The Chinese government is taking antitrust action against the American AI chip developer. However, Beijing is powerless against Nvidia’s technological superiority.
Nvidia, the most successful stock in recent years, has been stagnant for several weeks. Since the beginning of December, the shares have lost more than five percent of their value. For a tech mega-cap like Nvidia, with a market capitalization of $340 billion, this represents a loss of $170 billion – roughly equivalent to the value of Siemens.
The reason for investor caution is the trade dispute between the USA and China. Although Donald Trump will not start his term as US President until January 20, the tougher stance between the two countries is already evident. This week, Chinese authorities announced an investigation against Nvidia for alleged violations of antitrust laws. The American company is the world’s most important developer of AI-enabled semiconductors.
Prequel to Trump 2.0
The Chinese authorities refer to an acquisition from 2020 when Nvidia bought the Israeli networking company Mellanox for $6.9 billion. With the investigation, the Chinese government expresses its displeasure over US export restrictions. During his first term, Trump pursued an aggressive course against China and during the recent election campaign, he hinted at tariffs of 60 percent on all Chinese goods.
The direct impact on Nvidia is “negligible,” believes Kristofer Barrett, Head of Global Equities at asset manager Carmignac. He sees the antitrust investigation as a bargaining chip that the Chinese could use in future negotiations with the USA. China’s allegations are not unfounded. One condition for approving the Mellanox merger was that Chinese companies continue to have unrestricted access to all Mellanox products. Nvidia could not fulfill this condition due to US export restrictions.
The investigation is to be taken seriously, “but it is part of a geopolitical game,” says Marcus Weyerer, Investment Strategist at Franklin Templeton. Ultimately, China has no interest in alienating Nvidia and cannot afford to do without its technology. Nvidia’s technological lead is too great, and China relies on the technology to compete in the AI race.
China is not yet able to produce similar chips to Nvidia’s, especially without Extreme Ultraviolet Lithography (EUV) technology, which is almost exclusively supplied by ASML. Export restrictions also apply to China in this case. Kristofer Barrett, however, considers it unlikely that China can develop an AI chip that is competitive in global markets unless there is a new “technological paradigm.”
A possible new paradigm was introduced this week by Google, a new chip called Willow based on Quantum technology. Such high-performance processors can perform calculations millions of times faster than the fastest supercomputers and overshadow the capabilities of AI chips. However, “Willow” is not a threat to Nvidia. It is expected to take at least ten years for Quantum chips to become mass-market. “Fears that traditional AI chips could soon become outdated are unfounded,” believes investment strategist Weyerer.
Nvidia: Balancing Act between USA and China
China remains dependent on Nvidia, even though it cannot access the most advanced AI chips due to trade restrictions. However, Nvidia and the US chip industry also need China. After the US Department of Commerce issued new export controls in early December affecting manufacturing equipment, software, and memory chips, retaliatory measures followed promptly. Beijing announced export bans on key materials such as gallium, germanium, and antimony, essential for the high-tech industry. Additionally, exports of graphite, needed for electric vehicle batteries, are set to be restricted.
Nvidia must navigate between its own interests and US trade policy. China is not only a raw material supplier but also the second-largest market after the USA. In the third quarter, the company estimated it generated over $5 billion in revenue in China, although the revenue share has declined in recent years. Nevertheless, Nvidia plans to invest in the country in autonomous driving development and expand research teams, as reported by Bloomberg on Thursday.
Nvidia CEO Jensen Huang is putting on a brave face. At the end of November, he received an honorary doctorate from the Hong Kong University of Science and Technology. In his acceptance speech, he praised China’s contribution to AI research. He emphasized that his company has benefited from its presence in China with offices in Hong Kong, Shanghai, Beijing, and Shenzhen. He encouraged students to apply for jobs at Nvidia.
$19 Billion in Quarterly Profit
Nvidia has hardly suffered from the trade conflict so far, thanks to its comfortable position. In the third quarter, it made a profit of $19 billion on revenue of around $35 billion. The gross margin is close to 75 percent. With such profitability, the company can invest billions in research to stay at the forefront of technology. Fines or potential loss of revenue from China do not faze Nvidia.
However, Nvidia’s stock and other semiconductor stocks are currently not advancing significantly. The Philadelphia Semiconductor Industry Index has declined significantly since the summer. This does not mean that the stock boom driven by AI prospects is ending. According to Weyerer, it is merely a consolidation. The rally has broadened and is no longer solely driven by the semiconductor sector.
While Nvidia’s prospects for the coming year are still positive, the rest of the industry has a mixed outlook. The former industry leader Intel is struggling to remain technologically relevant. ASML may have a quasi-monopoly on EUV technology, but it is heavily dependent on a single major customer: Taiwanese chip manufacturer TSMC, which also produces chips for Nvidia and Apple.
Currently, this is an advantage, as there are no signs that the tech giants will reduce their investments in AI technology in the future. Looking at Microsoft’s investment behavior, demand for AI-enabled chips is expected to increase tenfold in a few years, “so we are only at the beginning of the boom,” says Weyerer. The stock expert does not see a speculative bubble at the moment. Many tech companies are exceeding high profit expectations in the AI sector, and their valuations are within reason.