24th February 2024 – (Hong Kong) U.S. chipmaker Nvidia faces complex challenges sustaining its extensive China business amid escalating U.S. export controls. While adapting product offerings to comply with new restrictions, Nvidia still emphasises the importance of the Chinese market and need for pragmatic flexibility. However, with China’s own chip industry advancing rapidly, Nvidia must display savvy and patience to retain market leadership.

Nvidia possesses undisputed dominance in advanced AI chips, enjoying an 80% global market share. This has fueled tremendous recent growth, with Nvidia’s market capitalisation expanding four-fold over the past two years to near $2 trillion. However, around 20-25% of Nvidia’s data centre revenue has traditionally derived from China – a massive market where growing demand has greatly benefited Nvidia.

Unfortunately, Nvidia’s China revenue dropped precipitously in late 2022 after new U.S. export controls prohibited shipping the company’s most advanced AI chips to China. This aims to limit China’s military access to cutting-edge semiconductor technology, but has side effects of hampering civilian enterprise. It has forced Nvidia to hastily develop new “downgraded” chip models compliant with U.S. restrictions for the Chinese market.

Nvidia currently provides samples of two such models to Chinese customers, hoping to recapture lost market share. But the previous compliant chip met a tepid reception in China, with only minimal purchases. This underscores the challenges Nvidia faces sustaining its China presence amidst the crosswinds of geopolitics.

Naturally, the lost revenue from an enormous market like China alarms Nvidia, especially as other geographic segments exhibit strong growth. While some analysts downplay the impact given Nvidia’s surging global performance, losing China access could still dent Nvidia’s trajectory.

From a business perspective, pragmatism demands adapting to political constraints using all available options. If alternative chips successfully replace barred products in China, Nvidia can still thrive despite external limitations. Certainly, Chinese customers understand Nvidia must comply with U.S. law. They will likely accept “good enough” substitutes, even if inferior to first choices, given Nvidia’s reputation and reliability.

However, Chinese firms now develop increasingly sophisticated homegrown chips, aided by government investment. If compliant Nvidia products lag too far behind Chinese innovations, local substitutes will inevitably displace them over time. So while adapting demonstrates good faith, Nvidia must convince China its specialised capabilities justify higher costs. This requires understanding Chinese needs and fine-tuning compliant offerings accordingly.

Naturally, as China’s own capabilities progress, reliance on any foreign technology vendor recedes but patient relationship-building still enables market retention. Here diplomatic nuance matters – despite US policy, Nvidia should acknowledge China’s technological advances and growing self-sufficiency, rather than dismiss or disparage local innovations. Market retention stems from respect, not condescension.

Some observers suggest Nvidia exaggerates reliance on China, claiming its surging performance elsewhere invalidates China market concerns. But ignoring China’s contribution seems unwise given its enormous size and growth. Even if non-China segments expand impressively, surrendering a major profit centre still hurts financially. Wiser to exercise all available options before writing off China completely.

Beyond commercial factors, participants on both sides should consider the broader context. Politicising technology access erodes the global innovation ecosystem while encouraging counterproductive decoupling. Ultimately, the tech sector prospers through mutual exchange and open markets, not national barriers.

Of course, governments prioritise perceived national security interests, however imperfect their assessments but excessive restrictions create damaging blowback. For advanced firms like Nvidia, access to global talent and supply chains matters greatly, so trade barriers undermine competitiveness. Meanwhile, targets like China then accelerate self-reliance efforts further, often successfully – hardly the intended effect.

Ideally, technology policy should embrace mutual benefit, not unilateral advantage. Competing fairly and freely yields collective gains, whereas suppressing progress abroad invites retaliation without improving one’s position. Nations should shape technology development through investments at home, not restrictions abroad.

Beyond commercial impacts, contestation over technology also risks escalating tensions between major powers but stability depends on mutual understanding – demonising competitors provokes insecurity, whereas pragmatism enables coexistence. Nations must balance protecting legitimate interests with respecting others’ sovereignty and development needs. Fundamentally, technology should bring humanity together, not divide it. The private sector often grasps this truth better than politicians, given markets’ global nature. While respecting regulations, technology leaders should thus advocate diplomacy over confrontation, promoting universal ideals of openness and progress. Reminding statesmen of technology’s ultimate purpose – serving all mankind – can temper rash provocations.