China urges local companies to stay away from Nvidia chips

(Bloomberg) — Beijing is stepping up pressure on Chinese companies to buy locally made artificial intelligence chips instead of Nvidia Corp. products, part of the nation’s effort to expand its semiconductor industry and counter U.S. sanctions.

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Chinese regulators have discouraged companies from buying Nvidia’s H20 chips, which are used to develop and run AI models, according to people familiar with the matter. The policy took the form of guidance rather than an outright ban as Beijing wants to avoid crippling its own AI startups and escalating tensions with the US, said the people, who asked not to be identified because the matter is private .

The move is designed to help Chinese AI chip makers gain more market share while preparing local tech companies for possible further U.S. restrictions, the people said. The country’s top AI processor makers include Cambricon Technologies Corp. and Huawei Technologies Co. Earlier this year, Beijing also told local electric vehicle makers to source more supplies from local chip makers as part of its drive to become self-sufficient in critical situations. technologies.

Nvidia shares fell as much as 3.9 percent to $119.26 on Friday, extending an earlier slide, after Bloomberg reported the news. The stock has doubled this year.

The US government has banned Nvidia from selling its most advanced AI processors to Chinese customers in 2022 as part of an attempt to limit Beijing’s technological advances. Nvidia, based in Santa Clara, Calif., modified later versions of the chips so they could be sold under U.S. Commerce Department regulations. The H20 line corresponds to these criteria.

In recent months, several Chinese regulators, including the powerful Ministry of Industry and Information Technology, have issued so-called window guidelines — instructions without the force of law — to curb Nvidia’s use, the people said. The notice was aimed at encouraging companies to rely on domestic suppliers such as Huawei and Cambricon, they added. Beijing also amplified the message through a local trade group, according to another.

At the same time, Chinese officials want local companies to build the best AI systems possible. If that means having to buy some foreign semiconductors at the expense of domestic alternatives, Beijing will still tolerate that, according to people familiar with China’s AI policy.

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Nvidia declined to comment. China’s Ministry of Commerce, Ministry of Information and Technology and Cyberspace Administration did not respond to faxed requests for comment.

Separately, Nvidia Chief Executive Jensen Huang said on Friday that it was doing everything it could to serve customers in China and comply with the requirements of US government restrictions.

“The first thing we have to do is comply with whatever policies and regulations are imposed,” he said in an interview with Bloomberg Television. “And in the meantime, we’re doing everything we can to compete in the markets we serve. We have a lot of customers out there who depend on us and we will do everything we can to support them.”

Nvidia, the world’s most valuable chipmaker, has seen sales soar as data center operators around the world scramble to buy more of its processors. China continues to be part of this growth, although trade restrictions have taken a toll. In the July quarter, it got 12 percent of its revenue, or about $3.7 billion, from the country, including Hong Kong. This is up more than 30% from a year earlier.

“Our China data center revenue grew sequentially in Q2 and is a significant contributor to our data center revenue,” Chief Financial Officer Colette Kress said during an August earnings call. “As a percentage of total data center revenues, they remain below levels seen prior to the imposition of export controls. We still expect the Chinese market to be very competitive going forward.”

Nvidia chips are the gold standard for companies looking to develop artificial intelligence services. People like Meta Platforms Inc., OpenAI and Alphabet Inc. they scrambled to harvest their most cutting-edge products so they could build cutting-edge AI models. Several Chinese technology companies, including ByteDance Ltd. and Tencent Holdings Ltd., stockpiled Nvidia chips before the export controls took effect.

Meanwhile, Chinese chip designers and makers are working to introduce alternatives to Nvidia. Beijing has offered billions in subsidies to the semiconductor sector, but local AI chips lag far behind Nvidia’s price tag.

China still has a burgeoning AI sector, despite US restrictions. ByteDance and Alibaba Group Holding Ltd. have invested aggressively as a flock of startups vie for leadership. There are six so-called tigers in the development of large language models, the key technology behind generative AI: 01.AI, Baichuan, Moonshot, MiniMax, Stepfun and Zhipu.

Some of the companies are turning a blind eye to the Chinese decree to avoid H20 chips and are rushing to buy more of them ahead of an anticipated U.S. sanction later this year, one of the people said, although they also buy domestic products. Huawei chips to please Beijing.

–With assistance from John Liu, Jessica Sui, Zheng Wu, Ian King and Tyler Kendall.

(Updates with Nvidia actions in the fourth paragraph.)

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