USA vs. China – Marching Orders

What Jensen loses now, he will more than make up in the long run.  

• Once again, China proves to be the most effective agent of US trade policy, and while Nvidia may lose revenues in the short term, it and everyone will benefit in the long term.
• The Cyberspace Administration of China (CAC) has informed Chinese companies working on AI to end testing and cancel their orders for the upcoming Nvidia chip that was intended for sale in China.
• This rumoured chip is called the RTX Pro 6000D, which is a stripped-down version of Blackwell that meets the new US guidelines for export to China and may now never be launched.
• ByteDance, Alibaba, Baidu, Tencent and so on are thought to be already testing the product and have orders in the pipeline, but now it looks as if all of this will be scrapped.
• If this order from the CAC becomes long-lasting and widespread, then Nvidia, AMD and anyone else who sells into the Chinese AI data centre who is not Chinese may see their business go to zero fairly quickly.
• This is why Nvidia was shrewd to exclude all revenues from China in its current (FQ3 26) quarterly estimates, as it looks as if this risk has come to pass.
• Nvidia will clearly do what it can to change the Chinese state’s mind, but I have long believed that it is flogging a dead horse and that the Chinese market is effectively lost (see here).
• That does not mean that it should not try and get some reprieve and make some sales in the short term, but it is very clear what the eventual direction of travel is.
• Chinese regulators appear to have concluded that domestic chips have obtained the performance of foreign chips available in China, and as China has made clear since 2015, the preference is for a homegrown solution.
• However, while the regulator have been focused on performance and whether cutting-edge AI can be developed with domestic chips, what it appears to have ignored are the economics.
• RFM Research has long concluded that while China is perfectly capable of developing advanced AI, it is incapable of doing so economically when it uses silicon chips that have been made in China.
• This is exacerbated by the software that has been developed to work with these chips, which is not nearly as good as CUDA and is best described as “usable”.
• While the software issues are fixable with time and experience, China is effectively stuck at 7nm, where it uses an old technique called multipatterning.
• This technique enables the manufacture of 7nm chips using older semiconductor manufacturing equipment, but has many more steps and lower yields.
• This means that the chips are more expensive to make than 7nm using EUV and way more expensive when compared to the current cutting edge at 3nm and beyond.
• While the Chinese state is able to govern what Chinese companies in China do, it is unable to force unaffiliated countries to choose Chinese technology, and it is here where I think the difference will be made.
• Historically, Chinese technology has been just as good and cheaper to purchase, which is one reason why Huawei saw such success with its 4G and 5G basestation offerings across the world.
• However, now that Chinese technology based on Chinese silicon will be just as good but more expensive, the no-strings-attached (Western) options will be cheaper for them to purchase.
• I do not think the Chinese economy is strong enough to enable the mass subsidisation that it would take to make Chinese AI cheaper, and so, I think it is likely that it will remain uncompetitive when compared to offerings from the West.
• The net result is that while the Chinese can compete on performance, they can’t compete on economics, and it is the economics that will decide which version non-affiliated countries adopt most of the time.
• This is where Nvidia, AMD and everyone else will make up for what they have lost in China with revenues and market share growth in other countries.
• This is why I think that the Chinese are behind, and that there is very little scope to catch up, given that it has no access to cutting-edge hardware.
• This will be crucial to the ideological struggle that is being played out between China and the West, and at the moment, I continue to think it is the West that has the advantage.