US-China AI chip battle goes to Huawei

The recent geopolitical tensions between the United States and China have created significant ripples across the technology landscape, particularly in the artificial intelligence sector. According to Bernstein analyst Stacy Rasgon, the US government's decision to impose severe export controls on NVIDIA's AI chips to China has effectively "handed the Chinese AI market to Huawei." This development comes as Reuters reports that Huawei is ramping up production of its AI chips for mass shipment, causing NVIDIA's stock to sink further in an already challenging year.

Key Analysis Points

• The Biden administration's export controls had already limited NVIDIA to selling only lower-performance AI chips (H20) to China, which were already outperformed by Huawei's offerings in some aspects.

• The latest restrictions require NVIDIA to obtain licenses even for these lower-end chips, effectively blocking them from the Chinese AI market entirely.

• Chinese domestic manufacturers like Huawei are being forced to innovate in ways they might not have pursued otherwise, potentially creating stronger long-term competition for US tech companies.

• Despite NVIDIA being down approximately 30% year-to-date (significantly worse than the NASDAQ 100), Rasgon maintains that the fundamental AI demand story remains strong.

• The China market was already becoming proportionally less significant for NVIDIA, representing their lowest percentage of total revenue in over ten years despite record absolute sales figures.

The Unintended Consequences of Tech Restrictions

The most insightful takeaway from Rasgon's analysis is her warning about the potential long-term consequences of these export restrictions. "The Chinese are not stupid," Rasgon notes, explaining that we're "forcing them to be creative in all senses of that word." While these policies might succeed in temporarily slowing China's AI advancement, they could ultimately accelerate domestic innovation in ways that create more formidable competitors in the long run.

This matters tremendously in the context of global technological competition. History has repeatedly shown that necessity drives innovation, and by cutting China off from American technology, we may be inadvertently creating the conditions for a more technologically self-sufficient China. Engineers often do their best work under constraints, and these export controls represent perhaps the ultimate constraint for Chinese tech companies.