The Chinese government has directed domestic technology companies not to buy Nvidia chips, but rather to use homegrown technology.
Nvidia (NVDA 0.34%) is arguably the most important company in the world because its graphics processing units (GPUs) have become the gold standard in artificial intelligence (AI) infrastructure. Indeed, Forrester Research analysts recently commented, “Without Nvidia’s GPUs, modern AI wouldn’t be possible.”
However, President Donald Trump has dragged Nvidia into his trade war with China, and political crossfire has been a constant problem for the company. Both countries have used national security as justification to restrict the sale or purchase of the company’s products, and investors recently got some more bad news on that front.
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Nvidia is caught in the middle of President Trump’s trade war with China
Nvidia took a $4.5 billion write-down in the first quarter, when President Trump extended export restrictions to include H20 graphics processing units (GPUs). Those semiconductors, scaled-back versions of the H100 GPU and H200 GPU, had been designed specifically for Chinese companies in compliance with Biden-era export controls. So, Nvidia was left with inventory it could not sell when Trump changed the terms.
Nvidia CEO Jensen Huang has repeatedly insisted that export bans would not slow progress in China, the second-largest artificial intelligence (AI) market in the world, but would instead stifle U.S. technology leadership. Nvidia commented on social media, “For the U.S. to win the AI race, America’s full-stack platform must remain the global standard.”
Interestingly, while the president cited national security as grounds for export controls, he made a deal with Huang in July that allows Nvidia to sell H20 GPUs in China, provided the government gets 15% of sales. The unprecedented arrangement raised questions about whether the national security risks were a gambit for Trump to exert influence over the private sector or whether he is prioritizing business interests over national security.
Regardless, Trump’s decision to lift the export restrictions was a win for Nvidia. Huang says the AI market in China is currently a $50 billion opportunity and is growing at a rate of 50% annually. That means the company could earn hundreds of billions of dollars in revenue by the end of the decade if it can supply Chinese customers with AI infrastructure.
Nvidia recently got bad news from the Chinese government
Shortly after Trump negotiated a revenue-sharing arrangement with Nvidia, U.S. Commerce Secretary Howard Lutnick made comments that upset Chinese authorities. “We don’t sell them our best stuff, not our second-best stuff, not even our third-best stuff. I think fourth best is where we have come out,” he told CNBC. “So, you want to sell the Chinese enough that their developers get addicted to the American technology stack.”
While nothing about Lutnick’s statement is particularly surprising — it is widely known that the H20 GPU is a scaled-down version of more powerful accelerators like the H100 and H200 — his choice of words and callous delivery rankled leaders in Beijing. Shortly thereafter, the Chinese government told companies to stop buying H20 GPUs due to national security concerns. Nvidia has since halted production of the chip, according to The Information.
More recently, the Chinese government accused Nvidia of violating its antimonopoly laws when it acquired networking specialist Mellanox in 2020. In turn, Beijing’s top cybersecurity regulator urged Chinese companies not to buy RTX Pro 6000D chips, which are designed to support industrial AI workloads. Instead, China is pushing its companies to rely on homegrown hardware from companies like Huawei.
Indeed, while Alibaba Group, Tencent, and TikTok-parent ByteDance have historically been major buyers of Nvidia hardware, The Wall Street Journal recently reported that those companies are now leaning more heavily on domestic chips. That is undoubtedly bad news for Nvidia and its shareholders because it means China is unlikely to be a material source of revenue anytime soon.
For context, Piper Sandler analyst Harsh Kumar estimated that Nvidia would earn $56 billion in revenue from China next year. But that outcome now seems very unlikely given the political tension between the U.S. and China. Indeed, the way the winds are blowing, some analysts question whether Nvidia will see any revenue from China next year.
Trevor Jennewine has positions in Nvidia. The Motley Fool has positions in and recommends Nvidia and Tencent. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.
