NVIDIA Faces Challenges with US and China Regulations

Strengthened Regulations on Data Center Environment in China

Risk of Exclusion Due to Semiconductor Chip Standards

US Adds to Export Blacklist

NVIDIA's Major Clients Included "Caught in the Middle of Trade War"

NVIDIA, a leader in artificial intelligence (AI) chips, is cornered by dual regulations from the US and China. The Chinese government's strengthened energy efficiency regulations have impacted NVIDIA's products. The US has not only banned the export of advanced semiconductors made by NVIDIA to China but also included major NVIDIA clients in China on the export control list.

According to the Financial Times (FT) on the 27th, the National Development and Reform Commission (NDRC) of China has decided to apply strengthened energy efficiency standards when constructing or expanding data centers. Citing documents obtained from the Chinese government, FT reported that "NVIDIA's H20 chip does not meet these standards." Although this regulation was established in 2023, it remained at a recommendation level until recently. However, with the NDRC warning of possible on-site inspections and fines, some companies are reportedly replacing existing data center H20 chips with Chinese products.

The H20 chip is a low-spec product released by NVIDIA for export to China after the US tightened export controls in October 2023 to prevent NVIDIA's advanced semiconductors from being used to enhance China's military capabilities. However, with China using environmental regulations as a means of industrial protection, NVIDIA is at risk of being pushed out of the market.

China is NVIDIA's fourth-largest market after the US, Taiwan, and Singapore. NVIDIA's sales in China last year amounted to approximately $17 billion, accounting for 13% of its total sales. Of this, the data center segment is estimated to be the largest, with sales of around $12 billion. Stacy Rasgon, an analyst at Bernstein Research, pointed out that "China contributes about 5% to NVIDIA's earnings per share (EPS)." A slowdown in sales in China would inevitably lead to a deterioration in performance.

NVIDIA is contemplating how to respond to China's regulations. It is reported that there are discussions on adjusting the performance of the H20 chip to meet China's energy standards. However, there are concerns that this could weaken competitiveness due to reduced chip performance. It is also reported that high-level meetings with Chinese regulatory authorities are being pursued to ease tensions.

To make matters worse, the US is also increasing sanctions on Chinese companies. The Bureau of Industry and Security of the US Department of Commerce has added a total of 80 companies and institutions from China, Iran, Pakistan, and South Africa to the 'blacklist' (export control list). Six subsidiaries of Inspur Group, a major Chinese cloud computing company and a key client of NVIDIA, are included in this sanction list. US companies are prohibited from trading with these companies and must obtain government approval for product supply.

As a result, there are concerns about disruptions in NVIDIA's supply chain in China. If the US does not ease export controls, it is suggested that the dominance of the Chinese AI market will eventually shift to Huawei. Gil Luria, an analyst at DA Davidson, said, "NVIDIA is being drawn deeper into the middle of the US-China tech conflict," adding that "this trend is negative for the company."

Reporter Hyein Lee hey@hankyung.com