China vs. USA – Art of the Deal?

The screw is given another turn.

• While it is not very difficult to make an argument for banning the sales of advanced chips into China, giving Nvidia no warning and costing it $5.5bn appears to be a bit of own goal in the short term, but in the long-term, this is likely to hurt China’s competitiveness overseas.
• The US Department of Commerce has announced that Nvidia’s H20, AMD’s MI308 and other chips like it will now require a license to be exported to China with immediate effect.
• With a presumption of denial of licence, this will effectively halt all shipments of affected products with immediate effect.
• The net result is that $5.5bn of Nvidia inventories and commitments to the H20 may now have to be scrapped unless Nvidia can sell or repurpose the chips elsewhere.
• In previous instances where the rules suddenly changed, Nvidia was given enough warning and it was able to re-use the capacity it had earmarked for China elsewhere.
• I suspect that this would have been the same except that H20 is materially different to the H100 (upon which it is based) as opposed to the H800 which is the same as the H100 except that its memory bandwidth is capped at 300 GBPS as opposed to 600 GBPS.
• Hence, when it transpired that it would no longer be able to sell the H100 to China, the H100s could easily be sold elsewhere but the H20 is very different.
• This chip has limits on its performance where it is estimated that it is capped at just 14% of the compute throughput of the H100 with the goal being to slow and limit China’s ability to produce cutting-edge AI.
• This has been nothing short of a complete failure as DeepSeek R1 and Alibaba’s most recent models demonstrate that they can perform just as well (and in some cases better) than the current crop of models from the global leaders.
• Furthermore, I have doubts that hitting the H20 will prevent China from producing these models as silicon does not really determine the ability to make models but more the speed and economics of their production and use.
• This is why Alavan Independent and RFM Research have long argued that the Chinese are not behind in AI but that they will have great trouble competing economically.
• This is crucial because it is already clear that DeepSeek does not have a sustainable competitive edge when it comes to training and so pretty soon the USA and China will be competing head to head when it comes to the economics of AI.
• One only has to look at Llama 4 (see here) for evidence of this which uses the Mixture of Experts and quantisation techniques which RFM research has calculated contributed the lion’s share of the efficiency improvements claimed by DeepSeek in January 2025.
• It is at this point that the silicon advantage will become apparent.
• While the latest systems from Nvidia are extremely expensive, they offer a significant gain when it comes to the cost of tokens for both inference and training.
• By comparison, China will soon be 2 generations or more behind meaning that its models while competitive when it comes to performance, will cost more to train and run.
• This means that when it comes to expanding outside of its borders, Chinese AI is going to be more expensive than competing solutions with the added complication of being tied to the Chinese state.
• This is how the latest restrictions are going to do very little in the short-term in terms of limiting China’s AI capability but will handicap its competitiveness meaning that it will be predominantly non-Chinese AI that is selected by non-Chinese countries and companies.
• Given how long-term the Chinese think this could be a factor in bringing it to the negotiating table to hammer out a trade deal that both parties can be satisfied with as opposed to continuing rounds of tit-for-tat measures and rhetoric.
• For Nvidia, it is unlikely to be able to lay off the H20 chips it has already made and are those that are in production and even if it can, it will be at prices below what China would have paid for them.
• Hence, while there is likely to be some write-back of this provision, I suspect a good portion of it will be used and is lost to shareholders.
• The good news is that this is a small bump in the road for Nvidia where demand for its products remains strong and it continues to sweep its competitors contemptuously to one side.