Nvidia in China mirrors Apple and Tesla, which have been locked in price wars with Chinese companies. The latest battle in the semiconductor space is between Chinese tech giant Huawei, which is challenging Nvidia's technological monopoly on AI chips. This should be enough to understand why Washington elites passionately oppose Huawei.
A few short days after Nvidia's strong earnings report, a new report by Reuters revealed that the company's China unit had been pressured by "abundant supply forcing it to be priced below a rival chip" produced by Huawei.
Sliding AI chip prices in Nvidia's China unit compound the challenges faced by US sanctions on AI chip exports. Rising competition from Huawei casts doubts on the company's future in a market that contributes about 17% of its revenue.
This intensifying competition in China serves as a cautionary sign to investors following a strong earnings report on Wednesday.
In response to US sanctions barring the export of most of its advanced semiconductors, Nvidia, which leads the AI chip market, introduced three chips specifically for China last year.
Sources told Reuters that Nvidia's H20 for the Chinese market has experienced "weak demand," adding that there is an "abundant supply of the chip in the market." They said the H20 chips are being offered at 10% discount to Huawei's powerful Ascend 910B.
During Nvidia's first-quarter earnings, senior executives warned that its China unit had "substantially" weakened due to US sanctions.
"Our data center revenue in China is down significantly from the level prior to the imposition of the new export control restrictions in October," CFO Colette Kress told investors, adding, "We expect the market in China to remain very competitive going forward."
Another major margin squeeze for Nvidia is that sources recently noted Beijing has urged companies to purchase only Chinese chips.
"Nvidia is walking a fine line and working on a balancing act between maintaining the Chinese market and navigating US tensions," said Hebe Chen, a market analyst at IG, adding, "Nvidia is definitely preparing for the worst in the long term."
With more than a million H20 chips expected to be shipped to China in the second half of 2024, Dylan Patel, founder of the research group SemiAnalysis, explained that Nvidia must compete with Huawei on pricing or risk inventory builds.
The AI price chip war, similar to the EV price war or smartphone price war between US and Chinese companies, will only intensify. All of this suggests a more challenging environment for Nvidia to hold high margins.