USA vs. China – Losing Battle

Nvidia will eventually lose China.

• Nvidia will resume shipments of the H20 into China and announced a new chip, but the reality remains that as soon as it can, China will remove all foreign companies from its technology supply chains.
• However, what Nvidia loses in China, it is likely to more than make up elsewhere, meaning that the China rivalry is not a long-term negative for its business.
• Jensen has spent most of his time over the last few weeks lobbying, and this has now borne fruit with the promise from the US Administration that an application to ship the H20 to China will be approved.
• Jensen has also been heavily lobbying Chinese officials, presumably to convince them to continue buying his chips.
• However, I suspect that with China, his entreaties will have fallen on deaf ears and that China will continue to buy his products only for so long as it is unable to make its own.
• At that point, it will ditch Nvidia and use domestic variants just as it has done in solar panels and is doing in electric vehicles.
• The key difference will not be the performance of models or how advanced China can take its AI, but how economically it can create it and offer AI services to customers.
• The H20 will, over time, become less and less competitive with the latest Blackwell and Rubin systems, which is likely to be exacerbated when China switches to its domestic variants.
• This is because it is very unlikely that China will be able to get past 7nm with its domestic fabs, and even at that node, it will struggle to compete with foreign semiconductor companies who use EUV for some layers at 7nm.
• I think that there is still good demand for Nvidia silicon in China despite the state’s sourcing preference, as the ecosystem surrounding the domestic variants is far from developed, and the chips are described as “usable”.
• For as long as China can afford to subsidise its uncompetitive silicon, this will not be a big problem, but this is not a sustainable proposition.
• The Chinese economy is not in a very good position with increasing dependence on exports to make up for weak domestic consumption, a growing debt problem and a worsening demographic profile.
• These parts of the supply chain, the Chinese can fix with time, and so I continue to expect that demand for Nvidia will wane with time in the local market.
• However, where I think the Chinese will never catch up is in economics, which may not make much difference at home, but it will in non-affiliated markets.
• When it comes to a choice for a non-affiliated country, the Western version will now be cheaper than the Chinese one if one is also going to use Chinese hardware and the same if one is going to run it on Western hardware.
• Given that using Chinese standards comes with strings attached to Beijing and the Western versions much less so, this will make the Western version more attractive to a non-affiliated country.
• We have already seen some evidence of this as Saudi Arabia, UAE and potentially Qatar are already pivoting away from China, and others may follow.
• 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 why I think the Chinese are behind, and 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 think it is the West that has the advantage.