The Zhitong Finance App learned that UBS expects data center developers to expand production capacity despite ongoing supply chain constraints, and demand for artificial intelligence infrastructure will accelerate in 2027, creating opportunities for industrial equipment manufacturers and engineering companies. UBS analyst Steven Fisher said in an October 16 research report that industry experts attending the Singapore Data Center World Expo said that orders are accelerating, multi-year capacity reservations are increasing, and they are confident that investment in AI infrastructure will continue beyond 2027. These findings suggest that even when the overall economy is under inflationary pressure, data center spending is still an important growth engine for industrial companies.
Power generation and construction companies are expected to benefit
UBS has determined that Caterpillar (CAT.US), Cummins (CMI.US), and Guangda Services (PWR.US) will be the beneficiaries of continued progress in data center construction. Caterpillar and Cummins are expected to grasp the demand for power generation equipment, while Guangda Services will benefit from grid investment. Caterpillar told the UBS team that demand for power generation equipment is still extremely strong, and the company is expanding production capacity.
The report also highlights growing market interest in “behind-the-meter power generation” (behind-the-meter power generation), a model that allows data centers to generate electricity on-site rather than rely entirely on public grids. UBS expects that by 2028 or 2029, most projects will still be mainly grid-connected and equipped with traditional diesel backup systems. The ultimate combination of on-site power generation, energy storage, and grid connectivity will determine how much profit equipment manufacturers can get.
Supply shortages remain a constraint
Industry experts have listed equipment availability and manufacturing capacity as major barriers to data center expansion. Suppliers of cooling systems, power equipment, and power generation technology are racing to reduce delivery times and increase production. Customers are increasingly turning to prefabricated and modular systems to speed up construction and reduce labor requirements.
The industry is also transitioning to 800 volt DC power distribution, which is expected to be deployed between 2027 and 2029. UBS said the technology should reduce copper demand, heat generation, and the complexity of distribution systems.
The share of construction continues to rise
UBS estimates that data centers directly account for about $63 billion, or about 5% of the US $1.3 trillion non-residential construction market. However, when indirect expenses for manufacturing facilities, power infrastructure, and related projects are factored in, the bank estimates that data centers drive 20% to 30% of overall non-residential construction activity, and much of that growth.
The strong performance of this spending contrasts with market concerns about the broader industrial economy. UBS pointed out that rising inflation and interest rates associated with the Iran conflict complicate expectations of industrial recovery. The bank anticipates that higher investment costs will be more clearly reflected in the fourth quarter results, particularly for companies with greater exposure to fuels and materials.
Caterpillar's power business profit margins in the spotlight
Caterpillar's (CAT.US) electricity and energy division's second-quarter profit exceeded expectations, with an incremental profit margin of 39%. UBS said that the market generally expects incremental profit margins to remain high in the third and fourth quarters, but they are expected to fall back from the level of the second quarter. Caterpillar has warned that unusually favorable incremental profitability in the second quarter may not continue.
Investors are still questioning whether industrial stocks can continue to outperform the market if the growth of AI-related orders slows down. Fisher believes that even if the absolute level of on-hand orders is still high, Caterpillar's month-on-month growth in on-hand orders may substantially slow down or flatten, making it more difficult for its stock price to outperform the market.
AI investment risks
UBS acknowledged that the AI infrastructure boom may eventually slow down as technology advances reduce computational costs and smaller AI models are more widely adopted. Such developments could suppress the profitability of AI companies and reduce the need for new data centers. However, the bank still anticipates that technology adoption will create more opportunities for industrial suppliers, while warning investors should pay attention to the sustainability of infrastructure spending.
The report also raised questions about the financial stability of newer cloud computing providers after CoreWeave (CRWV.US) bonds were sold off. Compared to established hyperscale cloud operators, information commonly disclosed by industrial vendors is insufficient to determine their exposure to these customers, UBS said. This distinction is likely to become increasingly important as investors assess the durability of on-hand orders for equipment and future orders.