replacement of aging North American grids and construction of transmission networks to carry electricity from renewable energy power plants. There is also grid demand related to AI data centers, but it is difficult to regard that as the core market yet.”
In materials released in August last year, global energy market research firm Wood Mackenzie estimated that US demand for power transformers had increased 116% since 2019. It also found that demand for distribution transformers had risen 41% over the same period. The increases reflected a combination of rising electricity consumption, expansion of clean energy projects and replacement of aging equipment.
Aging equipment is a particular issue. According to a National Renewable Energy Laboratory (NREL) study released by the US Department of Energy in 2024, about 55% of distribution transformers in use in the United States had been installed more than 33 years earlier. Investment to maintain and replace the existing grid is therefore needed regardless of new data center construction.
This also helps explain why Korean manufacturers have expanded their US operations. Hyosung Heavy Industries decided to acquire a transformer plant in Memphis, Tennessee, in late 2019, before the surge in AI data center investment gathered pace. The investment was intended to strengthen its competitiveness in North America by securing a local manufacturing base.
HD Hyundai Electric also identifies replacement of aging transmission and distribution infrastructure and rising electricity consumption as major drivers of expanding US transformer demand. LS ELECTRIC is expanding its business by targeting both the North American renewable energy and data center markets.
Medium- and long-term growth expected despite US political uncertainty
Securities analysts are also placing greater weight on medium- and long-term growth potential than on the short-term burden of data center regulation. In a November 6 report analyzing the US midterm elections' impact on Korea's electrical equipment industry, LS Securities analyst Seong Jong-hwa assessed the positive factors as outweighing the negative ones.
Seong cited demand to replace aging grids as a reason. According to the report, more than 70% of North America's grid consists of aging infrastructure that is at least 25 to 30 years old. The report expects replacement of aging equipment and construction of new factories as US manufacturing returns home to support demand even if data center investment slows.
Seong also identified transmission permitting reform and increased renewable energy investment as positive factors, reasoning that Democratic control of Congress had increased the likelihood of passage of permitting reform legislation to shorten transmission permitting timelines. Seong further analyzed that tighter requirements for environmentally friendly electricity use by data centers could increase construction of grids integrating renewable energy with an energy storage system (ESS), creating additional demand for transformers, circuit breakers and other equipment.
Experts also assess that while Korean electrical equipment suppliers could be affected in the short term, the medium- and long-term growth trend is unlikely to change substantially. Kim Seong-jin, a specialist researcher at the Korea Institute for Industrial Economics and Trade, explained: “Although the Democratic Party is pursuing tighter regulation of AI data centers, it is also actively promoting environmentally friendly energy, so demand for related electrical equipment is expected to continue steadily. There could be some short-term effects, but growth is expected to continue over the medium and long term.”
Original Korean article: insightkorea.co.kr
English brief by Korea Wind Intelligence, koreawindintel.com
