USA vs China – Wrong Villain

I think China is responsible for almost all of Nvidia’s China issues.

• Jensen has admitted that Nvidia’s market share in China has fallen to 0% due to US policy but I think he is blaming the wrong villain as so far in the technology battle, Chinese regulators have been far more effective at implementing US policy than the US Department of Commerce.
• Nvidia very wisely removed all Chinese revenues from its forecast last quarter as this risk has clearly become manifest and while there might be a short-term reprieve, it is very clear what the long-term outlook is.
• For six years the ideological struggle between China and The USA described by my colleague Alastair Newton of Alavan Independent has been played out in the semiconductor sector.
• Here the aim was to prevent China from developing advanced semiconductor manufacturing to hinder its rise as a technological and geopolitical rival to The USA.
• This has been largely effective and China’s semiconductor industry now focuses largely on older nodes (28nm and older) and a multipatterning process that can deliver 7nm chips but at high cost and low yield.
• However, in the last 18 months, the focus has shifted to AI where the US has attempted to stop China from developing cutting edge AI which has been a complete failure.
• 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 a month ago it informed Chinese AI companies that they should end testing and development of AI systems using chips from AMD and Nvidia and pointed them in the direction of home grown variants.
• This is far more effective than anything that the US Department of Commerce can do and in my opinion is now by far the main reason why Nvidia’s share in China has fallen to zero.
• Without a change of heart by the CAC, nothing is going to change regardless of whether the Department of Commerce grants Nvidia and AMD licences to sell in China.
• This means that in the future all Chinese AI will be developed using local silicon which will have been manufactured on the 7nm multipatterning process developed by Huawei and SMIC which is being rolled out in multiple fabs.
• The result is that while Chinese AI will be just as good in terms of the results that it produces 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.
• Nowhere is clearer than at Huawei which launched its SuperPod for H2 2026 which by my calculations is 32x less efficient than a system from Nvidia to produce the same amount of compute (see here).
• This is a direct result of being stuck at 7nm and being unable to migrate to smaller nodes due to being unable to buy EUV machines from ASML or manufacture them in China.
• The net result is that while China can produce AI that performs, it cannot do so economically, which at the end of the day is likely to be the deciding factor.
• 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 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.