Nikada
Preamble
I’ve recently been writing a few articles about selling while you can. For those who follow Deere & Company (DE), you may remember the article I wrote predicting an imminent drop in the stock price. Although I’ve got you covered Nvidia (Nasdaq: NVDA) (Neo:NVDA:CA) Investing in small artificial intelligencewhich raises positive optimism about Nvidia’s future dominance in AI, this article is a harbinger of difficult times ahead in markets outside the collective West and the Chinese market.
And those who follow the stories about the chips will be aware of the sanctions imposed on China by the US government with the enthusiasm of a Wall Street banker selling mortgage-backed securities to the Greeks. For example, in October last year, it was reported that the US government tightened export restrictions on Nvidia’s most advanced AI chips. These chips, which are designed for the Chinese market under Previous regulations, then export was banned. This move escalated the technology war and China condemned the restrictions. The United States implemented similar restrictions the previous year in order to prevent China from obtaining powerful artificial intelligence technology.
Fast forward a year, and it became clear that the restrictions were not working. Apparently, despite the US ban on the sale of advanced AI chips to China, various organizations have managed to obtain them through distributors, who remain anonymous. Experts who researched the matter claim that the chips may have been converted without the manufacturer’s knowledge. The US is now investigating potential violations, and Nvidia says it will take action if necessary. Server makers claim that they complied with regulations and that the products sold were not the most advanced.
As you might imagine, the restrictions not only had a limited impact, but also spurred China to develop alternatives to Nvidia from local companies like Huawei.
As an investor in Nvidia, I hope the company can successfully overcome the issues associated with selling into China, however, other big names, such as Tesla (Nasdaq:TSLA), have failed to maintain revenue and margin.
Tesla is embroiled in a brutal price war in China, and to maintain sales against a growing wave of competition from incumbent automakers and new electric vehicle players like BYD and Xiaomi, Tesla has been forced to cut prices across multiple models.
These significant price cuts have come at the expense of Tesla’s profits, which are shrinking at an alarming rate in China. Domestic manufacturers, such as BYD, offer much cheaper cars, which could account for about a third of Tesla’s cheapest option.
I’ve previously covered Intel and AMD’s troubles in the Chinese market
Nvidia Finance
Overall, the latest quarterly report painted a picture of a thriving company with a dominant position in AI technology and commendable long-term growth prospects.
Revenues rose 262% year over year, driven by the data center segment, and the company’s AI business is expected to continue its impressive growth.
In fact, it was difficult to find any negatives at all. The report went on to highlight the company’s increasing profitability, resulting from high levels of operating leverage and a move towards higher margin products such as the Blackwell range. Given the growth in all things AI, investors can no doubt expect even more returns in the future.
Let’s not forget the announced 10-for-1 stock split, which usually pushes the stock price in a direction that satisfies the investor.
Now, we need to address potential barriers to success in China. The challenges faced by the Chinese markets due to export restrictions have been addressed, and the company has a strategy to overcome the obstacles set by the US government. In fact, the company noted that additional competition from Chinese companies would spur Nvidia to innovate more.
According to Nvidia’s latest Form 10-K, China represents about 17% of Nvidia’s total revenue. While “other countries” also represents about 17%. These “other countries” include Western countries and countries outside the West’s collective influence; Indonesia and Russia for example.
Nvidia Regional Sales (NVIDIA 10K model)
In recent years, US export restrictions have limited the types of chips Nvidia can sell in China. As we all know, the most advanced AI chips have been banned. But now, even those designed specifically for the Chinese market as a result of the restrictions have been placed on the list of products prohibited for sale.
To address this problem, Nvidia was forced to develop modified, less powerful versions of its chips to comply with US export controls. In short, Nvidia is stuck selling products with specifications far below the most advanced technologies.
To say the situation is fluid would be an understatement. There are ongoing changes in US regulations and enforcement procedures, all of which could impact what chips Nvidia is able to sell in China.
Huawei
Going back to 2023, it has been reported that US restrictions on exporting advanced AI chips to China could create an unexpected opportunity for Huawei and its Ascend chips.
Analysts said Huawei’s Ascend chips were roughly on par with China’s Nvidia chips in terms of raw power, but still fell short in performance. However, the report went on to claim that the challenge lies in developing the software ecosystem built on Nvidia’s CUDA platform. This ecosystem allows for the training of complex AI models, something Huawei’s CANN alternative struggled with at the time. Technology experts estimated that it could take Huawei between 5 and 10 years to catch up, but Huawei produced competitive products much sooner than expected.
Latest reports
Nvidia’s attempt to tackle the Chinese AI chip market with its H20 chip faces an uphill battle. Despite being the most powerful chip designed specifically for China, the H20 got off to a weak start. There appears to be an oversupply in the market, forcing Nvidia to cut prices and sell the H20 at a discount compared to Huawei’s rival Ascend 910B chip.
Furthermore, Huawei is expected to ramp up production of the Ascend 910B chip this year, a chip that may outperform the H20 in some key areas.
I’m sure it can be appreciated that Huawei’s rise as a serious competitor should be a major concern for investors.
According to Reuters, analysts have become increasingly concerned about Nvidia’s long-term prospects in China, a market that contributes significantly to its revenue. This price war is just a symptom of the intense competition Nvidia faces in China. China’s push to develop domestic chips and the government’s directive to prioritize Chinese chips represent an additional headache for Nvidia.
While some Chinese tech giants have placed orders for the H20, overall demand appears low. Government procurement data indicates less interest in the H20 than in Huawei’s offerings. To make matters worse, the need to undercut Huawei’s price combined with higher manufacturing costs for the H20 are putting pressure on Nvidia’s profit margins.
With nearly a million H20 chips expected to be shipped to China in the coming months, Nvidia’s success is said to depend on its ability to compete effectively with Huawei on price and performance. However, if you ask me, if Nvidia is struggling to sell the H20 at a cheaper price than the Ascend 910B, that’s a very bad omen.
manufacturing
Huawei has partnered with a number of companies, including China’s largest chip foundry, SMIC (OTCQX:SIUIF), to produce new advanced chips.
SMIC reportedly plans to manufacture Huawei-designed chips without more advanced extreme ultraviolet (EUV) devices, relying instead on older deep ultraviolet (DUV) technology. The companies are also developing technologies including self-aligned quad patterning, or SAQP, which will reduce their reliance on sophisticated lithography.
It remains to be seen whether Huawei and SMIC can use SAQP to achieve mass production of advanced chips. These R&D efforts are a crucial step for China to achieve self-sufficiency in chip manufacturing.
Once mass production of advanced chips is completed, it seems to me that there are markets outside of China that can be satisfied.
Potential markets
It is widely known that Huawei is the equivalent of persona non grata in the collectivist West. But it is able to sell its goods in non-aligned countries, such as the countries that make up the BRICS Plus group or Indonesia. That being the case, it is conceivable that their Ascend range may soon compete with Nvidia outside of China; Certainly Russia.
Potential clients for Huawei could include Chinese data center giant GDS Holdings Limited (GDS), which is making a big push into Southeast Asia. Reports indicate that through a joint venture with an Indonesian sovereign wealth fund, the company aims to develop a comprehensive data center platform across Indonesia, with its initial focus on building a massive data center campus in Batam.
This facility will boast a net floor area of 10,000 square meters and an IT power capacity of 28 MW. GDS views this collaboration as a validation of its expertise and a starting point for further expansion within Indonesia.
Another possibility for Huawei chips is Tencent Holdings Limited (OTCPK: TCEHY), a well-known Chinese cloud company. Early in 2012, the company built a facility in Jakarta, which is now fully operational. Apart from Indonesia, Tencent has data centers in; United States, Singapore, Russia, Germany, Canada and India. There have been a large number of articles describing Tencent’s entry into the MENA region.
Risks
As mentioned previously, this article offers an alternative to the always positive narrative that can frequently be read in the media. I am the first to admit that there are risks to this less optimistic hypothesis. First of all, countries outside the collective West may insist on better, and at this time, no company comes close to Nvidia’s offering.
Second, even if we lose some business in China, which seems very likely, revenue expansion outside China is expected to pick up impressively.
summary
US restrictions have apparently hampered Nvidia’s plans to sell more advanced AI chips in China, forcing it to try to force lower-spec versions. To make matters more complicated, Huawei has emerged as a serious competitor.
Huawei’s Ascend chipset is gaining traction and could overtake the Nvidia H20 in the Chinese market. Of course, lower demand for the H20 and price pressure could impact Nvidia’s profits.
Then there’s always the possibility that Huawei could, at some point, gain a foothold in other countries through data center-focused Chinese companies.
Furthermore, Huawei is expected to ramp up production of the Ascend 910B chip this year, a chip that may outperform the H20 in some key areas.
I’m sure it can be appreciated that Huawei’s rise as a serious competitor should be a major concern for investors.
According to Reuters, analysts have become increasingly concerned about Nvidia’s long-term prospects in China, a market that contributes significantly to its revenue. This price war is just a symptom of the intense competition Nvidia faces in China. China’s push to develop domestic chips and the government’s directive to prioritize Chinese chips represent an additional headache for Nvidia.
Furthermore, Huawei is expected to ramp up production of the Ascend 910B chip this year, a chip that may outperform the H20 in some key areas.
I’m sure it can be appreciated that Huawei’s rise as a serious competitor should be a major concern for investors.
According to Reuters, analysts have become increasingly concerned about Nvidia’s long-term prospects in China, a market that contributes significantly to its revenue. This price war is just a symptom of the intense competition Nvidia faces in China. China’s push to develop domestic chips and the government’s directive to prioritize Chinese chips represent an additional headache for Nvidia.
