Nvidia could lose big in China.

Nvidia can't export its best AI chips to China anymore because of US rules. Now its Chinese customers like Alibaba, Tencent, and ByteDance aren't thrilled about buying the lower-powered chips Nvidia's offering instead.

What's going on here?

Nvidia’s Chinese customers are shifting some orders to domestic chipmakers like Huawei.

What does this mean?

Nvidia can't export its best AI chips to China anymore because of US rules added last year. To comply, Nvidia whipped up some downgraded chips. Its big Chinese customers in China planned to buy a bunch of these now-banned chips. So they're not too pumped about the lower-powered replacements. Fair I reckon.

As a result, China's big tech firms are taking their business elsewhere. WSJ reported that Huawei scored orders for at least 5,000 Ascend 910B chips (similar to Nvidia’s A100) AI chips from major Chinese internet companies in 2023. And Alibaba is also working on its own chips in case it can't get Nvidia's anymore.

Why should I care?

In the short term, Nvidia's downgraded chips don't have much alpha over China's homegrown options. In the long run, the unpredictable export controls are pushing Chinese companies to ditch Nvidia so their supply doesn't get disrupted.

It's a tricky spot for Nvidia - they wanna keep their Chinese customers happy but also follow the US rules. While Nvidia has short-term demand it can't meet, tightening U.S. export controls pose a major risk to the company's sales growth in China over the next 5 years.