In the US-China chip war, it’s become an endless game of tag (you’re it). And yesterday (Monday), Beijing tagged Washington right where it hurts — its shining chip star, Nvidia.
Specifically, China’s State Administration for Market Regulation announced an investigation into Nvidia’s 2020 acquisition of Israeli chip company, Mellanox. The timing isn’t random – it’s a week after the US tightened chip export controls on China, which then fired back with an export ban on critical minerals like gallium and germanium.
So, does Beijing have legal grounds for this probe? Grounds or not, it has plausible deniability: both the DoJ and France have already opened antitrust probes into Nvidia. And that’s enough to fend off questions while China hits back at the US chips industry, which is already grappling with turmoil at Nvidia’s top rival, Intel.
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This isn’t China’s first shot at Nvidia, either:
- In March, its regulators tried to convince local car-markers to avoid Nvidia, and
- In September, its regulators urged more local firms not to use some Nvidia chips.
So why hasn’t Beijing launched an antitrust probe until now, or just banned Nvidia chips outright? Two reasons: first, China often leaves options open for further escalation as its tit-for-tat with the US progresses; but second, it mostly can’t compete with Nvidia, so needs to give its own local producers time to catch up.
Now of course, lots of companies produce chips, but Nvidia is years ahead when it comes to the most advanced chips — we’re talking AI chips, with applications in the military, intelligence, and beyond. And the US uses export bans to preserve this US advantage, though some end-users in China have found loopholes to maintain access.
So then, what’s the mood at Nvidia HQ?
Given they’re one of only four companies in the world now worth over $2T (hello Apple, Saudi Aramco, and Microsoft), they’re throwing a lot of cash and brain power at this.
- In the short term, their stock dropped 3.7% on the news, though hold your tears: Nvidia’s stock is still up 188% this year. These moves reflect the fact that while Nvidia isn’t allowed to sell its top chips to China, it still sells enough of everything else there to call China its second-largest market after the US.
- In the medium term, Nvidia will be war-rooming ahead of Donald Trump’s proposed 60% tariffs on Chinese goods, and whatever China might then do in response. But just like Beijing has avoided an outright Nvidia ban for fear of harming its own companies, Washington will be mindful of its own tech champion losing its second-largest market. So you can bet DC lobbyists will be busy.
- And in the long term, Nvidia has managed to continue selling into China by tweaking its products to comply with US export controls. But Nvidia executives keep offering nothing-burger answers when analysts ask how sustainable this strategy will be if the chip war keeps escalating: “We guide one quarter at a time.”
INTRIGUE’S TAKE
One of the reasons the US has been able to ratchet up this pressure on China’s chip sector is because of its dominance over one of three sector bottlenecks: chip design (where Nvidia leads). The other two bottlenecks are conveniently controlled by US partners: Taiwan’s TSMC dominates advanced manufacturing, and Dutch company ASML dominates the extreme ultraviolet radiation tech that underpins it all.
This arrangement offers the US a lot of leverage in a critical sector. But one of the reasons US partners have gone along with US export controls (and forgone sales to China) is that, while their China revenues have dropped, they can still make a tonne of cash there by selling lower-tech chips. And yet as the China-US tit for tat escalates, tighter US controls risk further eating into revenues from ASML, Nvidia, and beyond.
So while the US and its partners are presenting a united front for now, that unity will come under more pressure as the stakes rise and the export controls continue to bite.
Also worth noting:
- China’s regulators have already threatened Intel with a separate cybersecurity probe, though nothing seems to have happened yet. A similar cybersecurity probe resulted in a ban on Micron chips last year.
- In response to last week’s expanded US export controls, ASML says it’s not expecting much additional direct impact on its bottom line: it’s still projecting 20% of its sales to come from China next year — down from 50% last year.