USA vs. China – Wrong Villain pt. II

China is the roadblock, not the White House.

• Jensen has admitted that the real uncertainty around whether sales in China will resume lies with Chinese regulators and not with the US Department of Commerce, meaning that nothing is going to change unless President Xi changes his mind.
• The latest debate in Washington surrounds the export of the H200 to China, which, while better than the H20, is still pretty far off the cutting-edge Blackwell chips that everyone else is buying right now.
• This would represent a substantial relaxation of the current export policy to China and would be going back to the approach that existed before October 2022.
• This was that China needed to be kept 2 generations behind the USA, which was then changed in 2022 to keeping China as far behind as possible.
• The H200 is currently 2 generations behind the cutting edge, and once Vera Rubin starts shipping, this will become 3.
• Consequently, I think that there is a reasonable possibility that this chip gets licensed, but whether the Chinese will be allowed to buy it is another matter entirely.
• The main question is: why did the Cyberspace Administration of China (CAC) inform Chinese AI companies that they should end testing and development of AI systems using chips from AMD and Nvidia and use home-grown variants instead?
• There are two possibilities.
  • First, Negotiating tactic: which is the view that the CAC has banned all sales of Nvidia and AMD AI chips into China in order to gain negotiating leverage over the USA.
  • China is a big market, meaning that Nvidia and AMD are missing out by not being able to sell to the Chinese AI companies.
  • This will lead them to pressure the White House to allow the export of their most advanced chips to China, which is what China really wants.
  • This view believes that if Blackwell Ultra is licensed, then the CAC will do an about-face and allow Chinese companies to purchase it.
  • RFM Research and Alavan Independent do not subscribe to this view and continue to think that Nvidia and AMD are unlikely to restart sales of AI chips in China.  
  • Second, Technological independence: which is the view that China is determined that it must become technologically independent and not rely on technology from overseas.
  • China’s inability to access EUV technology has hammered its semiconductor sector, meaning that it remains stuck at an inefficient 7nm node and can go no further.
  • As a result, any Chinese company that wants to make a chip that competes overseas has to use an overseas fab, once again highlighting this technological dependency.
  • The policy and 5-year plan of the Chinese Communist Party (CCP), calls for technological independence, which RFM Research and Alavan Independent think takes priority over economics.
  • The notion that the Chinese will not be able to develop cutting-edge AI has been completely debunked, as the launch of DeepSeek R1 proved, which has since been followed up with models from other Chinese companies that are just as good or better.
  • The problem as the Cyberspace Administration of China (CAC) sees it is that all of these models were developed using Nvidia chips, meaning that there is a preference in China to use Nvidia or AMD chips, which in turn is creating another dependence much like the one suffered in semiconductors.
  • China is absolutely determined to become technologically independent, such that whatever the USA does, it will have no impact on its technological roadmap.
  • This is why we think that whatever chips are licensed by the Department of Commerce, the CAC will not allow Chinese companies to buy them.
  • We think that only a change of heart by President Xi can alter this trajectory.
• The result is that while Chinese AI will be just as good in terms of performance, compared to its US counterparts, it will be larger, more power hungry and much more expensive to deploy than an equivalent system from AMD or Nvidia because it is built on homemade hardware.
• Hence, while the Chinese can compete on performance, they won’t be able to 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 China is behind, and that there is little scope for it 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.