Following the news of the AI chip revenue agreement between the U.S. Government, Nvidia, and AMD on Monday, the Chinese authorities have summoned domestic companies to halt the purchase of Nvidia chips over security concerns.
The Cyberspace Administration of China (CAC) has launched a probe into Nvidia, raising concerns about potential security risks. This move is set to disrupt Nvidia’s plans for trade resumption with China and signals a potential escalation in the US/China tech war.
A U.S. Rescission, Then China’s Rebuff
On July 14, Trump’s administration revived the ban they placed on AI chips sold to China. The ban had resulted in huge losses for the chip makers and China alike. In the days following the announcement of the ban, Nvidia lost $5.5 billion in its first quarter, and AMD lost $800 million.
Weeks following the reversal of restrictions placed on AI chip sales to China, President Trump called for a meeting with AMD and Nvidia to finalize the talks. The conclusion of the meeting? A 15% AI chip revenue share each from AMD and Nvidia, in exchange for export licenses.
However, almost immediately, Chinese authorities fired back. For years, the U.S. has tightened export controls to suppress and restrict China’s access to advanced AI chips. The results of these restrictions led to the production of Nvidia’s H20s and AMD’s MI308 chips made suitable for the Chinese market.
The chips were not as powerful as those used in the U.S., but China had no choice, as they couldn’t manufacture an AI chip that was up to par with what they got. This led to China being reliant on the U.S. for AI chips.
During the trade war, however, when chip sales were banned to China, its tech giants could no longer sit idle. This led to companies like Huawei (a Chinese chipmaker) striving to make chips that could function like Nvidia’s H20 chip.
As a result of this, Huawei was able to make its Ascend series and the newly released CloudMatrix 384 AI system capable of rivaling Nvidia’s flagship GB200 NVL72. This progress has led to companies focusing on domestically made chips.
The Basis of the Rebuff
Just like the U.S. gave reasons of national security concerns to ban chip trade to China, Chinese authorities are also doing the same. According to reports, the CAC summoned Nvidia to investigate suspicions of its H20 chips containing hidden access points capable of enabling unauthorized data extraction.
The rising suspicion surrounding Nvidia’s chips allegedly led to the summons of firms like Alibaba, Tencent, ByteDance, and others to pause purchases amid security reviews. Further reports from Bloomberg stated companies were urged to avoid using H20 chips, particularly for government-related purposes.
After Effects and Nvidia’s Response
Nvidia has vehemently denied these claims, stating, “Cybersecurity is critically important to us. Our chips have no backdoors.” However, the damage is done; China’s CAC scrutiny has put Nvidia’s $15-20 billion in potential H20 sales at risk, with orders from tech titans reportedly on hold.
Now, while China has not explicitly called for a ban on Nvidia chips, Nvidia is slowly losing its foothold in the Chinese market. With the rise of domestic alternatives like Huawei and SMIC, over time Nvidia might totally lose the Chinese market.
The message, however, is clear: China will no longer be hindered by the U.S. in forging its tech destiny. And with time they might actually surpass the U.S.
